10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2002

Commission File Number 0-29811

NEW FOCUS, INC.

(Exact Name of Registrant as Specified in its Charter)

Incorporated in the State of Delaware

I.R.S. Employer Identification Number 33-0404910

5215 Hellyer Avenue, San Jose, California 95138-1001

Telephone: (408) 284-4700

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [_]        No [X]

On March 31, 2002, 76,401,255 shares of the Registrant’s common stock, $0.001 par value, were issued and outstanding.

INDEX

NEW FOCUS, INC.

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated balance sheets—March 31, 2002 and December 30, 2001	3
	Consolidated statements of operations—Three months ended March 31, 2002 and April 1, 2001	4
	Consolidated statements of cash flows—Three months ended March 31, 2002 and April 1, 2001	5
	Notes to consolidated financial statements—March 31, 2002	6-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-20
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	20-36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	36-38
Item 2.	Changes in Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 5.	Other Information	38
Item 6.	Exhibits and Reports on Form 8-K	38-39
SIGNATURES		40

2

NEW FOCUS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and per share amounts)

	March 31, 2002			December 30, 2001
	(unaudited)			(see note)
ASSETS
Current Assets
Cash and cash equivalents	$	82,027		$	78,664
Short-term investments		202,171			215,991
Trade accounts receivable, less allowances of $1,126 in 2002 and $1,848 in 2001		5,370			5,025
Inventories:
Raw materials		3,310			4,328
Work in progress		2,083			1,653
Finished goods		2,315			3,259
Total Inventories		7,708			9,240
Prepaid expenses and other current assets		7,136			8,857
Total current assets		304,412			317,777
Property, plant and equipment:
Land and building		15,073			24,605
Manufacturing and development equipment		30,614			49,880
Computer software and equipment		6,183			7,810
Office equipment		3,522			4,279
Leasehold improvements		16,325			15,772
Construction in progress		2,372			3,053
		74,089			105,399
Less allowances for depreciation and amortization		(13,411	)		(17,333	)
Net property, plant and equipment		60,678			88,066
Intangible assets, net of accumulated amortization of $15,046 in 2002 and $13,700 in 2001		10,948			12,294
Other assets		11,472			11,587
Total assets	$	387,510		$	429,724
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,706		$	2,438
Accrued compensation and related benefits		5,070			5,710
Other accrued expenses		3,473			5,111
Restructuring accrual		4,663			4,956
Deferred revenue and research and development funding		979			1,775
Current portion of long-term debt		8			109
Total current liabilities		16,899			20,099
Long-term debt, less current portion		5			7
Deferred rent		1,557			1,508
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value:
Authorized shares—10,000,000
Issued and outstanding—none		—			—
Common stock, $0.001 par value:
Authorized shares—250,000,000
Issued and outstanding—76,401,255 in 2002 and 75,980,323 in 2001		76			76
Additional paid-in capital		976,992			977,541
Notes receivable from stockholders		(2,804	)		(5,815	)
Deferred compensation		(12,322	)		(18,220	)
Accumulated other comprehensive income		451			1,436
Accumulated deficit		(593,344	)		(546,908	)
Total stockholders’ equity		369,049			408,110
Total liabilities and stockholders’ equity	$	387,510		$	429,724

Note: The December 30, 2001 consolidated balance sheet has been derived from audited financial statements.

See notes to consolidated financial statements.

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NEW FOCUS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31, 2002			April 1, 2001
Net revenues	$	10,096		$	40,762
Cost of net revenues (1)		13,921			55,442
Gross profit		(3,825	)		(14,680	)
Operating Expenses:
Research and development (2)		8,379			12,807
Less funding received from research and development contracts		(1,017	)		(12	)
Net research and development		7,362			12,795
Sales and marketing (3)		2,578			2,447
General and administrative (4)		3,902			6,204
Amortization of goodwill and other intangibles		1,346			21,437
In-process research and development		—			13,400
Restructuring and impairment charges		24,022			—
Deferred compensation		5,898			25,324
Total operating expenses		45,108			81,607
Operating loss		(48,933	)		(96,287	)
Interest income		2,530			5,835
Interest expense		(1	)		(13	)
Other income (expense), net		(32	)		(828	)
Loss before benefit for income taxes		(46,436	)		(91,293	)
Benefit for income taxes		—			(5,000	)
Net loss	$	(46,436	)	$	(86,293	)
Basic and diluted net loss per share	$	(0.62	)	$	(1.22	)
Shares used to compute basic and diluted net loss per share		75,259			70,460

(1) Excluding $940 and $3,491 in amortization of deferred stock compensation for the three months ended March 31, 2002 and April 1, 2001, respectively.

(2) Excluding $3,752 and $18,639 in amortization of deferred stock compensation for the three months ended March 31, 2002 and April 1, 2001, respectively.

(3) Excluding $385 and $1,400 in amortization of deferred stock compensation for the three months ended March 31, 2002 and April 1, 2001, respectively.

(4) Excluding $821 and $1,794 in amortization of deferred stock compensation for the three months ended March 31, 2002 and April 1, 2001, respectively.

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NEW FOCUS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended
	March 31, 2002			April 1, 2001
Operating activities
Net loss	$	(46,436	)	$	(86,293	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,870			2,439
Restructuring and impairment charges		23,362			—
Amortization of goodwill and other intangibles		1,346			21,437
Acquired in-process research and development		—			13,400
Amortization of deferred compensation		5,898			25,324
Deferred rent		49			114
Loss on disposal of assets		108			—
Benefit for income taxes		—			(5,000	)
Changes in operating assets and liabilities:
Trade accounts receivable		(345	)		3,443
Inventories		1,532			11,110
Prepaid expenses and other current assets		1,721			(493	)
Accounts payable		268			(4,827	)
Accrued expenses		(2,571	)		4,716
Deferred revenue and research and development funding		(796	)		—
Net cash used in operating activities		(11,994	)		(14,630	)
Investing activities
Purchase of available-for-sale investments		(33,006	)		(116,872	)
Proceeds from sales and maturities of investments		45,841			18,393
Acquisition of businesses and related expenses, net of cash acquired		—			(81,693	)
Acquisition of property, plant and equipment		(260	)		(27,373	)
Proceeds from sale of property, plant and equipment		308			—
Decrease in other assets		115			6,893
Net cash provided by (used in) investing activities		12,998			(200,652	)
Financing activities
Payments on equipment loan		(103	)		(63	)
Proceeds from issuance of common stock, net of repurchases		1,187			156
Proceeds from payment of notes receivable with shareholders		1,275			74
Net cash provided by financing activities		2,359			167
Increase (decrease) in cash and cash equivalents		3,363			(215,115	)
Cash and cash equivalents at beginning of period		78,664			363,375
Cash and cash equivalents at end of period	$	82,027		$	148,260

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NEW FOCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

MARCH 31, 2002

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 29, 2002.

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

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2002.

The Company maintains a fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to December 31. Each of the three-month periods ended March 31, 2002 and April 1, 2001 contained 91 days.

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (FAS 141) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142). We adopted both standards at the beginning of fiscal 2002. FAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting, thereby eliminating the pooling-of-interests method. In addition, FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. The adoption of FAS 141 and FAS 142 did not have a material impact on the Company’s results of operations, financial position, or cash flows, because at December 30, 2001, the Company had no goodwill or indefinite lived intangible assets.

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In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which became effective for fiscal periods beginning after December 15, 2001 and supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. FAS 144 provides a single model for accounting and reporting the impairment and disposal of long-lived assets. The statement also sets new criteria for the classification of assets held-for-sale and changes the reporting of discontinued operations. The adoption of FAS 144 did not have a material impact on the Company’s results of operations, financial position, or cash flows.

NOTE 2—COMPREHENSIVE LOSS

Comprehensive loss for the three months ended March 31, 2002 is $47.4 million, comprised of the Company’s net loss of $46.4 million and $985,000 of net unrealized holding losses on marketable equity securities. Comprehensive loss for the three months ended April 1, 2001 is $85.5 million, comprised of the Company’s net loss of $86.3 million and $801,000 of net unrealized holding gains on marketable equity securities.

NOTE 3—LOSS PER SHARE

Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period less outstanding unvested shares.

	Three Months Ended
(in thousands, except per share amounts)	March 31, 2002			April 1, 2001
Net loss (numerator)	$	(46,436	)	$	(86,293	)
Shares used in computing basic and diluted net loss per share (denominator):
Weighted average common shares outstanding		76,226			73,541
Less shares subject to repurchase		(967	)		(3,081	)
Denominator for basic and diluted net loss per share		75,259			70,460
Basic and diluted net loss per share	$	(0.62	)	$	(1.22	)

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

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because all such securities are antidilutive for all periods presented. The total number of shares, including options and warrants to purchase shares, excluded from the calculations of diluted net loss per share was 10,317,000 for the three months ended March 31, 2002 and 7,047,000 for the three months ended April 1, 2001, respectively.

NOTE 4—INCOME TAXES

No tax provision was recorded for the three months ended March 31, 2002 due to the significant on-going losses. The benefit for income taxes of approximately $5.0 million for the three months ended April 1, 2001 relates to the deferred tax benefit associated with the amortization of other identifiable intangible assets and deferred compensation resulting from the JCA and Globe Y acquisitions. Excluding the tax benefit associated with these acquisitions, the Company recorded a provision for income taxes of approximately $175,000 in the first quarter of 2001, primarily for alternative minimum taxes and foreign withholding taxes.

NOTE 5—SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

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

The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, excluding gains and losses on the Company’s investment portfolio. There were no intercompany sales or transfers.            

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

	Three Months Ended March 31, 2002
	Telecom			Photonics Tools			Total
	(in thousands)
Revenues from external customers	$	4,942		$	5,154		$	10,096
Depreciation and amortization expense	$	3,422		$	448		$	3,870
Operating segment loss	$	(15,707	)	$	(1,960	)	$	(17,667	)

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	Three Months Ended April 1, 2001
	Telecom			Photonics Tools			Total
				(in thousands)
Revenues from external customers	$	32,308		$	8,454		$	40,762
Depreciation and amortization expense	$	2,143		$	243		$	2,386
Operating segment loss	$	(36,095	)	$	(31	)	$	(36,126	)

Operating segment loss excludes amortization of goodwill and other intangibles, in-process research and development, restructuring and impairment charges, and amortization of deferred stock based compensation.

	Three Months Ended
	March 31, 2002			April 1, 2001
	(in thousands)
Loss
Total loss for reportable segments	$	(17,667	)	$	(36,126	)
Interest and other income, net		2,497			4,994
Amortization of goodwill and other intangibles		(1,346	)		(21,437	)
In-process research and development		—			(13,400	)
Restructuring and impairment charges		(24,022	)		—
Amortization of deferred compensation		(5,898	)		(25,324	)
Loss before income taxes	$	(46,436	)	$	(91,293	)
Geographic information
Revenues
United States	$	5,925		$	25,680
Asia		1,041			1,997
Europe		3,130			13,085
Consolidated total	$	10,096		$	40,762

Revenues are attributed to countries based on the location of customers.

NOTE 6—SIGNIFICANT CUSTOMERS

In the three months ended March 31, 2002, Alcatel accounted for 13.4% of the Company’s net revenues. In the three months ended April 1, 2001, Alcatel, Agilent Technologies, and Corvis Corporation accounted for 15.6%, 12.8% and 11.6% of the Company’s net revenues, respectively.

NOTE 7—CONTINGENCIES

On February 13, 2002, a lawsuit was filed purportedly on behalf of both Howard Yue and Globe Y Technology, a company acquired by New Focus, in Alameda County Superior Court. The action is captioned Globe Y Technology, Inc. v. New Focus, Inc. et al., and asserts claims against the Company and several of its officers and directors. The

9

complaint alleges eight causes of action, including fraud and deceit by active concealment, fraud and deceit based upon omissions of material facts, negligent misrepresentation, and breach of contract. The claims stem from the acquisition of Globe Y Technology, Inc. by the Company completed February 15, 2001. The complaint seeks unspecified economic, punitive, and exemplary damages, prejudgment interest, costs, and equitable and general relief. The Company believes that these claims are without merit and intends to defend them vigorously.

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

On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against the Company and seven of its officers and directors (collectively the “Individual Defendants”) in the United States District Court for the Southern District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp. (collectively the “Underwriter Defendants”), the underwriters in the Company’s initial public offering. Three subsequent lawsuits were filed containing substantially similar allegations. These complaints have been consolidated. On April 19, 2002, plaintiffs filed a Consolidated Amended Complaint. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants related to the Initial Public Offering and the Secondary Offering, violations of Section 15 of the Securities Act of 1933 and Section 20(a) of the Securities Act of 1934 against the Individual Defendants, violations of Section 10(b) and Rule 10b-5 against the Issuer Defendant and violations of Section 12(a)(2) of the Securities Act of 1933 and Section 10(b), and Rule 10b-5 promulgated thereunder, of the Securities Act of 1934 against the Underwriter Defendants. The complaints seek

10

unspecified damages on behalf of a purported class of purchasers of common stock between May 18, 2000 and December 6, 2000.

Various plaintiffs have filed similar actions in the United States District Court for the Southern District of New York asserting virtually identical allegations against more than 400 other issuers. These cases have all been assigned to the Hon. Shira A. Scheindlin for coordination and decisions on pretrial motions, discovery, and related matters other than trial. The Company believes that it has meritorious defenses to these lawsuits and will defend the litigation vigorously. An unfavorable resolution of these lawsuits could have a material adverse effect on the business, results of operations or financial condition of the Company.

On March 12, 2001, another putative securities class action, captioned Mandel v. New Focus, Inc., et. al., Civil Action No. C-01-1020, was filed against New Focus and several of its officers and directors in the United States District Court for the Northern District of California. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class that purchased New Focus common stock between January 31, 2001 and March 5, 2001. Substantially similar actions, captioned Rosen v. New Focus, Inc., et. al., Civil Action No. C-01-1065; Solomon v. New Focus, Inc., et. al., Civil Action No. C-01-2023; Deutch v. New Focus, Inc., et. al., Civil Action No. C-01-1123; Connors v. New Focus, Inc., et. al., Civil Action No. C-01-1148; Spanos v. New Focus, Inc., et. al., Civil Action No. C-01-1328; Patton v. New Focus, Inc., et. al., Civil Action No. C-01-1413, and Naiditch v. New Focus, Inc., et. al., Civil Action No. C-01-1689 have also been filed against New Focus and several of its officers and directors in the United States District Court for the Northern District of California. The Naiditch action asserts a class period from October 25, 2000 to March 5, 2001. The cases were consolidated, and a lead plaintiff was appointed. On February 15, 2002, the District Court entered an order dismissing without prejudice the claims against the Company and its officers and directors. The order dismissing the action gave the plaintiffs a deadline of thirty days from February 15, 2002 in which to file an amended complaint. No amended complaint was filed by the deadline and the Company therefore believes that this lawsuit has been concluded.

On April 10, 2001, a stockholder derivative action purportedly on behalf of the Company, captioned Sherman v. Harris et. al., Civil Action No. 18797-NC, was filed in Delaware Chancery Court. The complaint alleges that the Company’s directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct including conduct complained of in the securities litigation described above. The complaint named the Company solely as a nominal defendant against whom the plaintiff seeks no recovery. On April 25, 2002, the Company received notice that the Plaintiff dismissed the action without prejudice pursuant to Delaware Court of Chancery Rule 41(a).

In addition, the Company is subject to various claims that arise in the normal course of business. In the opinion of management, the ultimate disposition of these claims will not have a material adverse effect on the position of the Company.

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NOTE 8 – RESTRUCTURING AND IMPAIRMENT CHARGES

In March 2002, the Company decided to divest operations related to the manufacture and sale of passive optical components products. As a part of this action, the Company will cease operations at its 243,000 square foot manufacturing facility in Shenzhen, China after fulfillment of end-of-life orders from customers. The Company plans to discontinue development work on all passive products early in the second quarter of 2002 and cease operations at its China manufacturing facility early in the third quarter of 2002.

The product line divestiture and plant closure will reduce the Company’s worldwide work force by approximately 350 people. For the three months ended March 31, 2002, the Company recorded restructuring and impairment charges totaling $24.0 million. The restructuring and impairment charges included $23.4 million for the write-down of the Company’s facility in China and equipment related to its passive product line and $644,000 for severance costs covering approximately 156 employees. Non-cash items included in the restructuring and impairment charges totaled $23.4 million. The Company estimated the net realizable value of its facility and land in Shenzhen, China based on consultation with real estate brokers located in Shenzhen, China. The net realizable value of equipment was determined through consultation with equipment brokers and auctions service providers. The Company expects to record an additional charge of $4-6 million in the second quarter of 2002 to complete these restructuring activities. As of March 31, 2002, $4.7 million in accrued restructuring costs, consisting

12

of $3.2 million for severance costs and $1.4 million for facility closure costs, remained in current liabilities.

The table below summarizes the Company’s restructuring and impairment activities (in thousands):

	Provision Balance as of December 30, 2001		Quarter Ended March 31, 2002		Cash Payments			Non-cash Charges			Provision Balance as of March 31, 2002
Restructuring and impairment activities:
Workforce reduction severance	$	3,058	$	644	$	(480	)	$	—		$	3,222
Facility Closure		1,898		16		(473	)		—			1,441
Property and equipment write-down		—		23,362		—			(23,362	)		—
Restructuring and impairment charges	$	4,956	$	24,022	$	(953	)	$	(23,362	)	$	4,663

On April 24, 2002, the Company entered into a definitive agreement to sell the passive optical components product line to Finisar Corporation. Under the terms of the agreement, Finisar will acquire the physical assets and intellectual property associated with this product line. The physical assets include development and production equipment as well as certain raw material and finished goods inventories. New Focus will assign to Finisar the intellectual property rights to fifty pending and issued patents, the Company’s proprietary know-how, and certain trademarks associated with this product line. New Focus will retain exclusive rights for use of this intellectual property outside the field of fiber optic communications. Finisar will grant to New Focus the ability to resell these passive optical components products through New Focus’ photonics tools catalog, website and related sales and marketing functions. Additionally, as part of the transaction, Finisar will employ certain key personnel from New Focus that have been associated with this product line.

New Focus will receive a minimum total consideration of approximately $12.75 million under the terms of the agreement. New Focus will receive an initial payment of approximately $6.75 million payable in the form of Finisar common stock. New Focus will also receive cash royalty payments that are subject to guaranteed minimum annual payments totaling $6.0 million during the first three years of the agreement. The royalty payments are based on a percentage of the sales of all products that utilize the transferred technology.

NOTE 9 – INTANGIBLE ASSETS

Intangible assets are being amortized using the straight-line method over the estimated useful lives of two to fours years. The components of intangible assets are as follows (in thousands):

	March 31, 2002			December 30, 2001
Developed technology	$	19,264		$	19,264
Customer base		2,877			2,877
Non-compete agreement and workforce		3,076			3,076
Other intangibles		777			777
Total intangibles assets		25,994			25,994
Less: accumulated amortization		(15,046	)		(13,700	)
	$	10,948		$	12,294

Estimated amortization expense for each of the following fiscal years are (in thousands):

2002	$	4,592
2003		3,794
2004		3,777
2005		131
	$	12,294

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NEW FOCUS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains predictions, estimates and other forward-looking statements regarding the revenue outlook for the second quarter of 2002, potential impairment and restructuring charges, planned reductions in the company’s expense structure by the end of 2002, the company’s projected quarterly revenue level to achieve profitability, estimates of net loss and net cash outflow at the company’s current revenue level assuming realization of projected expense reductions, and the company’s commitment to its acquisition and partnering strategies. These statements are subject to risks and uncertainties and actual results may differ materially from any future performance suggested. The risks and uncertainties include the difficulty of forecasting anticipated revenues due to weakness and uncertainties related to general economic conditions and overall demand within the company’s markets, especially the telecommunications industry; the high sensitivity of the size of the company’s net loss to its level of revenue due to the fixed and/or project oriented nature of its expenses; and the difficulty of achieving anticipated cost reductions due to unforeseen expenses, including costs arising from the consolidation of the company’s manufacturing operations and the divestiture of certain product lines, that may arise in future quarters. Additionally, if we cannot effectively execute on our acquisition and partnering strategies and our expansion into potential new markets, we will be unable to achieve our profitability goal in a timely manner. We may experience difficulty in achieving anticipated cost reductions due to an inability to reduce expenses without jeopardizing product development schedules for product areas that will be an ongoing focus of our business. Furthermore, any unforeseen delays in completing the development of the company’s new products may limit our ability to generate volume revenues. We also may experience difficulty in gaining customer acceptance of our new products and in generating future revenue from new products commensurate with prior investments in research and development activities. Other risk factors that may affect the company’s financial performance are listed in “Risk Factors” elsewhere in this document.

Overview

Demand for our telecom products fell abruptly beginning in the latter half of the first quarter of 2001 due to the widespread business downturn in the telecommunications industry. Market conditions continued to worsen with each successive quarter of 2001. As a result of the telecommunications industry downturn, we experienced order cancellations and rescheduling of orders to later periods. Revenues from our telecom products declined in each quarter of 2001, from $32.3 million in the first quarter, to $19.0 million in the second quarter, $9.7 million in the third quarter and $4.4 million in the fourth quarter. At the same time, as a result of the broader economic downturn, demand for our photonics tools also declined, particularly impacting OEM sales to the semiconductor market. Revenues from our photonics tools products declined in each quarter of 2001, from $8.5 million in the first quarter, to $7.6 million in the second quarter, $6.1 million in the third quarter and $5.0 million in the fourth quarter. Revenues

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from our telecom products and photonics tool products comprised $4.9 million and $5.2 million, respectively, of our total net revenues in the first quarter of 2002. We expect that our total net revenues in the second quarter of 2002 will be within a range of $8-11 million.

We expect difficult conditions within the telecommunications market to continue for the balance of 2002 and well into 2003. In March 2002, we decided to divest operations related to the manufacture and sale of passive optical components products. As a part of this action, we will cease operations at our 243,000 square foot manufacturing facility in Shenzhen, China after fulfillment of end-of-life orders from customers. Although our divestiture of our passive optical components product line and the closing of our offshore manufacturing operations will accelerate the realization of cost savings, in light of the market conditions, it is unlikely that we will be able to generate $15-16 million in quarterly revenue from our current product lines. Consequently, we intend to seek strategic acquisition opportunities to grow our revenues and diversify our product portfolio.

In addition, we will continue to review our various lines of business and will adjust our cost reduction plans and business strategies to fit market realities.

Critical Accounting Policies and Estimates

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

Inventories.  Inventories are stated at the lower of cost (determined using the first in, first out method) or market (estimated net realizable value). We generally plan production based on orders received and forecasted demand. We also maintain a stock of certain products for our photonics tools business. We must order components and build inventories well in advance of product shipments. These estimates are dependent on our assessment of current and expected orders from our customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. As our markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs by our customers, there is a risk that we will forecast incorrectly and produce excess inventories of particular products. The inventory risk is compounded for telecom products, because many of our customers place orders with short lead times. As a result, actual demand will differ from forecasts, and such a difference may have a material adverse effect on actual results of operations. In 2001, we incurred charges related to excess inventory write-downs and related order cancellation fees of $36.6 million due to the abrupt and severe downturn in the telecommunications industry in 2001. Further we recorded inventory write-downs of approximately $1.3 million in the quarter ended March 31, 2002 related to the divestiture of our passive product line. The excess inventory write-downs, and related order cancellation fees were calculated in accordance with our policy, which is based on inventory levels in excess of estimated six-month demand and our judgment for each specific product. Should actual

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demand differ from our estimates, revisions to our excess inventory write-down would be required.

Impairment of goodwill and other intangible assets.  At March 31, 2002, we had $10.9 million of other intangible assets. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. During 2001, we wrote off $289.3 million of goodwill. At December 30, 2001, there was no remaining goodwill.

Restructuring and Impairment.  For the three months ended March 31, 2002, we recorded restructuring and impairment charges totaling $24.0 million. The restructuring and impairment charges included $23.4 million for the write-down of our facility in China and equipment related to the passive product line and $644,000 for severance costs covering approximately 156 employees. At March 31, 2002 we had a remaining accrual of $4.7 million. The restructuring accrual contains estimates for facilities lease losses and equipment salvage values, and may require an adjustment if actual results differ, which could materially affect our results of operations.

Allowance for doubtful accounts.  We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Product warranty.  We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or repair costs differ from our estimates, revisions to the estimated warranty liability would be required.

RESULTS OF OPERATIONS:

Net Revenues:

Net revenues decreased to $10.1 million for the three months ended March 31, 2002 from $40.8 million for the three months ended April 1, 2001, primarily as a result of the decreased sales of our telecom products attributed to a widespread business downturn in the telecommunications industry. Sales of our telecom products were $4.9 million, or 48.5% of total net revenues for the three months ended March 31, 2002, compared to $32.3 million, or 79.2% of total net revenues, for the three months ended April 1, 2001.

Gross Profit (Loss):

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Gross profit, including amortization of deferred stock compensation, decreased to a loss of 47.2% in the three months ended March 31, 2002, from a loss of 44.6% in the three months ended April 1, 2001. Excluding amortization of deferred stock compensation of $940,000 and $3.5 million, respectively, gross profit decreased to a loss of 37.9% in the three months ended March 31, 2002 from a loss of 36.0% in the three months ended April 1, 2001. The substantial loss for the first quarter of 2002 is primarily due to the lower revenue and high level of fixed manufacturing costs. Cost of net revenues for the three months ended March 31, 2002 also includes a $1.3 million charge for the write-down of excess inventories, due to the divestiture of the passives product line. The substantial loss for the first quarter of 2001 is primarily due to a $28.5 million charge for the write-down of excess inventories and related charges.

Research and Development Expenses:

Research and development expenses, including amortization of deferred stock compensation, increased to 110.1% of net revenues, or $11.1 million, in the three months ended March 31, 2002 from 77.1% of net revenues, or $31.4 million, in the three months ended April 1, 2001. Excluding amortization of deferred stock compensation of $3.8 million and $18.6 million, respectively, research and development expenses increased to 72.9% of net revenues, or $7.4 million, in the three months ended March 31, 2002 from 31.4% of net revenues, or $12.8 million, in the three months ended April 1, 2001. Research and development expenses, excluding amortization of deferred stock compensation, increased as a percentage of net revenues for the comparable periods, but decreased in absolute dollars as a result of the Company’s efforts to more closely align development expenses with revenue expectations for 2002.

Sales and Marketing Expenses:

Sales and marketing expenses, including amortization of deferred stock compensation, increased to 29.3 % of net revenues, or $3.0 million, in the three months ended March 31, 2002 from 9.4% of net revenues, or $3.8 million, in the three months ended April 1, 2001. Excluding amortization of deferred stock compensation of $385,000 and $1.4 million, respectively, sales and marketing expenses increased slightly to $2.6 million in the first quarter of 2002 from $2.4 million in the first quarter of 2001.

General and Administrative Expenses:

General and administrative expenses, including amortization of deferred stock compensation, increased to 46.8% of net revenues, or $4.7 million, in the three months ended March 31, 2002 from 19.6% of net revenues, or $8.0 million, in the three months ended April 1, 2001. Excluding amortization of deferred stock compensation of $821,000 and $1.8 million, respectively, general and administrative expenses increased as a percentage of net revenues to 38.6%, or $3.9 million, in the three months ended March 31, 2002, from 15.2% of net revenues, or $6.2 million, in the three months ended April 1, 2001. The decrease in the absolute dollar amount for general and administrative expenses

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was primarily due to lower legal and consulting fees. Expenses for the first quarter of 2001 included costs associated with the integration of JCA and Globe Y.

Amortization of Goodwill and Other Intangibles:

Amortization of goodwill and other intangibles which arose from our acquisitions of JCA and Globe Y in January and February 2001, respectively, totaled $1.3 million and $21.4 million in the three months ended March 31, 2002 and April 1, 2001, respectively. All of the goodwill associated with the acquisitions of JCA and Globe Y was written down through impairment charges in 2001. Other intangibles are being amortized over estimated useful lives of approximately two to four years.

In-process Research and Development:

A one-time in-process research and development charge of $13.4 million related to our acquisition of JCA was recorded in the three months ended April 1, 2001. In-process research and development represents the value assigned in a purchase business combination to research and development activities of the acquired business that had not yet reached technological feasibility and have no alternative future use.

Restructuring and Impairment Charges:

In March 2002, we decided to divest operations related to the manufacture and sale of our passive optical components products. As a part of this action, we will cease operations at our 243,000 square foot manufacturing facility in Shenzhen, China after fulfillment of end-of-life orders from customers. We plan to discontinue development work on all passive products early in the second quarter of 2002 and cease operations at our China manufacturing facility early in the third quarter of 2002.

The product line divestiture and plant closure will reduce our worldwide work force by approximately 350 people. For the three months ended March 31, 2002, we recorded restructuring and impairment charges totaling $24.0 million. The restructuring and impairment charges included $23.4 million for the write-down of our facility in China and equipment related to the passive product line and $644,000 for severance costs covering approximately 156 employees. Non-cash items included in the restructuring and impairment charges totaled $23.4 million. We estimated the net realizable value of our facility and land in Shenzhen, China based on consultation with real estate brokers located in Shenzhen, China. The net realizable value of equipment was determined through consultation with equipment brokers and auctions service providers. We expect to record an additional charge of $4-6 million in the second quarter of 2002 to complete these restructuring activities. As of March 31, 2002, $4.7 million in accrued restructuring costs, consisting of $3.2 million for severance costs and $1.4 million for facility closure costs, remained in current liabilities.

On April 24, 2002, we entered into a definitive agreement to sell the passive optical components product line to Finisar Corporation. Under the terms of the agreement,

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Finisar will acquire the physical assets and intellectual property associated with this product line. The physical assets include development and production equipment as well as certain raw material and finished goods inventories. We will assign to Finisar the intellectual property rights to fifty pending and issued patents, our proprietary know-how, and certain trademarks associated with this product line. We will retain exclusive rights for use of this intellectual property outside the field of fiber optic communications. Finisar will grant to New Focus the ability to resell these passive optical components products through our photonics tools catalog, website and related sales and marketing functions. Additionally, as part of the transaction, Finisar will employ certain key personnel from New Focus that have been associated with this product line.

We will receive a minimum total consideration of approximately $12.75 million under the terms of the agreement. We will receive an initial payment of approximately $6.75 million payable in the form of Finisar common stock. We will also receive cash royalty payments that are subject to guaranteed minimum annual payments totaling $6.0 million during the first three years of the agreement. The royalty payments are based on a percentage of the sales of all products that utilize the transferred technology.

We will continue to review our various lines of business and will adjust our cost reduction plans and business strategies to fit market realities.

Interest and Other Income, net:

Interest and other income, net totaled $2.5 million for the three months ended March 31, 2002, compared to $5.0 million for the three months ended April 1, 2001. Interest income was the largest component, totaling $2.5 million and $5.8 million for 2002 and 2001, respectively. The decrease in interest income for the comparable periods was due to a combination of a lower average cash and short-term investment balance and a lower investment yield. The average cash and short-term investment balance was approximately $116.9 million, or 29%, lower in the first quarter of 2002 compared to the first quarter of 2001.

Income Taxes:

As a result of the significant on-going losses no income tax provision was recorded for the three months ended March 31, 2002. For the three months ended April 1, 2001, we recorded a benefit for income taxes of approximately $5.0 million related to the deferred tax benefit associated with the amortization of other identifiable intangible assets and deferred compensation resulting from the JCA and Globe Y acquisitions. Excluding the tax benefit associated with these acquisitions, we recorded a provision for income taxes of approximately $175,000 in the first quarter of 2001, primarily for alternative minimum taxes and foreign withholding taxes.

LIQUIDITY AND CAPITAL RESOURCES:

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Our cash, cash equivalents and short-term investments decreased to $284.2 million at March 31, 2002 from $294.7 million at December 31, 2001. The decrease in cash, cash equivalents and short-term investments was primarily due to our net loss of $46.4 million partially offset by non-cash charges of $34.6 million. Net working capital was $287.5 million at March 31, 2002.

Cash used in operating activities was $12.0 million in the three months ended March 31, 2002, primarily due to our net loss (excluding non-cash charges) of $11.8 million and a decrease in accrued expenses of $3.4 million, partially offset by increases in inventory and prepaid expenses and other current assets of $3.2 million. Cash provided by investing activities, excluding net proceeds from sales and maturities of investments, was $163,000. Cash generated by financing activities was $2.4 million in the three months ended March 31, 2002 primarily due to proceeds from the sale of stock under employee stock option and purchase plans and the repayment of stockholder notes.

Cash used for capital expenditures in the three months ended March 31, 2002 was $260,000. We expect that our capital expenditures will continue to be minimal throughout 2002. We have no material contractual obligations or commercial commitment other than future minimum payments under operating leases for our facilities, which total $40.0 million through 2011.

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

ITEM 3 – Qualitative and Quantitative Disclosures About Market Risk

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

Interest Rate Sensitivity:

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

Exchange Rate Sensitivity:

A substantial majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily the Chinese yuan renminbi (CNY). Since late 1997, the CNY has

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been trading at a conversion rate of approximately 8.28 CNY to the U.S. dollar. Accordingly, we have experienced no material foreign currency rate fluctuations.

RISK FACTORS:

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

Risks Related to Our Financial Results

We have a history of losses and such net losses will likely continue if we are unable to restructure our operations through selective acquisitions and divestitures.

We incurred net losses of approximately $46.4 million for the quarter ended March 31, 2002, compared to net losses of approximately $79.5 million for the quarter ended December 30, 2001, and approximately $32.0 million for the quarter ended September 30, 2001. For the fiscal year ended December 30, 2001, we incurred net losses of approximately $495.4 million, approximately $36.0 million for the fiscal year ended December 31, 2000, and approximately $7.7 million for the nine months ended March 31, 1999. As of March 31, 2002, we had an accumulated deficit of approximately $593.3 million. Due to the current economic climate and associated uncertainty within the telecommunications industry that have contributed to the sharp decline in demand for our products, we are currently unable to provide meaningful forecasts beyond the second quarter of 2002. We expect the difficult industry conditions to continue throughout 2002 and well into 2003. Consequently, our efforts to reduce our expense structure and minimize the use of our cash may not be successful. Furthermore, we need to achieve $15-16 million in quarterly revenues in order to return to profitability based on our announced restructuring plans. Achievement of this level of revenues is unlikely in 2002 without revenues provided by strategic acquisitions. We may be unable to complete such acquisitions for a variety of reasons. As a result of the foregoing, we may not be able to generate sufficient revenues and adequately contain costs and operating expenses necessary to achieve profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We are experiencing decreased sales and increased difficulty in predicting future operating results.

We have experienced reduced order volumes of current products and slow market adoption of new products and these factors have, and will continue to have, an adverse impact on our revenues. With our limited order backlog, we are unable to predict future sales accurately or provide meaningful long-term guidance for our future financial performance. In the fiscal year ended December 2001, we incurred charges related to

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excess inventory write-downs and related order cancellation fees of approximately $36.6 million. Further we recorded inventory write-downs of approximately $1.3 million in the quarter ended March 31, 2002 related to the divestiture of our passive product line. We have in the past been, and may in the future be, unable to accurately forecast our revenues, and therefore our future operating expenses. Many of our expenses are fixed in the short term, and the steps we have taken to reduce spending may not be adequate if our revenues are lower than we project. Any new product introductions will also result in increased operating expenses in advance of generating revenues, if any. Therefore, net losses in a given quarter could be greater than expected. Additional factors contributing to the difficulty in predicting future operating results include:

• uncertainty regarding the capital spending plans of the major telecommunications carriers, upon whom our customers and, ultimately we, depend for sales;

• our plans to develop and sell products to diversified markets other than telecom, which might not succeed;

• bankruptcy filings by existing customers and potential customers;

• our customers efforts to decrease inventory levels, which, in turn, reduces our sales;

• the long sales cycle for our products;

• minimal backlog and lower near-term sales visibility;

• declining average selling prices; and

• general market and economic uncertainty.

Failure to accurately forecast our revenues and future operating expenses could cause quarterly fluctuations in our net revenues and may result in volatility or a decline in our stock price.

Accounting treatment of our acquisitions has impacted our operating results.

Our operating results are adversely impacted by purchase accounting treatment, primarily due to the impact of in-process research and development charges and the amortization of and impairment charges relating to goodwill and other intangibles originating from the two acquisitions we completed in 2001. Under generally accepted accounting principles in the United States through June 30, 2001, we accounted for our acquisitions using the purchase method of accounting. Under purchase accounting, we recorded the fair market value of our common shares issued in connection with acquisitions, the fair value of the stock options assumed and the amount of direct transaction costs as the cost of acquiring these entities. That cost is allocated to the

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individual assets acquired and liabilities assumed, including various identifiable intangible assets such as in-process research and development, acquired technology, acquired customer base and acquired workforce, based on their respective fair values. We allocated the excess of the purchase cost over the fair value of the net identifiable assets to goodwill. We also incur other purchase accounting related costs and expenses in the period a particular transaction closes to reflect purchase accounting adjustments adversely affecting gross profit and the costs of integrating new businesses or curtailing overlapping operations. In addition, for fiscal 2001, we recorded an acquisition-related amortization expense of approximately $54.5 million. During 2001, under applicable accounting rules, we periodically evaluated the carrying value of our goodwill and other intangible assets. As a result of these evaluations, we recorded charges totaling approximately $289.3 million for impairment of goodwill and other intangible assets in 2001. At December 30, 2001, all the remaining goodwill had been written off through impairment charges. As of March 31, 2002, the net book value of other intangible assets arising from our acquisitions of JCA and Globe Y was approximately $10.7 million. Purchase accounting treatment of future mergers and acquisitions or the write-down of goodwill and other long-lived assets could result in a reduction in net income or an increase in net loss for the period in which the transaction takes place, which could have a material and adverse effect on our results of operations.

The long sales cycles for our telecom products may cause operating results to vary from quarter to quarter, which could continue to cause volatility in our stock price.

The length and variability of the sales and implementation cycles for our telecom products may cause our operating results to vary from quarter to quarter. We do not recognize revenue until a product has been delivered to a customer, all significant vendor obligations have been performed and collection is considered probable. Customers often view the purchase of our telecom products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our telecom products and our manufacturing process. This customer evaluation and qualification process frequently results in a lengthy initial sales cycle of up to one year or more. In addition, some of our customers require that our telecom products be subjected to Telcordia qualification testing, which can take up to nine months or more. While our customers are evaluating our telecom products and before they place an order with us, we may incur substantial costs and expenses to customize our telecom products to the customer’s needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our telecom products, or may return purchased products due to defects after the revenue for the sale has been recognized. Because of the difficulties of the telecommunications market in which we compete, our customers are slower to adopt new technologies that require expensive modification of currently installed systems or the possible installation of new systems, thus increasing the length of these sales and development cycles. The long sales cycles have caused and may continue to cause, our revenues and operating results to vary significantly and unexpectedly from quarter to quarter, which could continue to cause volatility in our stock price.

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We depend on a few key customers and the loss of these customers or a significant reduction in sales to these customers could significantly reduce our revenues.

Our customer base is highly concentrated. Historically, orders from a relatively limited number of customers accounted for a substantial portion of our net sales. In the three months ended March 31, 2002, Alcatel S.A. accounted for 13.4% of our net revenues. In the fiscal year ended December 30, 2001, Agilent Technologies and Alcatel S.A. accounted for approximately 13.4% and 11.3% of our net revenues, respectively. In the fiscal year ended December 31, 2000, Corvis Corporation, Agilent Technologies and Corning Incorporated accounted for approximately $17.6%, 14.4% and 10.6% of our net revenues, respectively. We anticipate that our operating results will continue to depend on sales to a relatively small number of customers. As a result of the significant downturn in the telecommunications industry, we have a minimal amount of order backlog. If we lose of any of our key customers or if these customers continue to reduce order volumes, we may not be able to replace the loss of orders with orders from new customers, which would materially adversely affect our revenues.

We have incurred, and may in the future continue to incur, inventory-related charges, the amounts of which are difficult to predict accurately.

Our sales are generally made pursuant to purchase orders that are subject to cancellation, modification or rescheduling without significant penalties. None of our current customers have any minimum purchase obligations, and they may stop placing orders with us at any time, regardless of any forecast they may have previously provided. As a result of the business downturn, we have incurred charges to align our inventory with actual customer requirements over the near term. Despite our limited ability to forecast customer demand, due to the long lead time required for some of the raw materials used to manufacture our products, we have to order certain raw materials months in advance of when we expect to need them. If we over-estimate demand, we will incur additional inventory write-downs. As discussed above, our ability to forecast our customers’ needs for our products in the current economic environment is very limited. We have incurred, and may in the future incur, significant inventory-related charges. In the fiscal year ended December 2001, we incurred charges related to excess inventory write-downs and related order cancellation fees of approximately $36.6 million. Further we recorded inventory write-downs of approximately $1.3 million in the quarter ended March 31, 2002 related to the divestiture of our passives product line. We may incur significant similar charges in future periods. Moreover, because of our current difficulty in forecasting sales, we may in the future revise our previous forecasts. While we believe, based on current information, that these inventory-related charges are appropriate, subsequent changes to our forecast may indicate that these charges were insufficient or even excessive.

Risks Related to Our Business

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The complexity of our product lines necessitates a business infrastructure that our current net revenues do not support. Our results of operations will continue to be adversely affected if we are unable to successfully restructure our operations.

Our two business segments are comprised of telecom and photonics tools. We have distinct product lines within these segments that require significant development resources, and we manufacture our products in multiple production facilities. The complexity of our multiple product lines necessitates a business infrastructure requiring substantially higher revenue levels than we are currently achieving. As a result of the slowdown in the economy and excess customer inventories, our order rates have declined, and we have a minimal amount of order backlog. We are currently reviewing the products we sell to customers, the locations in which we operate and the manner in which we go to market with our core product offerings. We have decided to exit the business of selling passive optical components products to the telecommunications market and recently we entered into a definitive agreement to sell the passive optical component product line to Finisar Corporation. Ultimately, we may decide to eliminate additional product offerings through termination, sale or other disposition or to sustain certain products at a minimum level where customer commitments prevent us from eliminating the offering altogether. Any decision to further eliminate or limit our offering of a product could involve the expenditure of capital, the realization of losses, a reduction in workforce, additional facility consolidations and/or the elimination of revenues along with the associated costs, any of which could harm our financial condition and operating results.

If the telecommunications market does not recover for an extended period of time, our ability to generate revenues from sales of our telecom products will be severely affected.

For the quarter ended March 31, 2002, approximately 48.5% of our revenues were from our telecom products, and for the fiscal year ended December 30, 2001, approximately 70% of our revenues were from our telecom products. In 2001, the telecommunications market experienced, and continues to experience, a substantial market downturn. Even if we are successful with our strategy to diversify, we will still be dependent upon the telecommunications market, although to a lesser degree. Our success will still depend partly on the continued growth of the Internet as a widely-used medium for commerce and communications, the continuing increase in the amount of data, or bandwidth, transmitted over communications networks and the growth and upgrading of optical networks to meet the increased demand for bandwidth. If the bandwidth requirements do not expand and upgrading of optical networks does not continue, the telecommunications market may not grow sufficiently enough to enable us to increase or even maintain the sales of our telecom products, adversely affecting our total net revenues. During 1999-2000, carriers and systems providers’ expectations for growth in bandwidth requirements were overly optimistic and resulted in significant over-ordering. This over-ordering has created significant excess inventories within the telecommunications industry. The excess inventory has reduced visibility for component and equipment suppliers as to the real demand for product within the industry. If we

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cannot accurately forecast the demand for our telecom products, our product development efforts may not be timed to our customers’ requirements and availability of our existing products may not be matched to our customers’ needs, either of which would adversely impact our results of operations.

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

Our future success depends in part on our ability to anticipate our customers’ needs and develop products that address those needs. We have reduced, and expect to further reduce, our research and development spending as part of our restructuring measures, which may harm our ability to develop new and enhanced products. Even if we develop new products, customers may not purchase the new or enhanced product because, among other things, the product may be too expensive, defective in design, manufacture or performance, uncompetitive, or may have been superceded by another product or technology. If we fail to effectively transfer production processes, or introduce and sell new products or enhanced products, our revenues will be adversely affected and our results of operations will be harmed.

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

Our growth strategy in the past has included, and continues to include, acquisitions of other companies, technologies or product lines to complement our internally developed products.

In the event of any future acquisitions, we could:

• use cash resources that would reduce our financial reserves;

• issue stock that would dilute our current stockholders’ percentage ownership;

• incur debt;

• assume liabilities;

• further increase operational and administrative complexity of our business; or

• incur expenses related to in-process research and development, amortization of goodwill and other intangible assets.

Any future acquisitions we may make also involve numerous other risks, including:

• problems related to the integration and management of acquired technology, operations and personnel;

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• problems completing product development programs of the acquired company and consolidating research and development efforts;

• unanticipated costs or liabilities;

• diversion of management’s attention from our core business;

• adverse effects on existing business relationships with suppliers and customers;

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

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

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

Competition may increase, which could reduce our sales and gross margins, or cause us to lose market share.

Competition in the telecommunications and photonics tools markets in which we compete is intense. We face competition from other large companies, including JDS Uniphase Corporation, Agere Systems, Inc., Nortel Networks Corporation and Alcatel S.A., many of which have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion, sale and support of their products. In addition, the market capitalization and cash reserves of several of our competitors are much larger than ours, and, as a result, these competitors are much better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Some of our competitors may spin-out new companies in the optical component and module market, which may compete more aggressively than their former parent companies due to their greater dependence on our markets. Additional competitors may enter the market, and we are likely to compete with new companies in the future. Our competitors in the photonics

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tools market consist of both public and private companies. We face competition from other public companies, including Coherent, Inc. and Newport Corporation, some of which have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. Our industry is also consolidating, and we believe it will continue to consolidate in the future as companies attempt to strengthen or hold market positions. We anticipate that consolidation will accelerate as a result of the current industry downturn. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. As a result of the foregoing factors, we expect that competitive pressures may result in further price reductions, reduced margins and loss of market share.

Our telecom products are deployed in large and complex systems and may contain defects that are not detected until after our products have been installed, and if our products fail to perform our business will be harmed.

Our business depends on our producing excellent products of consistently high quality. Some of our telecom products are designed to be deployed in large and complex optical networks. Because of the nature of these products, they can only be fully tested for reliability when deployed in networks for long periods of time. For various reasons including, among others, the occurrence of performance problems unforeseeable in testing, our products may fail to perform as expected. Furthermore, our customers may discover defects in our products only after they have been fully deployed and operated under peak stress conditions. Failures could result from faulty design or problems in manufacturing. In either case, we could incur significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. We have experienced some field failures with our telecommunications products in the past, which resulted in increased product returns, requiring increased warranty costs and adversely affecting our net revenues, and we remain exposed to similar failures in the future. In addition, our products are combined with products from other vendors. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things:

• loss of existing customers and failure to attract new customers;

• costly product redesigns or expenditure of additional capital equipment required to correct a defect;

• damage to our brand reputation;

• diversion of development and engineering resources; and

• legal actions by our customers.

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

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

We may from time to time become involved in various lawsuits and legal proceedings. For example, the Company has been a defendant in various putative securities class actions filed in the United States District Court for the Northern District of California, which actions were recently dismissed by the court with leave to amend. No amended complaint was filed by the deadline set by the court and we therefore believe that this lawsuit has been concluded.

Litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on the business, results of operations or financial condition of the Company. Any litigation to which we are subject could require significant involvement of our senior management and may divert management’s attention from our business and operations. For more information about current legal proceedings, see “Part II—Other Information, Item 1—Legal Proceedings.”

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

Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel. Our officers and key employees are not bound by employment agreements that require them to work for us for any specific term.

In April 2002, we announced the promotion of Nicola Pignati to president and chief executive officer. Mr. Pignati will also join our board of directors following our annual meeting of stockholders scheduled for May 29, 2002. R. Clark Harris, the chairman of our board of directors, served as president and chief executive officer from October 2001. Mr. Harris will remain in an active role as our chairman of the board and chief strategy officer. Our management team has not worked together for a significant length of time and may not be able to work together effectively to successfully implement our business strategies. If the management team is unable to accomplish our business objectives, our ability to stabilize and then grow our business could be severely impaired.

We have reduced our work force from approximately 2,100 in the first quarter of 2001 to approximately 750 employees at the end March 2002. We have instituted restructuring plans that include further reductions in our worldwide workforce. Our ability to continue to retain highly skilled personnel in light of these reductions in force and other factors will be a critical factor in determining whether we will be successful. Despite the economic downturn, competition for highly skilled personnel continues to be

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intense. We may not be successful in retaining qualified personnel to fulfill our current or future needs, which could adversely impact our ability to develop and sell our products.

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

For the quarter ended March 31, 2002, approximately 41.3% of our net revenues were from international sales, and for the fiscal year ended December 30, 2001, approximately 35.7% of our net revenues were from international sales. We expect that sales to customers outside North America will continue to account for a significant portion of net sales.

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

Our international operations are subject to risks including the following:

• greater difficulty in accounts receivable collection and longer collection periods;

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

• difficulties and costs of staffing and managing foreign operations;

• sudden and unexpected reductions in demand in particular countries in response to exchange rate fluctuations;

• reduced protection for intellectual property rights in some countries;

• potentially adverse tax consequences; and

• political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing facilities.

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

Risks Related to Manufacturing Our Products

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If we fail to balance our manufacturing capacity with the demand for our products, our business will be adversely affected.

We face a challenge in accurately balancing our manufacturing capacity with the demand for our products. Throughout 2000, we aggressively expanded our manufacturing capacity in both the U.S. and China, through the expansion of facilities and the hiring of employees. As a result of the lower order volumes by our customers in 2001, we closed our Santa Clara facility for the U.S. and our smaller facility in Shenzhen, China and slowed the rate of production in our other U.S. and China factories in the first two quarters of 2001. Currently we operate manufacturing facilities in San Jose, California, Camarillo, California, and Shenzhen, China.

When we closed our older Santa Clara facility, we transferred our passive optical components product development activities to our newer, larger facility in San Jose, and when we closed our smaller production facility in Shenzhen, we consolidated optical components product manufacturing activities into our larger Shenzhen factory, which, in connection with the sale of our passive optical components business, we plan to close in the third quarter of 2002. We also plan to close our Camarillo, California facility in the third quarter of 2002 as a result of the difficult conditions in the telecommunications industry, which we believe will extend well into 2003. We will concentrate manufacturing activities in San Jose and outsource manufacturing requirements as needed. Our efforts to close underutilized manufacturing facilities may involve significant cash expenditures and cause potential disruption, which would adversely impact our results of operations.

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

We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our subcontractors, and, as a result, product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively impact our revenues, competitive position and reputation. We have, in the past, experienced a disruption in the manufacture of some of our products due to changes in our manufacturing processes, which resulted in reduced manufacturing yields and delays in the shipment of our products. If we experience similar disruptions in the future, it may result in lower yields or delays of our product shipments, which could adversely affect our revenues, gross margins and results of operations. In addition, we may experience manufacturing delays and reduced manufacturing yields upon introducing new products to our manufacturing lines. Due to the planned closure of our Camarillo, California facility, we may transfer certain production activities to offshore subcontractors, which will require precise coordination between our operations and those of the subcontractors. Without this coordination we may experience manufacturing delays and reduced manufacturing yields. We have in the past experienced lower-than-targeted product yields, which have resulted in delays of customer shipments, lost revenues and impaired gross margins.

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

Generally, customers do not purchase our products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as well as each new manufacturing line, must pass through varying levels of qualification with our customers. Additionally, most of our telecommunications products require Telcordia qualifications testing. Customers may also require that we, and any subcontractors that we may use, be registered under international quality standards, such as ISO 9001. Under our current restructuring plans we are consolidating our worldwide manufacturing operations. The manufacturing lines for these products at our consolidated facilities or at our subcontractors’ facilities must undergo qualification with our customers before commercial manufacture of these products can recommence. The qualification process, whether for new products or in connection with the relocation of manufacturing of current products, determines whether the manufacturing line achieves the customers’ quality, performance and reliability standards. We may experience delays in obtaining customer qualification of our manufacturing lines and, as a consequence, our operating results and customer relationships would be harmed. If there are delays in qualification of our products, our customers may drop the product from a long-term supply program, which would result in a potentially significant lost revenue opportunity over the term of that program.

Our failure to accurately forecast component and material requirements has caused us to incur additional costs, have excess inventories or have insufficient materials to build our products, all of which have harmed our results of operations. If we continue to be unable to accurately forecast component and material requirements, our results of operations will continue to be adversely impacted.

We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we predict both the demand for our products and the lead times required to obtain the necessary components and materials. It is very difficult to develop accurate forecasts of product demand, especially in the current uncertain market conditions in the telecommunications and photonics tools industries and the economy in general. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components or materials at a given time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our results of operations. Order cancellations and lower order volumes by our customers have created excess inventories. Further, in order to avoid additional excess material inventories we have incurred cancellation charges associated with modifying existing purchase orders with our vendors. In fiscal 2001, we recorded approximately $36.6 million in excess inventory and related order cancellation fees, primarily related to telecom products, which negatively impacted our operating

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results. Most of these charges were incurred in the first quarter of fiscal 2001. If we fail to accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials in the future, we could incur additional inventory write-downs or cancellation charges.

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

We currently purchase several key components used in the manufacture of our products from single or limited source suppliers. We do not have long-term or volume purchase agreements with any of these suppliers and these components may not in the future be available in the quantities or at the prices required by us. We may fail to obtain required components in a timely manner in the future, or could experience further delays from evaluating and testing the products of these potential alternative suppliers. The recent softening of demand in the telecommunications industry could adversely impact the financial condition of our suppliers, many of whom have limited financial resources. We have in the past, and may in the future, be required to provide advance payments in order to secure key components from financially limited suppliers. Financial or other difficulties faced by these suppliers could limit the availability of key components or impair our ability to recover advances made to these suppliers. Any interruption or delay in the supply of any of these components, or the inability to obtain these components from alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

Risks Related to Our Intellectual Property

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

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

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We are currently defending a claim that we have infringed the intellectual property rights of Photonetics, Inc. and Photonetics S.A., and if we are unsuccessful in defending this claim or future intellectual property claims, we may have to expend a substantial amount of resources to make our products non-infringing and may have to pay a substantial amount in damages.

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

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

• stop selling, incorporating or using our products that use the disputed intellectual property;

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

• redesign our products that use the disputed intellectual property.

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For more information about current legal proceedings, see “Part II—Other Information, Item 1—Legal Proceedings.”

Risks Related to Our Corporate Governance

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

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

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

Provisions of our charter documents and Delaware law may have anti-takeover effects that could prevent a change in our control, even if this would be beneficial to stockholders.

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

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

• a classified board of directors, in which our board is divided into three classes

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with three-year terms with only one class elected at each annual meeting of stockholders, which means that a holder of a majority of our common stock will need two annual meetings of stockholders to gain control of the board;

• a provision which prohibits our stockholders from acting by written consent without a meeting;

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

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

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

PART II. OTHER INFORMATION

ITEM 1.    Legal Proceedings

On February 13, 2002, a lawsuit was filed purportedly on behalf of both Howard Yue and Globe Y Technology, a company acquired by New Focus, in Alameda County Superior Court. The action is captioned Globe Y Technology, Inc. v. New Focus, Inc. et al., and asserts claims against the Company and several of its officers and directors. The complaint alleges eight causes of action, including fraud and deceit by active concealment, fraud and deceit based upon omissions of material facts, negligent misrepresentation, and breach of contract. The claims stem from the acquisition of Globe Y Technology, Inc. by the Company completed February 15, 2001. The complaint seeks unspecified economic, punitive, and exemplary damages, prejudgment interest, costs, and equitable and general relief. The Company believes that these claims are without merit and intends to defend them vigorously.

On July 20, 2001, Photonetics, Inc. and Photonetics, S.A. filed a complaint against us for patent infringement in the United States District for the District of Delaware. Photonetics, Inc. and Photonetics, S.A. claim that the we infringe U.S. Patent No. 5,594,744 and seek preliminary and injunctive relief and damages. Photonectics, Inc. and Photonetics, S.A. allege that our infringement is willful and seek enhanced damages and attorneys’ fees. We filed our answer and counterclaims on September 10, 2001. In the answer, we denied infringement of U.S. Patent No. 5,594,744 and asserted that the patent was invalid and unenforceable. In a declaratory judgment counterclaim, we claimed that U.S. Patent No. 5,594,744 is invalid, unenforceable and not infringed. We also counterclaimed for patent infringement of U.S. Patent Nos. 5,995,521 and 5,319,668 and seek preliminary and injunctive relief and damages. Additionally, we claim that

36

Photonetics, Inc. and Photonetics, S.A.’s infringement of the patents is willful and seeks enhanced damages and attorneys’ fees. On October 9, 2001, Photonetics, Inc. and Photonetics, S.A. filed its reply to our counterclaims. Photonetics, Inc. and Photonetics, S.A. denied infringement of U.S. Patent Nos. 5,995,521 and 5,319,668 and alleged that the patents were invalid. The parties have exchanged initial disclosures and are in the early stages of discoveries. Trial is scheduled to begin on August 4, 2003. An unfavorable resolution of the lawsuit could have a material adverse effect on the business, results of operations or financial condition of the Company.

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

Various plaintiffs have filed similar actions in the United States District Court for the Southern District of New York asserting virtually identical allegations against more than 400 other issuers. These cases have all been assigned to the Hon. Shira A. Scheindlin for coordination and decisions on pretrial motions, discovery, and related matters other than trial. We and our named officers and directors believe that we have meritorious defenses to these lawsuits and will defend the litigation vigorously. An unfavorable resolution of these lawsuits could have a material adverse effect on our business, results of operations or financial condition of the Company.

On March 12, 2001, another putative securities class action, captioned Mandel v. New Focus, Inc., et. al., Civil Action No. C-01-1020, was filed against New Focus and several of its officers and directors in the United States District Court for the Northern District of California. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class that purchased New Focus common stock between January 31, 2001 and March 5, 2001. Substantially similar actions, captioned Rosen v. New Focus, Inc., et. al., Civil Action No. C-01-1065; Solomon v. New Focus, Inc., et. al., Civil Action No. C-01-2023; Deutch v. New Focus, Inc., et. al., Civil Action No. C-01-1123; Connors v. New Focus, Inc., et.

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al., Civil Action No. C-01-1148; Spanos v. New Focus, Inc., et. al., Civil Action No. C-01-1328; Patton v. New Focus, Inc., et. al., Civil Action No. C-01-1413, and Naiditch v. New Focus, Inc., et. al., Civil Action No. C-01-1689 have also been filed against New Focus and several of its officers and directors in the United States District Court for the Northern District of California. The Naiditch action asserts a class period from October 25, 2000 to March 5, 2001. The cases were consolidated, and a lead plaintiff was appointed. On February 15, 2002, the District Court entered an order dismissing without prejudice the claims against the Company and its officers and directors. The order dismissing the action gave the plaintiffs a deadline of thirty days from February 15, 2002 in which to file an amended complaint. No amended complaint was filed by the deadline and the Company therefore believes that this lawsuit has been concluded.

On April 10, 2001, a stockholder derivative action purportedly on behalf of the Company, captioned Sherman v. Harris et. al., Civil Action No. 18797-NC, was filed in Delaware Chancery Court. The complaint alleges that the Company’s directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct including conduct complained of in the securities litigation described above. The complaint named the Company solely as a nominal defendant against whom the plaintiff seeks no recovery. On April 25, 2002, the Company received notice that the Plaintiff dismissed the action without prejudice pursuant to Delaware Court of Chancery Rule 41(a).

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

ITEM 2.    Changes in Securities and Use of Proceeds—

None.

ITEM 3.    Defaults Upon Senior Securities—

Not Applicable.

ITEM 4.    Submission of Matters to a Vote of Security Holders—

None.

ITEM 5.    Other Information—

Not Applicable.

ITEM 6.    Exhibits and Reports on Form 8-K

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a) Exhibits

10.25 Form of Amendment to Nonstatutory Stock Option Agreement entered into as of March 7, 2002, by and between the Registrant and each of Peter Hansen, R. Clark Harris and Nicola Pignati.

10.26 Amended and Restated Stock Option Agreement entered into as of March 7, 2002, by and between the Registrant and each of Dr. Timothy Day, Peter Hansen and William L. Potts, Jr.

10.27 Stock Option Agreement dated as of November 14, 2001, by and between the Registrant and R. Clark Harris.

b) Reports on Form 8-K

None

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SIGNATURES

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

	NEW FOCUS, INC. (Registrant)
DATE: May 13, 2002	BY:/s/    Nicola Pignati Nicola Pignati President and Chief Executive Officer
DATE: May 13, 2002	BY:/s/    William L. Potts, Jr. William L. Potts, Jr. Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description
10.25	Form of Amendment to Nonstatutory Stock Option Agreement entered into as of March 7, 2002, by and between the Registrant and each of Peter Hansen, R. Clark Harris and Nicola Pignati.
10.26	Amended and Restated Stock Option Agreement entered into as of March 7, 2002, by and between the Registrant and each of Dr. Timothy Day, Peter Hansen and William L. Potts, Jr.
10.27	Stock Option Agreement dated as of November 14, 2001, by and between the Registrant and R. Clark Harris.

EX-10.25

Exhibit 10.25

NEW FOCUS, INC.

AMENDMENT

TO

NONSTATUTORY STOCK OPTION AGREEMENT

This Amendment is made as of March 7, 2002 by and between New Focus, Inc., a Delaware corporation (the “Company”) and                                      (“Optionee”).

WHEREAS, the Company has granted Optionee one or more options (each referred to herein as the “Option”) to purchase shares of common stock of the Company under the Company’s 1990 Incentive Stock Plan and/or 1998 Stock Plan and/or 1999 Stock Plan and/or 2000 Stock Plan (each referred to herein as the “Plan”) represented by one or more stock option agreements (each, as amended, referred to herein as the “Option Agreement”);

WHEREAS, it is expected that the Company from time to time will consider the possibility of a Change in Control (as defined below). The Board of Directors of the Company (the “Board”) recognizes that such consideration can be a distraction to Optionee and can cause Optionee to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of Optionee, notwithstanding the possibility, threat or occurrence of a Change in Control;

WHEREAS, the Board believes that it is in the best interests of the Company and its stockholders to provide Optionee with an incentive to continue Optionee’s employment and to motivate Optionee to maximize the value of the Company upon a Change in Control and otherwise; and

WHEREAS, to accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Amendment by Optionee, to agree to acceleration of vesting of the shares subject to the Option in certain events.

NOW, THEREFORE, the parties hereto agree that the Option Agreement is hereby amended as follows:

1.    Vesting Schedule.    Notwithstanding anything to the contrary in the Option Agreement, upon a Good Reason Event (as defined in Section 3 below) or Optionee’s termination without Cause (as defined in Section 3 below) at any time within the 3-month period prior to or the 18-month period following the effective date of a Change in Control (as defined in Section 3 below) or the 12-month period following a Buy-Side Event (as defined in Section 3 below), Optionee shall fully vest in and have the right to exercise the Option as to one hundred percent (100%) of the then unvested shares subject to the Option as of the date of such termination without Cause or Good Reason Event.

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2.    Termination Period.    Notwithstanding anything to the contrary in the Option Agreement, in the event of (i) a Good Reason Event or Optionee’s termination without Cause at any time within the 3-month period prior to or the 18-month period following a Change in Control, (ii) a Good Reason Event or Optionee’s termination without Cause at any time within the 12-month period following a Buy-Side Event, or (iii) the death or Disability of the Optionee, this Option may be exercised for twelve months after Optionee ceases to be a Service Provider. Notwithstanding the foregoing, in no event shall this Option be exercised later than the Term as provided in the Option Agreement.

3.    Definitions.    As used in the Option Agreement, the following terms shall have the meanings set forth below:

(a)    Buy-Side Event.    “Buy-Side Event” shall mean the (i) Company’s acquisition, directly or indirectly, of securities of another corporation or entity representing more than fifty percent (50%) of the total voting power represented by such corporation or entity’s then outstanding voting securities, or (ii) a merger or consolidation of another corporation or entity with the Company, or the Company’s purchase of all or substantially all the assets of another corporation or entity, a result of which merger, consolidation or purchase, the voting securities of such corporation or entity outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the Company) more than fifty percent (50%) of the total voting power represented by the voting securities of such corporation or entity or surviving entity outstanding immediately after such merger, consolidation or sale.

(b)    Cause.    “Cause” shall mean an Optionee’s (i) willful act of personal dishonesty, gross misconduct, fraud or misrepresentation, taken by the Optionee in connection with his/her responsibilities as an employee, that is seriously injurious to the Company; (ii) conviction of or entry of a plea of guilty or nolo contendere to a felony; or (iii) willful and continued failure to substantially perform his/her principal duties and/or obligations of employment (other than any such failure resulting from incapacity due to bonafide physical or mental illness), which failure is not remedied within a period of forty-five (45) days after receipt of written notice from the Company, specifically identifying the manner in which the Company believes that Optionee has not substantially performed his/her duties and/or obligations. For the purposes of this Section, no act or failure to act shall be considered “willful” unless done or omitted to be done in bad faith and without reasonable belief that the act or omission was in or not opposed to the best interests of the Company.

(c)    Change in Control.    “Change in Control” shall mean the occurrence of any of the following events:

(i)  the acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the “beneficial ownership” (as defined in Rule 13d–3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting securities;

(ii)  a merger or consolidation of the Company with any other corporation, or the sale of all or substantially all the assets of the Company, a result of which merger, consolidation

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or sale, the voting securities of the Company outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity, including the parent corporation of such surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger, consolidation or sale; or

(iii)  the approval of a plan of complete liquidation or dissolution of the Company; or

(iv)  a change in the composition of the Board occurring within a 12-month period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are members of the Board as of the date of this Amendment, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of directors whose election was neither in connection with any transactions described in subsections (i) or (ii), nor in connection with an actual or threatened proxy contest relating to the election of directors to the Board.

(d)    Good Reason Event.    “Good Reason Event” shall mean that without Optionee’s written consent and without Cause, any of the following events occur:

(i)  a reduction of five percent (5%) or more of Optionee’s compensation (including base salary and any non-discretionary and objective standard incentive payments or bonus awards, but excluding facilities, fringe benefits and prerequisites included in subsection (iii) below);

(ii)  a reduction of the scope or nature of Optionee’s duties and/or responsibilities, it being understood that the fact alone that Optionee’s duties and/or responsibilities are conducted at the Company level following a Change in Control, rather than at the combined entity level, shall constitute a “Good Reason Event;”

(iii)  a substantial reduction, without good business reasons, of the facilities, fringe benefits or perquisites available to Optionee immediately prior to such reduction (good business reasons include reductions to make such facilities, fringe benefits or perquisites consistent with the practice of the acquiring company);

(iv)  the relocation of Optionee’s primary workplace to a location more than fifty (50) miles away from his/her workplace in effect immediately prior to such relocation; or

(v)  the failure of the Company to obtain the express assumption of this Option Agreement, as amended hereby, by an acquiring corporation.

4.    Stock Option Agreements.    To the extent not amended hereby, the Option Agreement shall remain in full force and effect.

5.    No Guarantee of Continued Service.    Optionee acknowledges and agrees that the vesting of the Options pursuant to this Amendment or the Option Agreement is earned only by continuing as an employee of or in the service to the Company. Optionee further acknowledges and agrees that neither this Amendment nor the Option Agreement constitute an express or implied promise of continued engagement of employment by or service to the Company for the vesting

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period, for any period, or at all, and shall not interfere in any way with Optionee’s right or the Company’s right to terminate Optionee’s employment or service relationship at any time, with or without cause or with or without notice.

6.    Entire Agreement.    This Amendment, taken together with the Option Agreement (to the extent not amended hereby), represents the entire agreement of the parties and shall supersede any and all previous contracts, arrangements or understandings between the parties with respect to the Option. This Amendment may be amended at any time only by mutual written agreement of the parties hereto.

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IN WITNESS WHEREOF, each of the parties has executed this Agreement.

NE W FOCUS, INC.

By : ____________________________________

Tit le: ___________________________________

Da te: ___________________________________

OP TIONEE:

___ _____________________________________

Da te: ___________________________________

                            [Signature Page To Amendment To Nonstatutory Stock Option Agreement]

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EX-10.26

Exhibit 10.26

NEW FOCUS, INC.

AMENDED AND RESTATED

STOCK OPTION AGREEMENT

This Amended and Restated Stock Option Agreement (this “Option Agreement”) is made as of March 7, 2002 by and between New Focus, Inc., a Delaware corporation (the “Company”) and                 (“Optionee”).

WHEREAS, the Company has granted Optionee an option (the “Option”) to purchase shares of common stock of the Company under the Company’s                 Stock Plan (the “Plan”) represented by a stock option agreement dated                 (the “Prior Option Agreement”); and

WHEREAS, the Company and the Optionee desire to amend and restate the Prior Option Agreement in its entirety, which shall have no effect on the number of shares subject to the Option, the Exercise Price, the Date of Grant or the Vesting Commencement Date.

NOW, THEREFORE, the parties hereto agree that the Prior Option Agreement, but not the Exhibits thereto, is hereby amended and restated as follows:

Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement.

I.    NOTICE OF STOCK OPTION GRANT

[Name]

[Address]

You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:

Date of Grant
Vesting Commencement Date
Exercise Price per Share	$
Total Number of Shares Granted
Total Exercise Price	$
Type of Option:	____ Incentive Stock Option

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	__Nonstatutory Stock Option
Term/Expiration Date:

Vesting Schedule:

This Option shall be exercisable, in whole or part, according to the following vesting schedule:

[VESTING SCHEDULE]

Termination Period:

This Option may be exercised for a period of                  after Optionee ceases to be a Service Provider; provided, however, that (i) in the event of a Good Reason Event (as defined in Section 7 below) or Optionee’s termination without Cause (as defined in Section 7 below) at any time within the 3-month period prior to or the 18-month period following a Change of Control (as defined in Section 7 below), (ii) in the event of a Good Reason Event or Optionee’s termination without Cause at any time within the 12-month period following a Buy-Side Event (as defined in Section 7 below), or (iii) upon the death or Disability of the Optionee, this Option may be exercised for twelve months after Optionee ceases to be a Service Provider. Notwithstanding the foregoing, in no event shall this Option be exercised later than the Term/Expiration Date as provided above.

II.    AGREEMENT

1.    Grant of Option.    The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.

If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option (“NSO”).

2.    Exercise of Option.    This Option shall be exercisable during its term in accordance with the provisions of Section 10 of the Plan as follows:

(a)  Right to Exercise.

(i)  Subject to Subsections 2(a)(ii) and 2(a)(iii) below, this Option shall be exercisable cumulatively according to the following vesting schedule set forth in the Notice of Grant. Alternatively, at the election of the Optionee, this Option may be exercised in whole or in

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part at any time as to any Shares (vested or unvested). Vested Shares shall not be subject to the Company’s Repurchase Option (the “Repurchase Option”) as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1 (the “Restricted Stock Purchase Agreement”).

(ii)  As a condition to exercising this Option for unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement. Unvested Shares shall be subject to the Company’s Repurchase Option, which shall lapse at the same rate as the vesting schedule set forth in the Notice of Grant, subject to accelerated vesting in certain circumstances, as set forth in Section 6 hereof.

(iii)  This Option may not be exercised for a fraction of a Share.

(b)    Method of Exercise.    This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Stock Administrator of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

3.    Method of Payment.

Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a)  cash; or

(b)  check; or

(c)  consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or

(d)  surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or

(e)  delivery of Optionee’s promissory note (the “Note”) in the form attached hereto as Exhibit B-1, in the amount of the purchase price plus any applicable federal, state, or local income taxes payable on account of the exercise of the Option, together with the execution and delivery by the Optionee of the Security Agreement attached hereto as Exhibit B-2. The note shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement.

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4.    Non-Transferability of Option.

This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

5.    Term of Option.

This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

6.    Acceleration of Vesting.

(a)    Acceleration Following a Change of Control.    Notwithstanding any vesting provisions to the contrary, upon a Good Reason Event or Optionee’s termination without Cause at any time within the 18-month period following, or at any time within the 3-month prior to, the effective date of a Change of Control, Optionee shall fully vest in and have the right to exercise this Option as to one hundred percent (100%) of the then unvested shares subject to the Option as of the date of such termination without Cause or Good Reason Event.

(b)    Acceleration Following a Buy-Side Event.    Notwithstanding any vesting provisions to the contrary, upon a Good Reason Event or in the event of Optionee’s termination without Cause at any time within the 12-month period following a Buy-Side Event, Optionee shall fully vest in and have the right to exercise this Option as to one hundred percent (100%) of the then unvested shares subject to the Option as of the date of such termination without Cause or Good Reason Event.

7.    Definitions.    For purposes of this Option Agreement, the following terms shall have the meanings set forth below:

(a)    Buy-Side Event.    “Buy-Side Event” shall mean the (i) Company’s acquisition, directly or indirectly, of securities of another corporation or entity representing more than fifty percent (50%) of the total voting power represented by such corporation or entity’s then outstanding voting securities or (ii) a merger or consolidation of another corporation or entity with the Company, or the Company’s purchase of all or substantially all the assets of another corporation or entity, a result of which merger, consolidation or purchase, the voting securities of such corporation or entity outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the Company) more than fifty percent (50%) of the total voting power represented by the voting securities of such corporation or entity or surviving entity outstanding immediately after such merger, consolidation or sale.

(b)    Cause.    “Cause” shall mean an Optionee’s (i) willful act of personal dishonesty, gross misconduct, fraud or misrepresentation, taken by the Optionee in connection with his/her responsibilities as an employee, that is seriously injurious to the Company; (ii) conviction of or entry of a plea of guilty or nolo contendere to a felony; or (iii) willful and continued failure to substantially perform his/her principal duties and/or obligations of employment (other than any such failure resulting from incapacity due to bonafide physical or mental illness), which failure is not

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remedied within a period of forty-five (45) days after receipt of written notice from the Company, specifically identifying the manner in which the Company believes that Optionee has not substantially performed his/her duties and/or obligations. For the purposes of this Section, no act or failure to act shall be considered “willful” unless done or omitted to be done in bad faith and without reasonable belief that the act or omission was in or not opposed to the best interests of the Company.

(c)    Change of Control.    “Change of Control” shall mean the occurrence of any of the following events:

(i)  the acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the “beneficial ownership” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting securities;

(ii)  a merger or consolidation of the Company with any other corporation, or the sale of all or substantially all the assets of the Company, a result of which merger, consolidation or sale, the voting securities of the Company outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity, including the parent corporation of such surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger, consolidation or sale;

(iii)  the approval of a plan of complete liquidation or dissolution of the Company; or

(iv)  a change in the composition of the Board occurring within a 12-month period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are members of the Board as of the date of this Amendment, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of directors whose election was neither in connection with any transactions described in subsections (i) or (ii), nor in connection with an actual or threatened proxy contest relating to the election of directors to the Board.

(d)    Good Reason Event.    “Good Reason Event” shall mean that without Optionee’s written consent and without Cause, any of the following events occur:

(i)  a reduction of five percent (5%) or more of Optionee’s compensation (including base salary and any non-discretionary and objective standard incentive payments or bonus awards, but excluding facilities, fringe benefits and prerequisites included in subsection (iii) below);

(ii)  a reduction of the scope or nature of Optionee’s duties and/or responsibilities, it being understood that the fact alone that Optionee’s duties and/or responsibilities are conducted at the Company level following a Change of Control, rather than at the combined entity level, shall constitute a “Good Reason Event;”

(iii)  a substantial reduction, without good business reasons, of the facilities, fringe benefits or perquisites available to Optionee immediately prior to such reduction (good

5

business reasons include reductions to make such facilities, fringe benefits or perquisites consistent with the practice of the acquiring company);

(iv)  the relocation of Optionee’s primary workplace to a location more than fifty (50) miles away from his/her workplace in effect immediately prior to such relocation; or

(v)  the failure of the Company to obtain the express assumption of this Option Agreement, including the terms of Section 6 and this Section 7, by an acquiring corporation.

8.    Tax Consequences.  Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

(a)  Exercise of Option. Upon the exercise of an NSO, Optionee will recognize compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the exercised Shares on the date of exercise over the purchase price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

(b)  Disposition of Shares. If Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase.

(c)  Section 83(b) Election for Unvested Shares Purchased Pursuant to Options. With respect to the exercise of an Option for unvested Shares, an election (the “Election”) may be filed by the Optionee with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their fair market value on the date of purchase. This will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the Option is exercised over the purchase price for the exercised Shares. Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses. Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.

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OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE’S BEHALF.

9.    Entire Agreement; Governing Law.

The Plan is incorporated herein by reference. The Plan and this Option Agreement, including the exhibits hereto, constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, including the Prior Option Agreement, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California.

10.    NO GUARANTEE OF CONTINUED SERVICE.

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE:	NEW FOCUS, INC.
Signature	By: R. Clark Harris, President and Chief Executive Officer
Print Name
Residence Address

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EX-10.27

Exhibit 10.27

NEW FOCUS, INC.

2000 STOCK OPTION PLAN

STOCK OPTION AGREEMENT

Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement.

1. NOTICE OF STOCK OPTION GRANT

R. Clark Harris

[Address]

You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:

Date of Grant	November 14, 2001
Vesting Commencement Date	October 10, 2001
Exercise Price per Share	$3.70
Total Number of Shares Granted	1,500,000
Total Exercise Price	$5,550,000.00
Type of Option:	___    Incentive Stock Option
	X      Nonstatutory Stock Option
Term/Expiration Date:	November 13, 2012

Vesting Schedule:

This Option shall be exercisable, in whole or part, according to the following vesting schedule:

20% of the Shares subject to the Option shall vest as of the Vesting Commencement Date, and 1/60^th of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates.

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Termination Period:

This Option may be exercised for a period of ninety (90) days after Optionee ceases to be a Service Provider; provided, however, that (i) in the event of Optionee’s termination following a Good Reason Event (as defined in Section 7 below), a change of control (as defined in Section 7 below) or a Buy-Side Event (as defined in Section 7 below), or (ii) upon the death or Disability of the Optionee, this Option may be exercised for twelve months after Optionee ceases to be a Service Provider. Notwithstanding the foregoing, in no event shall this Option be exercised later than the Term/Expiration Date as provided above.

I. AGREEMENT

1.    Grant of Option.

The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the “Optionee”) an option (the “Option”) to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.

If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option (“NSO”).

2.    Exercise of Option.

(a)  Right to Exercise.    This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement.

(b)  Method of Exercise.    This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Stock Administrator of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

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3.    Method of Payment.

Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a)  cash; or

(b)  check; or

(c)  consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or

(d)  surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

4.    Non-Transferability of Option.

This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

5.    Term of Option.

This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

6.    Acceleration of Vesting.

(i)  Acceleration Upon a Change of Control.    Notwithstanding any vesting provisions to the contrary, upon a Change of Control, Optionee shall fully vest in one hundred percent (100%) of the then unvested shares subject to the Option as of the date of such Change of Control.

(ii)  Acceleration following a Buy-Side Event.    Notwithstanding any vesting provisions to the contrary, upon a Good Reason Event following a Buy-Side Event during the term of that certain Employment Agreement by and between the Company and Optionee dated as of October 10, 2001, Optionee shall fully vest in one hundred percent (100%) of the then unvested shares subject to the Option as of the date of such Good Reason Event.

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7.    Definitions.    For purposes of this Option Agreement, the following terms shall have the meanings set forth below:

(a)  Buy-Side Event.    “Buy-Side Event” shall mean the (i) Company’s acquisition, directly or indirectly, of securities of another corporation or entity representing more than fifty percent (50%) of the total voting power represented by such corporation or entity’s then outstanding voting securities or (ii) a merger or consolidation of another corporation or entity with the Company, or the Company’s purchase of all or substantially all the assets of another corporation or entity, a result of which merger, consolidation or purchase, the voting securities of such corporation or entity outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the Company) more than fifty percent (50%) of the total voting power represented by the voting securities of such corporation or entity or surviving entity outstanding immediately after such merger, consolidation or sale.

(b)  Cause.    “Cause” shall mean Optionee’s:  (i) willful act of personal dishonesty, gross misconduct, fraud or misrepresentation, taken by Optionee in connection with his responsibilities as an employee of the Company, that is seriously injurious to the Company; (ii) conviction of or plea of guilty or nolo contendre to a felony; or (iii) willful and continued failure to substantially perform his principal duties and/or obligations of employment (other than such failure resulting from incapacity due to bonafide physical or mental illness), which failure is not remedied within a period of forty-five (45) days after written notice from the Company, specifically identifying the manner in which the Company believes that Optionee has not substantially performed his duties and/or obligations. No act or failure to act shall be considered “willful” unless done or omitted to be done in bad faith and without reasonable belief that the act or omission was in or not opposed to the best interests of the Company.

(c)  Change of Control.    “Change of Control” shall mean the occurrence of any of the following events:

(i)  the acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the “beneficial ownership” (as defined in Rule 13d–3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting securities; or

(ii)  a merger or consolidation of the Company with any other corporation, or the sale of all or substantially all the assets of the Company, a result of which merger, consolidation or sale, the voting securities of the Company outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity, including the parent corporation of such surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger, consolidation or sale; or

(iii)  the approval of a plan of complete liquidation or dissolution of the Company; or

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(iv)  a change in the composition of the Board occurring within a 12–month period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are members of the Board as of the date of this Agreement, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of directors whose election was neither in connection with any transactions described in subsections (i) or (ii), nor in connection with an actual or threatened proxy contest relating to the election of directors to the Board.

(d)  Good Reason Event.    “Good Reason Event” shall mean if following the Company’s acquisition of another corporation or entity, the Board takes any of the following “Actions,” without Optionee’s written consent and without Cause:

(i)  a reduction of fifteen percent (15%) or more of Optionee’s compensation (including base salary and any non-discretionary and objective standard incentive payments or bonus awards, but excluding facilities, fringe benefits and perquisites included in subsection (iii) below) in effect immediately prior to such reduction;

(ii)  a reduction of Optionee’s duties and/or responsibilities; or

(iii)  a substantial reduction, without good business reasons, of the facilities, fringe benefits and perquisites available to Optionee prior to such Action; and

(iv)  within thirty (30) days after any such Action, Optionee provides written notice to the Board describing in reasonable detail the Action; and

(v)  the Board does not cure such Action within thirty (30) days after receipt of Optionee’s notice.

8.    Tax Consequences.

Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

9.    Exercising the Option.

(a)  Nonstatutory Stock Option.    The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

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(b)  Incentive Stock Option.    If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status.

(c)  Disposition of Shares.

(i)  NSO.    If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

(ii)  ISO.    If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.

(iii)  Notice of Disqualifying Disposition of ISO Shares.    If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee.

10.    Entire Agreement; Governing Law.

The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California.

11.    No Guarantee of Continued Service.

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OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

OPTIONEE:	NEW FOCUS, INC.
X        /s/    R. CLARK HARRIS		/s/    WILLIAM L. POTTS, JR., CFO
Signature		By:    William L. Potts, Jr., CFO
R. Clark Harris
Print Name
Residence Address

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