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

                                    FORM 10-K

       FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)

 ____
|  X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|____| ACT OF 1934
                  For the fiscal year ended September 30, 2005

                                       OR
 ____
|    | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|____| EXCHANGE ACT OF 1934
          For the transition period from ________ to __________________

                        Commission file number 000-31861

                      OPTICAL COMMUNICATION PRODUCTS, INC.
             (Exact Name of Registrant as Specified in Its Charter)
                              --------------------


Delaware                                                             95-4344224
(State or Other Jurisdiction                                   (I.R.S. Employer
of Incorporation or Organization)                            Identification No.)

                               6101 Variel Avenue
                        Woodland Hills, California 91367
          (Address of principal executive offices, including zip code)

       Registrant's Telephone Number, Including Area Code: (818) 251-7100
--------------------------------------------------------------------------------

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                                                       Name of each exchange
             Title of each class                        on which registered
-----------------------------------------------    -----------------------------
    Class A Common Stock, $0.001 par value           The Nasdaq National Market

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|

     Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|

     As of March 31, 2005, the last business day of the registrant's most
recently completed second fiscal quarter, the approximate aggregate market value
of voting and non-voting common stock held by non-affiliates of the registrant
was $32,634,881 (based upon the last closing price for shares of the
registrant's common stock as reported by The National Market System of the
National Association of Securities Dealers Automated Quotation System as of that
date). Shares of common stock held by each officer, director, and holder of 10%
or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.


<PAGE>


     The registrant has two classes of common stock authorized, Class A Common
Stock and Class B Common Stock. The rights, preferences and privileges of each
class of common stock are identical except for voting rights. The holders of
Class A Common Stock are entitled to one vote per share while holders of Class B
Common Stock are entitled to ten votes per share on matters to be voted on by
stockholders. As of December20, 2005, there were approximately 47,041,931 shares
of Class A Common Stock outstanding and 66,000,000 shares of Class B Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Certain information required in Part III hereto is incorporated by
reference to the Proxy Statement for the Registrant's 2006 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.


<PAGE>


                      OPTICAL COMMUNICATION PRODUCTS, INC.

                           ANNUAL REPORT ON FORM 10-K

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005

                                TABLE OF CONTENTS
                                                                           Page

PART I........................................................................1
       ITEM 1.   BUSINESS.....................................................1
       ITEM 2.   PROPERTIES.........  .......................................29
       ITEM 3.   LEGAL PROCEEDINGS...........................................30
       ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........30

PART II......................................................................31
       ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS.........................................31
       ITEM 6.   SELECTED FINANCIAL DATA.....................................33
       ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                 AND RESULTS OF OPERATIONS...................................33
       ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..46
       ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................47
       ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                 AND FINANCIAL DISCLOSURES...................................47
       ITEM 9A.  CONTROLS AND PROCEDURES.....................................47


PART III.....................................................................48
       ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........48
       ITEM 11.  EXECUTIVE COMPENSATION......................................48
       ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT AND RELATED STOCKHOLDER MATTERS..................48
       ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............48
       ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES......................48

PART IV......................................................................49
       ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                 FORM 8-K....................................................49


<PAGE>


This Annual Report on Form 10-K,  including  information  incorporated herein by
reference,  contains "forward-looking  statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to expectations concerning matters that are not
historical facts. Words such as "projects,"  "believes,"  "anticipates," "will,"
"estimate," "plans," "expects," "intends," and similar words and expressions are
intended to identify forward-looking  statements.  Although we believe that such
forward-looking  statements  are  reasonable,  we  cannot  assure  you that such
expectations  will prove to be correct.  Important  language  regarding  factors
which could cause actual results to differ materially from such expectations are
disclosed in this Report,  including without  limitation under the caption "Risk
Factors"  beginning on page 15 of this Report,  and the other  documents we file
with the Securities and Exchange Commission  ("SEC"),  including our most recent
reports on Form 8-K and Form 10-Q, and amendments  thereto.  All forward-looking
statements   attributable  to  Optical  Communication   Products  are  expressly
qualified in their entirety by such language. We do not undertake any obligation
to update any forward-looking statements.

                                    PART I.

ITEM 1.   BUSINESS

     We design,  manufacture and sell a comprehensive  line of high performance,
highly reliable fiber optic  subsystems and modules for the  metropolitan  area,
local area and storage area  markets.  Subsystems  and modules are  preassembled
components that are used to build network equipment.  Our subsystems and modules
are  integrated   into  systems  that  address  the  bandwidth   limitations  in
metropolitan area networks,  ("MANs"), local area networks, ("LANs") and storage
area networks,  ("SANs"). Our products include optical transmitters,  receivers,
transceivers  and  transponders  that  convert  electronic  signals into optical
signals and back to electronic  signals,  enabling  high-speed  communication of
voice and data  traffic  over  public and  private  fiber  optic  networks.  Our
products  support a wide range of  network  applications,  transmission  speeds,
distances and standards, including international transmission standards.

     The Company  was  founded in October  1991 with  initial  funding  from The
Furukawa Electric Company, Ltd. of Japan ("Furukawa").  We offer a comprehensive
line of high performance, cost-effective solutions to our customers supported by
volume production  capabilities.  We believe that our close working relationship
with leading  fiber optic  communication  equipment  manufacturers  allows us to
quickly design and build advanced fiber optic  subsystems and modules,  enabling
our  customers to focus on their core  competencies  in  designing  and building
overall systems. Our customers include  communication  equipment  manufacturers,
such as Alcatel, Canoga Perkins, Cisco Systems,  Fujitsu Network Communications,
Huawei  Technologies,  Huawei 3-Com, JDSU (formerly  Acterna),  Nortel Networks,
Siemens,  Ltd.,  and  Telrad  Telecommunication  some of whom  purchase  through
contract manufacturers such as Celestica,  Flextronics, Plexus, Sanmina-SCI, and
Solectron.

Industry Background

Increased network traffic

     During the past  several  years,  the amount of voice and data  transmitted
over  communication  networks  has  increased  significantly.   This  growth  is
primarily  attributed  to the rapid  growth  and  popularity  of data  intensive
applications, such as Internet access, distance learning, web hosting, real-time
data backup,  e-mail,  video  conferencing,  multimedia  file  transfers and the
movement of large  blocks of stored data across  networks.  To meet this demand,
communication service providers upgraded their

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<PAGE>

communication  networks to expand capacity,  which greatly reduced  transmission
costs per bit. This cost  reduction has, in turn,  further  increased the demand
for and usage of communication  networks.  This cycle,  increased demand fueling
increased  capacity at reduced costs and increasing demand further,  has enabled
the growth in voice and data traffic across networks.

Evolution of network infrastructure

     Communication  networks were  originally  designed to handle voice traffic.
The infrastructure of existing prior generation, or legacy, networks consists of
copper cabling along which voice  communications  are transmitted in the form of
electronic  signals.  While copper cabling is generally a reliable  transmission
medium,  its ability to transmit large volumes of data at high speed is limited,
and it is prone to electromagnetic  interference, or EMI, from nearby electronic
equipment and other sources.  EMI interferes  with the  transmission of a signal
and degrades signal quality.

     To overcome the limitations of the legacy copper cable  infrastructure  and
meet  increasing  demand  for  high  capacity  and  high-speed  voice  and  data
transmission,   communication   service   providers  have  adopted  fiber  optic
technology in their networks.  Fiber optic technology  involves the transmission
of data over fiber  optic cable via digital  pulses of light,  which  allows for
greater  bandwidth  over longer  distances  than copper cable and higher quality
transmissions that are not subject to EMI.

     Widespread  deployment of fiber optic technology  initially occurred in the
long-haul  networks.  Long-haul networks connect the communications  networks of
metropolitan  areas  around  the world and  facilitate  the  transport  of large
amounts of voice and data traffic over long distances, up to thousands of miles.
Companies  designing  equipment  for this  segment  have  typically  focused  on
providing as much bandwidth as possible between any two locations. The long-haul
market was the first to face increasing network  congestion as data,  aggregated
from expanding MAN, LAN, and SAN  infrastructures,  began to overload  long-haul
networks.   Long-haul   network   managers,   focused  on  maintaining   network
performance, were the first to adopt advanced subsystems and modules to increase
the capacity of existing fiber.  Long-haul  network managers have typically been
concerned  more about  network  performance  than  transmission  equipment  cost
because the cost of increasing the capacity of long-haul networks through adding
fiber is expensive  relative to upgrading the  transmission  equipment to higher
data transmission rates.

     The  build-out  of optical  long-haul  networks  through  the  adoption  of
advanced  subsystems  and modules to increase  capacity  represents an important
step in improving  network  infrastructure  to support  increased demand for new
services  and greater  traffic  volumes.  While  optical  fiber  continues to be
deployed, and its transmission capacity is expanded in long-haul networks, fiber
optic  technologies  are  increasingly  being  adopted to support high data rate
connections to link end-users to the long-haul networks.

Metropolitan area networks, local area networks, storage area networks

     Metropolitan area networks consist of metro core and access networks. Metro
core networks are the distribution  points between long-haul  networks and metro
access  networks.  In a  typical  system,  a  long-haul  network  connects  to a
city-wide MAN through which  long-haul  data is aggregated by network  managers,
such as Internet service  providers,  or ISP, and distributed to local users via
an access network.  Metro core networks enable enterprises and service providers
to  interconnect  network  systems  over  areas from as small as a city block or
corporate campus to a wider geographic area.

                                       2
<PAGE>

     Metro access networks connect  business and residential  end-users to metro
core  networks.   These  end-users  have  increasingly   demanded   higher-speed
connections  to  take  advantage  of  new   data-intensive,   multimedia-centric
applications.  Access  networks  traditionally  have used relatively slow copper
cable based connections.  A number of high-speed transmission  technologies have
been  developed  to  improve  the speed of access  networks,  including  digital
technologies  such  as  digital   subscriber  line,  or  DSL,  and  cable  modem
technologies.  DSL technology utilizes the legacy copper-based infrastructure to
provide users with increased bandwidth at low cost. Cable modems,  which connect
computers  to local  cable TV lines,  also  provide  users  with  access to high
bandwidth  at low cost.  As these high data rates and new  services  become more
widely available to end-users,  legacy copper cable  connections are expected to
become increasingly insufficient to meet demand. Consequently, service providers
are  beginning  to  deploy  fiber  optic  cable  directly  to  end-users  or  to
neighborhood  distribution points, enabling the business or residential end-user
to obtain a wide range of current and future services.

     Local area networks connect users within a building or groups of buildings.
Storage area networks connect  computers and data storage sites within buildings
or groups of buildings. These networks were originally developed as copper cable
networks  using  standards  such as Ethernet and Fast  Ethernet.  As performance
requirements  surpassed  the  limitations  of  copper-based  deployments,  these
networks were upgraded to support multimode fiber optic solutions to address the
expanding  application needs of the end-user.  As the data rate and transmission
distance  requirements  of these  networks  increase  further,  they  are  being
upgraded with single mode fiber optics technology to support the next-generation
of high-speed  networking standards,  such as Fibre Channel (single,  double and
quad speed), Gigabit Ethernet, and 10 Gigabit Ethernet.

Market Opportunity

     With increasing  volumes of  digitally-based  data being transmitted across
long-haul  networking  infrastructures,  the MAN topology is often viewed as the
limiting  factor  in  overall  network  performance.  In  addition,  LAN and SAN
segments are also requiring  greater  bandwidth and performance  capabilities to
address  data  traffic  congestion.  As a  result,  network  managers  have been
upgrading  their LAN and SAN  infrastructures  to higher  speeds  using  optical
transmission  technologies and high-speed  networking  standards such as Gigabit
Ethernet,  SONET/SDH,  Fibre Channel (quad speed),  Fast Ethernet and 10 Gigabit
Ethernet.

     As demand for bandwidth grows,  service providers will require increasingly
sophisticated systems to support metro, local and storage networks applications.
Systems  must  meet  the  unique   requirements  of  these  networks,   such  as
cost-effectiveness   and   reliability   in  harsh   environmental   conditions.
Historically, the MAN, LAN and SAN optical infrastructures have been supplied by
large vertically integrated fiber optic communication  equipment  manufacturers,
which  manufactured  their own components  such as lasers and  photodiodes.  The
demand for optical  networking  equipment has led to the expansion of production
by existing  optical  component  manufacturers,  as well as the  creation of new
companies offering  cost-effective fiber optic systems.  These new companies are
typically  not  vertically  integrated  and do not employ system design teams to
create  mixed   analog/digital   circuits  required  for  laser  and  photodiode
interfaces.

     The market demands on fiber optic communication  equipment manufacturers to
produce optical networking solutions for the MAN, LAN and SAN markets have given
rise to a number of significant technical challenges, including the following:

                                       3
<PAGE>

o    Providing solutions that balance performance and cost. The metropolitan
     market requires optical subsystems and modules that are designed
     specifically to meet the unique performance and cost requirements of this
     market.

o    Providing long distance operation in MAN applications where interconnection
     distances can range from a few kilometers (km) up to 120km. Systems that
     are unable to transmit over long distances require expensive repeaters to
     boost and regenerate signals, raising the overall cost of the solution to
     the end-customer.

o    Providing wide operating temperature range in metro networks where
     equipment is located in remote locations with no environmental control.
     Products that operate from -40 to 85 degrees Celsius are a necessity in
     this market. This is in contrast to the long-haul network and local area
     networks where equipment is deployed within temperature controlled
     buildings.

o    Delivering products that address the demand for increasingly smaller
     packages to provide higher port density requires greater component
     miniaturization, thermal and EMI engineering design expertise.

o    Supporting a wide range of data rates, transmission distance requirements,
     network standards, optical interfaces and packaging options requires that
     fiber optic communication equipment manufacturers offer a broad range of
     products.

o    Producing increasingly integrated products requires cross-disciplinary
     expertise in optics, circuit design, packaging, software, microwave and
     radio frequency engineering.

o    Responding to demands for shorter lead times requires manufacturers to
     design products and scale production rapidly.

o    Producing systems to handle increasingly higher data rates in compliance
     with Federal Communications Commission standards for EMI emissions requires
     advanced fiber optic subsystem and module design.

o    Responding to customer requirements for "customized" standard products
     requires scalable base-line designs.

Current Industry Environment

     The fiber optic communication industry continues to face challenging market
conditions.  Capital spending by service providers on network infrastructure has
remained  substantially below pre-2001 levels,  increasing only slightly - if at
all - during  the last  year.  As a result,  equipment  manufacturers  have also
dramatically  reduced their  quarterly  purchases of components and modules from
our  competitors  and  from  us.  While  several  service  providers,  including
BellSouth,  SBC and Verizon,  have announced current and planned  investments in
Fiber-to-the-Premises  (FTTP)  applications,  which we  believe  could  increase
traffic  demand on the  metropolitan  area networks  (MANs) into which such FTTP
infrastructure  would  feed,  it is too early to  predict  the  outcome of these
potential FTTP roll-outs. Because visibility in the industry remains limited, we
cannot  provide  any  assurance  as to the  timing or  extent  of any  increased
business  that  we  may  receive  as  a  result  of  these  or  other   industry
developments.

                                       4
<PAGE>

Our Solution

     We design,  manufacture and sell a comprehensive  line of high performance,
reliable  fiber  optic  subsystems  and  modules  that are  used in fiber  optic
transmission  systems.  Our subsystems and modules are integrated  into systems,
which address the bandwidth limitations in MAN, LAN, and SAN infrastructures. We
provide communication  equipment  manufacturers with high-value,  cost-effective
optical  solutions  to meet the market  requirements  of the MAN,  LAN,  and SAN
industry  segments,  allowing  them to  focus  on  their  core  competencies  of
designing and building overall systems.

     We provide our customers with the following key benefits:

o    High-performance, high reliability, cost-effective products - Our portfolio
of high  performance  subsystems and modules enables optical networks to operate
at high data transmission rates, transmit signals over a variety of distances up
to 120km and  operate in wide  temperature  ranges of between  -40 to 85 degrees
Celsius.  Our products are engineered using advanced packaging  technologies and
feature  low  levels  of  radiated  EMI.  Our  products  are   qualified   under
requirements  established by Telcordia (formerly Bellcore),  an engineering firm
that establishes standards (known as "generic  requirements") and specifications
for the telecommunications  industry, including standards and specifications for
fiber  optic  system  components.  The  Telcordia  requirements  relate  to  the
environmental,  electrical and optical testing of fiber optic  transmitters  and
receivers,  to ensure that they offer the high reliability required for critical
applications.  Our  products  are  engineered  to meet  the  specific  distance,
temperature and other performance requirements of the MAN, LAN, and SAN markets.

o    Comprehensive  product line - Our  comprehensive  fiber optic  product line
provides communication  equipment  manufacturers with a broad range of solutions
for MAN, LAN, and SAN  applications.  Our  subsystems  and modules are available
with all the common fiber optic interfaces,  and are available in a wide variety
of thru-hole and  pluggable  package  styles.  They support a wide range of data
rates, standards, wavelengths and transmission distances.

o    Innovative  design   capabilities  -  We  believe  that  our  expertise  in
high-speed  electronic  circuit  design and  packaging  of fiber optic  devices,
enhanced  by our close  working  relationships  with  customers,  enables  us to
provide innovative subsystems and modules for the MAN, LAN, and SAN markets. Our
engineers work closely with Furukawa and other  suppliers to integrate  advanced
semiconductor lasers and custom fiber optic packaging  techniques.  We also have
expertise in designing the complex transmitter circuitry that converts a digital
logic signal into the proper signal for the laser or light  emitting  diode.  We
design and  manufacture  our own fiber optic  receiver  subassemblies  using our
proprietary  automated  processes.  As a result of our fiber optic device design
expertise and our close customer relationships, we are able to quickly adapt our
products  to  respond  to new  standards  and our  customers'  requirements  for
subsystems and modules.

o    Reduced time to market - Our  subsystems  and modules  allow  communication
equipment  manufacturers to design and assemble fiber optic interfaces as easily
as standard  electronic  components by eliminating the need for complex setup of
individual  lasers or  receivers.  By working  closely with our customer  design
teams, we are able to provide optimized  solutions that are  cost-effective  and
meet time to market objectives.

o    Scalable  manufacturing  capabilities - Our broad portfolio of products use
modular designs which enable us to rapidly configure and manufacture  subsystems
and modules to meet each customer's

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<PAGE>

specifications  and to rapidly scale our production to deliver these products in
volume.  We can easily  customize  our  products  for  example  by  implementing
different electrical  connections,  or pin configurations,  voltages and package
sizes as requested by our customers,  without impairing the functionality of our
products.

Products

     We offer a comprehensive  line of  high-performance  fiber optic subsystems
and modules, including fiber optic transmitters,  receivers,  transceivers,  and
transponders,  primarily for use in MAN, LAN, and SAN applications.  Fiber optic
subsystems  and  modules  are  pre-assembled  components  that are used to build
network equipment.  Our products convert electronic signals into optical signals
and back into  electronic  signals,  thereby  facilitating  the  transmission of
information over fiber optic  communication  networks.  We believe our products'
technical  specifications  meet or exceed  industry  standards  for fiber  optic
subsystems and modules.

     Our fiber optic  products  integrate  advanced  optical  devices with mixed
analog/digital  integrated  circuits.  These circuits allow continuously varying
signals and digital data to be designed in the same circuit rather than separate
circuits.  Our  products  provide  subsystem/module  functionality  over  a wide
variety of connectivity speeds,  distances,  standards and operating temperature
ranges.

     Our products are engineered  with varying levels of integration to suit our
customers.  The lowest level of integration  involves  separate  transmitter and
receiver  modules,  which  provides our  customers the greatest  flexibility  in
product  design by allowing  them to place the  transmitters  and the  receivers
according to their design specifications. Transceivers provide the next level of
integration.  Transceivers  place both the  transmitter and receiver in the same
package with a dual fiber or connector interface.

Current products

     Transmitters  and Receivers -  Transmitters  convert an electronic  digital
input signal into an optical output signal for  transmission  over a fiber optic
network. Receivers detect optical signals from a fiber optic network and convert
them into an  electronic  signal in  standard  digital/logic  format for further
signal  processing.  We offer  separate  transmitter  and receiver  modules that
provide  our  customers  with the  greatest  flexibility  in  product  design by
allowing them to place transmitters and receivers separately according to design
specifications.

     Our optical  transmitter and receiver products support the SONET/SDH,  Fast
Ethernet,  Gigabit  Ethernet and Fibre  Channel  transmission  standards and are
offered in a wide range of data  rates,  transmission  distances  and  packaging
options.

     Transceivers  - Optical  transceivers  are  products  that  contain  both a
transmitter  and a  receiver  in a single  package  and  serve as high data rate
interconnects  between network devices, such as routers,  switches,  servers and
storage  elements.  Our optical  transceivers are available in a wide variety of
fiber optic interfaces, or form factors, and support a wide range of data rates,
wavelengths,  modes and transmission  distances.  Our  transceivers  support the
SONET/SDH,  ATM,  Fast  Ethernet,  Gigabit  Ethernet,  ESCON and  Fibre  Channel
transmission standards.

     SFP Transceivers - Small form-factor  pluggable,  or SFP,  transceivers are
"hot-pluggable"  optical  transceivers  that can be removed or inserted into the
equipment  without turning off the power of the system.  This feature allows our
customers to readily reconfigure their systems without interrupting their

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<PAGE>

network  services,  thereby,  eliminating  system  downtime  during upgrades and
maintenance.  Our cam latches are color  coded to provide the  end-user  with an
easy way to identify module types in an installed system.

     Our SFP  transceiver  is available in a variety of distances and speeds and
uses the popular small form factor LC fiber optic connector interface,  allowing
fiber optic  equipment  makers to  increase  their port  density.  They are also
offered in speeds from 155 Mb/s up to 2.5Gb/s including  multimode LED and 850nm
VCSEL light  sources as well as single mode 1310 and 1550nm  lasers.  We provide
commercial and  industrial  temperature  ranges for many of our SFP  transceiver
models.

     CWDM  Transceivers  - Coarse  wavelength  division  multiplexing,  or CWDM,
transceivers,  allow the  mixing  of  optical  signals  by  utilizing  different
wavelengths.  The CWDM  transceivers  use lasers  with wide  channel  wavelength
spacing,  typically 20 nm, which allows the equipment to achieve a lower overall
system cost. This lower cost is the result of a lower  transmitter cost since no
temperature  and  wavelength  control  is  needed,  as well  as a lower  optical
MUX/DMUX cost due to wider tolerance on the wavelength stability and bandwidth.

     Our CWDM  transceivers  are available in all the common  industry  standard
transceiver  footprints  of 1x9,  2x9,  GBIC,  SFF and SFP,  and  provide  eight
wavelength  channels at  nominally  1471 nm, 1491 nm, 1511 nm, 1531 nm, 1551 nm,
1571 nm, 1591 nm, and 1611 nm. They are  available in a  multi-rate  format that
allows  operation  at all  speeds  from 100 Mb/s Fast  Ethernet  up to  2.5Gb/s.
SONET/SDH.  Our  Gigabit  Ethernet  CWDM  product  family  is  available  in  an
industrial operating temperature option (-40 to +85 Celsius).

     Bi-Directional  Transceivers- Bi-Directional transceivers allow full duplex
transmission  utilizing a single fiber. These transceivers  incorporate  lasers,
receivers and optical filters,  allowing simultaneous transmission and reception
from  a  single  port  or  a  single  fiber.  The  advantage  of  Bi-Directional
transceiver  modules is lower material cost, lower  installation  cost and lower
operational  cost for fiber  installations,  as a result of having to  purchase,
install, maintain, and administer fewer fibers.

     Our   Bi-Directional   transceivers  are  available  in  industry  standard
pluggable  modules (SFP) and are compliant to the industry standard known as EFM
(Ethernet for First Mile). The data  transmission rate is 1250 Mb/s which is the
Gigabit  Ethernet  standard rate. Our Gigabit  Ethernet  Bi-Directional  product
family is available in an industrial  operating  temperature  option (-40 to +85
Celsius).

     DWDM  Transceivers  - Dense  wavelength  division  multiplexing,  or  DWDM,
transceivers,  allow the  mixing  of  optical  signals  by  utilizing  different
wavelengths.  The DWDM  transceivers  use lasers with narrow channel  wavelength
spacing,  typically  .8  nm or  100GHz.  DWDM  transceivers  enable  an  optical
transport system to increase the transmission capacity over a single fiber.

     Our DWDM  transceivers  are  available in the SFP  package,  and provide 44
wavelength  channels.  They are  available  in a  multi-rate  format that allows
operation at all speeds from 125Mb/s up to 2.67Gb/s.

     Transponders  - Our optical  transponders  combine the  functionality  of a
transceiver   with   integrated   circuits  for  electronic   multiplexing   and
demultiplexing  in the same package.  Multiplexers are paired with  transmitters
and allow the system  designer to combine  multiple  low-speed  electronic  data
streams onto a single optical  wavelength,  while  demultiplexers  and receivers
reverse this process. The transmitter portion of the transponder accepts sixteen
155 Mb/s  electronic  signals,  multiplexes  them together and provides,  at the
output, a single 2,488 Mb/s optical signal. The receiver portion of the

                                       7
<PAGE>

transponder  performs the reverse  function,  namely  accepting a single optical
signal and providing back sixteen 155 Mb/s electronic signals.  The advantage of
this product is the compact overall design that minimizes the equipment size and
the low speed  electronic  interface  that  simplifies  our  customers'  printed
circuit design.

Products under development

     Our product  development  efforts have, and will continue to be, focused on
developing  new  products and  technologies  to support  increased  transmission
speeds,  distances and capacities.  We have been developing  products to support
future  generations  of fiber optic MAN, LAN, and SAN by utilizing  CWDM,  DWDM,
850nm VCSEL-based optical modules, and to address 10 Gb/s transmission standards
for distances up to 80Km.

     Wavelength  division  multiplexing  is a  technology  that allows  multiple
signals to be sent along the same  optical  fiber by using  different  colors of
light for each signal.  We have expanded efforts in this area to cover SONET/SDH
and Gigabit Ethernet  applications for multiple operating temperature ranges. We
have  introduced  products  in CWDMs  for  distances  of up to 120Km at  Gigabit
Ethernet rate. We plan to develop CWDM optical transceivers operating up to 2.67
Gb/s with an extended operating temperature range (-40 to +85C).

     We  plan  to  introduce  optical  transceivers  using  DWDM as well as CWDM
technologies.  These are being  designed to allow the mixing of optical  signals
using different  standards,  such as SONET/SDH,  asynchronous  transfer mode, or
ATM, and Gigabit Ethernet,  by utilizing different  wavelengths.  Several of our
customers  have tested our DWDM  products for  distances of up to 80Km.  We also
plan to develop DWDM products in the same platform for distances up to 120 Km.

     In October 2002 we acquired certain assets of Cielo Communications, Inc., a
research and design company located in Broomfield, Colorado, focused on creating
1300 nm VCSEL technology for fiber optic  communication  networks.  The purchase
price  was $5  million  and  included  the  acquisition  of  capital  equipment,
inventory  and  intellectual  property.  We expect to cease the operation of our
Colorado facility as of January 31, 2006, because the cost of Fabry-Perot lasers
has been  decreasing,  making  1300 nm VCSEL  technology  less  attractive  as a
cost-effective replacement,  and because of the delay in development of the next
generation  of optical  modules.  As a result,  we expect to cease the immediate
development  of  products  based on 1300 nm VCSEL  technology,  although we will
retain the related intellectual property for future development.

     We believe that some of our competitors are developing  products similar to
those that we have under development. While we are currently developing products
in all of the areas described above, we may choose to prioritize or redirect our
development efforts in response to market demands.  Therefore, it is not certain
that we will introduce products for any or all of the categories listed above.

Customers

     We sell our products to  communication  equipment  manufacturers,  or CEMs,
directly and through contract  manufacturers,  or CMs, who incorporate them into
systems  they  assemble  for  CEMs.  Contract  manufacturers  assemble  specific
products  for CEMs.  We define  our  customers  as CEMs who have  purchased  our
products  directly  or ordered  our  products  for  incorporation  into  systems
produced by contract  manufacturers,  such as  Celestica,  Flextronics.  Plexus,
Sanmina-SCI, and Solectron.

                                       8
<PAGE>


     A  small  number  of  end  customers  have  historically  accounted  for  a
significant  portion of our total revenue.  For the fiscal year ended  September
30, 2005,  our 10 largest  customers  accounted for 66.2% of our total  revenue,
with  Alcatel  and  Cisco  Systems  (including  sales to each of their  contract
manufacturers)  accounting  for  approximately  17.5%  and  14.9%  of our  total
revenue,  respectively.  No other customer  accounted for more than 10.0% of our
revenue during the fiscal year ended September 30, 2005.

     For financial reporting purposes, we consider our customers to be the CEMs,
CMs and distributors who place purchase orders with us directly. No direct order
contract  manufacturer  accounted for more than 10.0% of our revenue  during the
fiscal year ended September 30, 2005.

Technology

     The development and manufacture of high-performance  fiber optic subsystems
and  modules  for  MAN,  LAN,  and SAN  require  diverse  technical  skills  and
expertise.  We believe that our  understanding  of fundamental  optical devices,
their  packaging  and  high  speed  circuit  design  allows  us  to  extend  the
performance of low cost packaging and technology,  which we originally  designed
for smaller local area networks,  to provide the  high-performance  required for
fiber optic MAN,  LAN, and SAN. Key elements of our  technological  capabilities
include:

          o    Optical  device   technology  -  We  understand  the  performance
               requirements  for many  optical  devices  for use in fiber  optic
               systems.  There is a wide  range of optical  source and  detector
               technologies  available,  and these  must be  optimized  for each
               application.

          o    Optical  packaging/subassembly  design  - We  work  closely  with
               Furukawa and other  suppliers to combine  advanced  semiconductor
               laser designs and custom optical packaging  techniques to produce
               advanced optical subassemblies.  Less than one micron tolerances,
               or variability  in the alignment of  components,  are required in
               these laser packages and reliability specifications require us to
               hold   these   mechanical   tolerances   over  a  wide  range  of
               temperatures and the specified life of our products.  A micron is
               one  thousandth  of a  millimeter.  We believe  these designs and
               technologies  improve the  performance of our products as well as
               enhance  yields and reduce  material  costs.  We also  design our
               receiver  packages  for  automated  assembly,  and we design  and
               manufacture our own optical subassemblies for our receivers. This
               allows us to provide design  flexibility,  high-performance,  and
               the ability to manufacture in volume.

          o    Links with  Furukawa - We have worked  closely  with  Furukawa to
               develop new optical  devices for our  products  using  technology
               that they have developed.  Furukawa supplies us with the majority
               of the optical  devices,  such as lasers,  needed for some of the
               optical subassemblies used in our products. We plan to continue
               to use  Furukawa's  lasers  in our new  products  whenever  such
               devices are available from Furukawa.  We also plan to implement
               second  sourcing of such devices wherever possible either through
               procurement from other suppliers  or  internal  development  to
               reduce our risk on a single source supplier.

                                       9
<PAGE>

          o    Electronic  circuit  design - We have  the  expertise  to  design
               complex  transmitter  circuitry  that  converts  a digital  logic
               signal  into the proper  signal  for the laser or light  emitting
               diode.  This circuit has  compensation and feedback control loops
               that  change  the  current to  maintain  constant  optical  power
               output.  This  electronic  signal must also be modulated  and the
               waveform of the modulation must be carefully controlled to ensure
               that the  optical  output  meets the fiber  optic  communications
               equipment  manufacturer's  defined  specifications.  We also have
               considerable  expertise  in  designing  receivers to minimize the
               effects  of  external  noise  that can  significantly  affect the
               performance of a receiver.  Our products  operate at speeds up to
               2.5 Gb/s and we are working to develop future products to work at
               10 Gb/s. At these speeds,  microwave and radio  frequency  design
               techniques  must be used to  ensure  that  the  waveforms  do not
               degrade and meet the parameters defined in standards.  We believe
               our  technical  competencies  in these areas enable us to produce
               fiber  optic  subsystems  and  modules  with low  electromagnetic
               interference emission levels.

          o    Fast product  development  cycle time - Our products are designed
               using  a  building  block  approach  that  allows  us to  combine
               different subassemblies in different ways to provide a wide range
               of products.  Our  integrated  subassemblies  allow us to quickly
               adapt our products to respond to new standards and our customers'
               requirements for special subsystems and modules. This ability, in
               combination  with our market  knowledge,  allows us to select the
               commercial  opportunities  we believe to be the best and  provide
               samples and production volumes in very short time frames.

Manufacturing

     We  assemble,  burn in and  test all of our  products  in our  facility  in
Woodland  Hills,   California.   We  also  conduct  all  of  our   manufacturing
engineering, quality assurance and documentation control at this facility.

     We use a number of subcontractors  and suppliers,  including  Furukawa,  to
supply  subassemblies.   We  rely  upon  domestic  and  international   contract
manufacturers for most of our printed circuit board assembly.  Our manufacturing
supply  chain  management  team  manages  these  relationships  supported by our
research and development group. We do not have any long-term  contracts with any
of our contract manufacturers and none of them are obligated to perform assembly
services for us for any specific period or at any specific price,  except as may
be provided in a particular purchase order.

     We provide quality assurance through internal testing procedures throughout
the entire manufacturing  process. Our quality control procedures include vendor
inspection,  incoming  material  inspection,  in-process  testing  and  outgoing
inspection.  We provide  specialized  training to assure the  competency  of our
manufacturing personnel.

     We purchase  several key  components for our products from a limited number
of suppliers.  The  components  that we purchase  include  integrated  circuits,
lasers,  light  emitting  diodes,  vertical  cavity   surface-emitting   lasers,
photodiode devices and other passive electronic components. We have periodically
experienced  shortages  and  delivery  delays  for these  materials.  Because we
operate in an industry where material  supplies are constrained,  we maintain an
inventory of some limited source components to decrease the risk of shortage. As
a result,  we have, at times, had excess inventory of these components that have
led to write downs of excess inventory.

                                       10
<PAGE>

Research and Development

     In fiscal 2003, 2004, and 2005, our research and development  expenses were
$16.2 million, $17.0 million and $14.6 million,  respectively.  Our research and
development   activities  are  focused  on  enhancing  our  existing   products,
developing new products to meet the evolving  needs of our customers  within our
existing markets and supporting  emerging standards that are consistent with our
product strategies.

     We plan to continue to collaborate with universities or research institutes
in our product development efforts. In addition, Furukawa has developed a number
of innovative  components that we have integrated into our products.  We plan to
continue  to  collaborate  with  Furukawa  to take  advantage  of their  optical
component   technology   wherever   appropriate.   We also  intend to  develop
relationships  with other  suppliers of  components  supplied by Furukawa to the
extent practicable.

Sales, Marketing and Technical Support

     We sell our products  primarily  through our  worldwide  direct sales force
supported by independent  manufacturers'  representatives and distributors.  Our
direct  sales force and field  applications  engineering  team  maintains  close
contact with our customers and provides  technical support to our manufacturers'
representatives and distributors. We maintain regional sales offices in Northern
and Southern California, Texas, New Hampshire, Canada and the United Kingdom. In
addition, we have direct sales personnel located on the East Coast of the United
States,  working from home offices. Our corporate customer service department in
Woodland Hills,  California provides day-to-day updates on orders and deliveries
to our customers world-wide, excluding Europe. We also have a satellite customer
service  operation in our United Kingdom  facility to better address our growing
European customer base.

     We  have  established   contractual   relationships   with   manufacturers'
representatives  and distributors in Europe,  Israel,  and Asia.  Manufacturers'
representatives  and distributors  are third parties who provide  commercial and
technical   support  in  selling  our  products  to  customers.   Manufacturers'
representatives represent us with customers, but customers place orders directly
with us.  We pay the  manufacturers'  representatives  a fee for  this  service.
Distributors perform the same function,  but differ in that the distributor buys
products  from us and  resells  them at a profit  to the end  customer.  We have
short-term  contracts with our manufacturers'  representatives and distributors,
which can be cancelled by either party upon 30 days notice.  We intend to expand
our  indirect  sales  activity by  establishing  relationships  with  additional
independent  manufacturers'  representatives  and distributors.  Please refer to
Note 14 to our Notes to Financial  Statements for further  information about our
sales to particular geographic areas.

     We focus  our  marketing  on CEMs in the  fiber  optic  MAN,  LAN,  and SAN
markets.  Our  intent  is to  become  a market  driven  supplier  that  provides
cost-effective,  value-add  solutions to our customer  base.  Our efforts in the
development  of an  effective  branding  campaign  are to  better  position  our
strengths  as  customer-focused  suppliers  of a broad  product  portfolio  that
addresses optical applications. Key elements of our marketing initiatives are as
follows:

     o    Utilization of the overall  marketing  resources to provide more focus
          on industry  segments,  to identify and drive new product efforts,  to
          position  our  company  strengths  with our  customers  as well as the
          technical community,  and to introduce new revenue  opportunities into
          the company product portfolio.

                                       11
<PAGE>

     o    The  development  of key  marketing  relationships  at our  identified
          strategic accounts with high-level  decision makers to better position
          us for current and  next-generation  opportunities  during the product
          development and specification defining phases.

     o    Utilization  of our  applications  engineering  group to  provide  our
          customers with complete pre- and post-sales  technical  support on our
          products,  including design and  troubleshooting  assistance.  We have
          added geographically-based field applications engineers to service key
          regional design centers to support the sales efforts.

     o    The implementation of a marketing communications plan to focus efforts
          on  strategic  corporate  branding  and  positioning   initiatives  in
          advertising,  press relations,  tradeshow events,  web site,  speaking
          engagements,  and publication  opportunities.  Our web site includes a
          part number search engine and provides  customers with a comprehensive
          listing of our broad product portfolio.

          We  also  interact  with  our  customers  in  industry   associations,
standards  committees and participation in multi-source  agreements,  to promote
and further enhance our position within the technical community.

          We provide  extensive  technical support to our customers during their
design and qualification process through direct contact with our application and
design   engineering   teams.  In  addition,   our  web  site  provides  product
documentation  and application  notes. Our account managers and customer service
personnel provide ongoing post-sales support.

Backlog

          Backlog  consists of orders for shipments  with release dates from our
customers.  As of September  30, 2004 and  September  30, 2005,  our backlog was
approximately  $6.6 million and $11.7 million,  respectively.  Orders in backlog
are firm,  but are subject to  cancellation  or  rescheduling  by the  customer.
Backlog  comparisons  on a year to year or quarter  to quarter  basis may not be
meaningful as our backlog is unpredictable and fluctuates monthly.

Competition

          The MAN, LAN, and SAN markets for optical  subsystems  and modules for
CEM  applications  are  highly  competitive  and  subject  to  rapidly  changing
technology.  We believe the primary  competitive  factors impacting our business
are as follows:

     o    Breadth of product portfolio;
     o    Competitive with market-level pricing;
     o    Time to market of new product  introductions;
     o    Established  relationships with key  customers;
     o    Capability  to scale  production  requirements;
     o    Quality and reliability of products;
     o    Complete technical documentation for product  lines;
     o    Financially  stable  suppliers;
     o    Ability  to  provide technical  design  support;
     o    Scope  and  responsiveness  of  service  and technical support;
     o    Compliance to industry standard specifications;  and

                                       12
<PAGE>

     o    Meeting the customer design phase timelines for product qualification.

          We believe that we have  established a favorable  position in the MAN,
LAN, and SAN markets by identifying  and focusing on fiber optic  subsystems and
modules specifically for these segments. We believe that we are focused on these
markets with a combination of comprehensive  product portfolios,  management and
design  expertise,  market  understanding  and  manufacturing  capabilities.  We
compete primarily with Avago Technologies,  ExceLight  Communications,  Finisar,
JDSU, MRV Communications,  OpNext, Picolight, and Stratos Lightwave. Many of our
current  and  potential   competitors  have  significantly   greater  financial,
technical,  marketing,  purchasing and other  resources than we do. In addition,
several low-cost Asian competitors are entering into our market segment. We have
competitors for all of our current products.

          Our  products  may  also  compete  with   technologies   that  provide
alternatives to optical networking, including fixed and mobile radio, free space
point-to-point  optical  transmission  and  copper-based  technologies  such  as
digital  subscriber line, or DSL, and cable modems.  Most of these  technologies
provide lower speed and shorter distance  capabilities  than optical  networking
technologies,  but may provide certain advantages such as lower costs and mobile
capabilities.

Intellectual Property

          Our  success  and  ability  to  compete  is  dependent  in part on our
proprietary technology.  We rely primarily on patent,  copyright,  trademark and
trade secret laws, as well as confidentiality  agreements and other methods,  to
establish and protect our proprietary technologies and processes. However, these
measures afford only limited protection of our proprietary technology. Including
patent properties acquired from Cielo Communications in October 2002, our patent
portfolio now counts more than 69 issued  United  States  patents and 31 pending
patent  applications.  The 31  pending  patent  applications,  include 5 pending
Canadian patent  applications,  one pending European patent  application,  and 2
pending PCT international patent applications. There can be no assurance that we
will  continue  to  seek  the  issuance  of  patents  from  our  pending  patent
applications  filed  in  the  United  States  and/or  with  non-US  governmental
authorities.  Furthermore,  there  can be no  assurance  that any of our  patent
applications  will  result in the  issuance  of any  patents or that any patents
issued will provide  competitive  advantages for us or protect us against claims
asserting that our products  infringe or may infringe the proprietary  rights of
third parties.

          On April 12,  2002,  the  Company  entered  into a  five-year  license
agreement  with  Stratos   Lightwave,   Inc.  covering  Stratos'   portfolio  of
optoelectronic  transceiver  patents.  In  addition,  we acquired  two  licenses
related to VCSEL technology  resulting from our acquisition of certain assets of
Cielo  Communications.  With the exception of these three licenses, we currently
do not license to or from any other third  parties  the  technology  used in the
manufacture  of  our  fiber  optic  subsystems  and  modules.  In  addition,  no
technology is transferred or licensed in connection with our supply relationship
with  Furukawa.  Accordingly,  Furukawa  owns  the  technology  relating  to the
manufacture  of its laser and other  products  we  purchase  from  Furukawa  for
incorporation into our products and may license or sell this technology to other
parties.  We own the technology  relating to the  manufacture of our fiber optic
subsystems and modules.  We have not  transferred  to Furukawa any  intellectual
property  rights that would allow it to compete with us in the MAN, LAN, and SAN
markets.  However,  there can be no assurance that Furukawa would not develop in
the future  internal  capabilities  to  manufacture  fiber optic  subsystems and
modules similar to and competitive with our products.

                                       13
<PAGE>

          Litigation may be necessary in the future to enforce our  intellectual
property rights or to determine the validity and scope of the proprietary rights
of others.  This litigation  could result in substantial  costs and diversion of
resources and could  significantly harm our business.  From time-to-time,  third
parties may assert patent, copyright,  trademark and other intellectual property
rights to technologies  and in various  jurisdictions  that are important to our
business.  Any claims  asserting  that our  products  infringe  or may  infringe
proprietary  rights of third  parties,  if  determined  adversely  to us,  could
significantly  harm our business.  Any claims,  with or without merit,  could be
time-consuming, result in costly litigation, divert the efforts of our technical
and management  personnel,  cause product shipment delays or require us to enter
into royalty or licensing agreements,  any of which could significantly harm our
business.  Royalty or licensing agreements, if required, may not be available on
terms  acceptable  to us,  if at all.  In  addition,  our  agreements  with  our
customers  typically  require us to indemnify our customers  from any expense or
liability  resulting  from  claimed  infringement  of third  party  intellectual
property  rights.  In the event a claim  against us is  successful,  we could be
liable for significant  monetary  damages.  If we cannot obtain a license to the
relevant  technology on acceptable  terms or license a substitute  technology or
redesign our products to avoid infringement, our business would be significantly
harmed.

Employees

          As of  September  30,  2005,  we had 317  full-time  employees  and no
part-time  employees.  Our  employees  are  not  represented  by any  collective
bargaining agreements and we have never experienced a work stoppage. We consider
our employee relations to be generally good.

Our Relationship with Furukawa

          We were  incorporated as a California  corporation in October 1991 and
we  subsequently  reincorporated  as a Delaware  corporation  in October 2000 in
connection  with our initial public  offering.  In November 1991, a wholly owned
subsidiary  of The Furukawa  Electric  Co.,  Ltd.  provided our initial  capital
investment.  Furukawa,  a publicly held company  incorporated  under the laws of
Japan, is one of the world's leading  manufacturers  of electric wire and cable,
nonferrous metals and related products.  It also provides engineering  services,
including the  installation  of power and  telecommunications  cables,  and is a
major manufacturer of fiber optic cable.  Furukawa's stock is publicly traded on
the  Tokyo  Exchange  Market  in Japan.  Furukawa  beneficially  owns all of our
outstanding  Class B common  stock,  which as of December  20, 2005  represented
58.4% of our outstanding shares of common stock and 93.4% of the combined voting
power of all of our outstanding common stock.

          Our  relationship  with  Furukawa  has allowed us to benefit  from the
optical  device and  packaging  technologies  developed at its  laboratories  in
Japan,  which are  incorporated  into  laser  products,  that we  purchase  from
Furukawa for inclusion in our products. We have also established a close working
relationship  with  Furukawa's  research and development  team through  periodic
meetings  and   discussions   to  understand   our  product  and   manufacturing
requirements.   Under   these   arrangements,   Furukawa   customizes   to   our
specifications the components that it supplies to us. For example,  Furukawa has
developed laser products with customized features in the areas of package design
and power output.  We have not licensed from Furukawa any of its optical devices
or other technologies.

          We currently  purchase the  majority of lasers from  Furukawa  under a
Master Purchase Agreement which we entered into with Furukawa on October 1, 2003
which was automatically  renewed on October 1, 2004 and October 1, 2005. We have
enjoyed a reliable  supply of these  critical  components  from  Furukawa in the
past. Under this Master Purchase Agreement, we agreed to purchase from Furukawa,
and

                                       14
<PAGE>

Furukawa  agreed to manufacture  and sell to us,  specific types of lasers which
are critical  parts in the  manufacture  of our  subsystems  and  modules.  This
Agreement  continues to renew  automatically  each year unless it is  terminated
upon  written  notice by either  Furukawa  or us prior to  renewal.  Under  this
agreement,  OCP and  Furukawa  must  maintain  a  minimum  quantity  of  certain
products.  The product and its related quantities,  or safety stock level, shall
be specified by OCP on a quarterly  basis. OCP will be obligated to purchase any
unused  safety  stock at the close of the quarter or at the  termination  of the
agreement. The pricing for these products are set out in the Agreement, although
we have agreed to  negotiate  with  Furukawa on a quarterly  basis to  determine
whether the pricing needs to be revised. Either Furukawa or we may terminate the
Agreement upon written notice to the other for material breach,  bankruptcy,  or
force majeure.

          In the last two years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  laser price reductions that we have
been able to obtain from Furukawa have been less than the price  reductions  for
the  associated  products that we have given our customers in response to market
conditions.  As a result, our gross margins have been negatively  impacted,  and
may  continue to be  negatively  impacted  in the  future.  While we continue to
negotiate  with  Furukawa  with respect to the pricing of the lasers we purchase
from  them,  we are  exploring  alternative  sources of supply for the lasers we
purchase from Furukawa.

          From time to time our research and development team works closely with
Furukawa's  team to assist in the  development  of our design and  manufacturing
process. We may enter into similar  development  agreements with Furukawa in the
future. However we have no current commitments and currently have no development
agreements under negotiation with Furukawa.

Disposition of Chatsworth Facility

          In June 2004, we sold the building  located in Chatsworth,  California
which was our former corporate headquarters.  Net proceeds from this transaction
were approximately $5.7 million.

ITEM 1A.  RISK FACTORS

          This Report contains  forward-looking  statements based on the current
expectations,  assumptions, estimates and projections about us and our industry.
Our  actual  results  could  differ  materially  from those  discussed  in these
forward-looking  statements  as a  result  of  certain  factors,  as more  fully
described in this section and  elsewhere in this Report.  These  forward-looking
statements  involve risks and  uncertainties.  You should carefully consider the
following risks before you decide to buy shares of our Class A common stock. The
risks  and  uncertainties  described  below  are not the only  ones  facing  us.
Additional  risks  and  uncertainties,   including  those  risks  set  forth  in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and elsewhere in this Report,  may also adversely  impact and impair
our  business.  If any of the  following  risks  actually  occur,  our business,
results of operations or financial  condition would likely suffer. In such case,
the trading  price of our Class A common stock could  decline,  and you may lose
all or part of the  money  you paid to buy our  stock.  We do not  undertake  to
update  publicly  any  forward-looking  statements  for any reason,  even if new
information becomes available or other events occur in the future.

Our continued success in generating revenue depends on growth in construction of
fiber optic MANs, LANs, and SANs.

                                       15
<PAGE>

          Our fiber optic subsystems and modules are used primarily in MAN, LAN,
and SAN applications. These markets are rapidly evolving, and it is difficult to
predict  their  potential  size or  future  growth  rate.  In  addition,  we are
uncertain  as to the extent to which  fiber optic  technologies  will be used in
these  markets.  Our success in generating  revenue will depend on the growth of
these  markets and their  adoption of fiber optic  technologies.  A  substantial
portion of our  revenue is derived  from sales of our product in the MAN market.
Sales of our products for the MAN market represented  approximately 84%, 87% and
89%,  of our  revenue for the years ended  September  30,  2003,  2004 and 2005,
respectively.

          As the result of currently  uncertain  economic and market conditions,
(a) our  revenue may  decline,  (b) we may be unable to predict  future  revenue
accurately,  and (c) we are currently unable to provide  long-term  guidance for
future  financial  performance.  The conditions  contributing to this difficulty
include:

          o lower near term revenue visibility; and

          o general market and economic uncertainty.

Based on these and other  factors,  major  customers  may reduce  orders for our
products  and,  as a result,  our  revenue in future  periods  may  decline.  In
addition,  our ability to meet financial  expectations for future periods may be
harmed.

We derive a  significant  portion of our total  revenue  from a few  significant
customers,  and our total  revenue  may  decline  significantly  if any of these
customers cancels, reduces or delays purchases of our products or extracts price
concessions from us.

          Our success  depends on our continued  ability to develop and maintain
relationships  with a  limited  number  of  significant  customers.  We sell our
products  into  markets  dominated  by a  relatively  small  number  of  systems
manufacturers,  a fact that limits the number of our  potential  customers.  Our
dependence  on orders from a  relatively  small  number of  customers  makes our
relationship with each customer critical to our business.

          We do not have long-term sales contracts with our customers.  Instead,
sales to our customers are made on the basis of individual  purchase orders that
our customers may cancel or defer on short notice without  significant  penalty.
In the past,  some of our major  customers  canceled,  delayed or  significantly
accelerated  orders in response to changes in the  manufacturing  schedules  for
their  systems,  and they are  likely  to do so in the  future.  The  reduction,
cancellation  or delay of individual  customer  purchase  orders would cause our
revenue to decline.  Moreover,  these  uncertainties  complicate  our ability to
accurately  plan  our  manufacturing  schedule.  Additionally,  if  any  of  our
customers  cancel or defer  orders,  our  operating  expenses  may increase as a
percentage of revenue.

          In the past, our customers have sought price  concessions from us, and
they are likely to  continue to do so in the future.  In  addition,  some of our
customers may shift their purchases of products from us to our competitors.  The
loss of one or more of our significant customers,  our inability to successfully
develop  relationships  with  additional  customers or future price  concessions
could cause our revenue to decline significantly.

We are  dependent  on a  limited  number  of  suppliers  for  most  of  our  key
components. If these suppliers are unable or unwilling to meet our manufacturing
requirements, if they raise prices of their products, or if they discontinue key
components,  we may experience production delays leading to delays in shipments,
increased costs and cancellation of orders for our products.

                                       16
<PAGE>


          We  purchase  several  key  components  that we  incorporate  into our
products from a limited  number of  suppliers.  We also purchase the majority of
our lasers  from  Furukawa  under a Master  Purchase  Agreement.  We do not have
long-term supply contracts with all of our other key suppliers and our agreement
with  Furukawa  is only  for one  year.  Our  dependence  on a small  number  of
suppliers  and our lack of longer  term supply  contracts  exposes us to several
risks, including our potential inability to obtain an adequate supply of quality
components,  the  discontinuance  of key components  from our  suppliers,  price
increases  and  late  deliveries.  For  example,  we face the  risk  that  price
increases imposed on us by our suppliers will be higher than the price increases
(or  cost  increases)   imposed  on  our  competitors  when  they  purchase  (or
manufacture) similar components; and we face a corresponding risk that any price
decreases  that we are able to obtain from our  suppliers  will be less than the
price  decreases (or cost  reductions)  that our  competitor's  obtain when they
purchase (or manufacture) similar components.  We have experienced shortages and
delays in obtaining,  and the  discontinuation of key components in the past and
expect  to  experience  shortages,   delays,  and  the  discontinuation  of  key
components in the future.

          In the past,  industry  capacity has been  constrained and some of our
component  suppliers  placed limits on the number of  components  sold to us. If
industry capacity becomes constrained in the future, our component suppliers may
place similar  limits on us. We do not have any control over these  limits,  and
our  suppliers  may  choose  to  allocate  more  of  their   production  to  our
competitors.

          A  disruption  in, or  termination  of, our supply  relationship  with
Furukawa  or any of our  other  key  suppliers,  or  our  inability  to  develop
relationships  with new suppliers would interrupt and delay the manufacturing of
our products,  which could result in delays in our revenue,  or the cancellation
of  orders  for our  products.  We may not be able  to  identify  and  integrate
alternative  suppliers  in a  timely  fashion,  or at  all.  Any  transition  to
alternative  suppliers would likely result in the need to requalify our products
with our  customers,  delays in shipment,  quality  control issues and increased
expenses,  any of which  would  limit our  ability  to deliver  products  to our
customers.  Furthermore,  if we are unable to identify an alternative  source of
supply, we may have to redesign or modify our products, which would cause delays
in shipments, increase design and manufacturing costs and require us to increase
the prices of our products.

          In the last two years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  on a percentage basis,  those price
reductions  have  been  significantly  less than the  price  reductions  we have
offered our customers, on products that incorporate these lasers, in response to
competitive  pressures and associated  customer demands.  As a result, our gross
margins have been  unfavorably  impacted.  While we continue to  negotiate  with
Furukawa  with respect to the pricing of the lasers we purchase  from them,  and
while we are exploring  alternative sources of supply for the lasers we purchase
from  Furukawa,  we cannot  assure you that these  efforts will be successful in
addressing and/or reversing this erosion in our gross margins.


Our future  operating  results are likely to fluctuate  from quarter to quarter,
and if we fail to meet the expectations of securities analysts or investors, our
stock price could decline significantly.

         Our historical  quarterly operating results have varied  significantly,
and our  future  quarterly  operating  results  are likely to  continue  to vary
significantly   from   period  to  period.   As  a  result,   we  believe   that
period-to-period  comparisons of our operating results should not be relied upon
as an indicator of our future performance.  Some of the factors that could cause
our operating results to vary include:

                                       17
<PAGE>

          o fluctuations  in demand for,  and sales of, our  products,  which is
            dependent on the implementation of fiber optic networks;
          o the timing of customer  orders,  particularly  from our  significant
            customers;
          o competitive  factors,   including  introductions  of  new  products,
            product enhancements and the introduction of new technologies by our
            competitors,  the  entry of new  competitors  into the  fiber  optic
            subsystems and modules market and pricing pressures;
          o our ability to control expenses;
          o the mix of our products sold; and
          o economic  conditions  specific  to the  communications  and  related
            industries.

          We incur  expenses  from  time to time that may not  generate  revenue
until  subsequent  quarters.   In  addition,  in  connection  with  new  product
introductions,  we  incur  research  and  development  expenses  and  sales  and
marketing  expenses that are not matched with revenue until a subsequent quarter
when the new product is introduced.  We cannot assure you that our  expenditures
on manufacturing capacity will generate increased revenue in subsequent quarters
or that new product introductions will generate sufficient revenue in subsequent
quarters to recover our research and development expenditures.  If growth in our
revenue does not outpace the increase in our expenses,  our quarterly  operating
results  may fall  below  expectations  and  cause our  stock  price to  decline
significantly.

          Due to  these  and  other  factors,  we  believe  that  our  quarterly
operating  results  are  not an  indicator  of our  future  performance.  If our
operating  results  are below the  expectations  of public  market  analysts  or
investors  in future  quarters,  the trading  price of our Class A common  stock
would be likely to decrease significantly.

General economic factors could negatively impact our growth plan.

          The unfavorable economic conditions in the United States that began in
2001 detrimentally affected the U.S. manufacturing industry,  particularly sales
of fiber  optics  equipment to service  providers  and  communication  equipment
companies.  Announcements  by fiber  optics  equipment  manufacturers  and their
customers at the time indicated that there was a reduction in spending for fiber
optic  equipment  as a result of the  economic  slowdown  and  efforts to reduce
then-existing  inventories.  Based  on  these  and  other  factors,  some of our
customers  reduced,  modified,  cancelled or rescheduled orders for our products
and  expressed   uncertainty  as  to  their  future  requirements.   Despite  an
improvement in general economic conditions in the United States since that time,
capital spending by service providers in the fiber optic communications industry
on network  infrastructure has remained substantially below pre-2001 levels. Our
business,  operating results and financial condition are likely to suffer if the
global economy, or economic conditions in the United States, experiences another
downturn.

If we do not develop and  introduce  new products  with higher  average  selling
prices in a timely manner,  the overall  average  selling prices of our products
will decrease.

          The market for fiber optic  subsystems and modules is characterized by
declining  average  selling  prices  for  existing  products  due  to  increased
competition,   the  introduction  of  new  products,  product  obsolescence  and
increased unit volumes as manufacturers deploy new network equipment. We have in
the  past  experienced,  and  in the  future  may  experience,  period-to-period
fluctuations in operating results due to declines in our overall average selling
prices.  We anticipate  that the selling  prices for our existing  products will
decrease in the future in response to product  introductions  by  competitors or
us, or other


                                       18
<PAGE>


factors,  including  pressure from significant  customers for price concessions.
Therefore,  we must  continue to develop and  introduce new products that can be
sold at higher prices on a timely basis to maintain our overall  average selling
prices. Failure to do so could cause our revenue and gross margins to decline.

If our  customers  do not approve our  manufacturing  processes  and qualify our
products, we will lose significant customer sales and opportunities.

          Customers  generally will not purchase any of our products before they
qualify them and approve our manufacturing processes and quality control system.
Our customers may require us to register under international  quality standards,
such as ISO 9001. We are currently  registered  under ISO  9001:2000.  Delays in
product  qualification or loss of ISO 9001  certification may cause a product to
be dropped  from a long-term  supply  program and result in a  significant  lost
revenue opportunity. If particular customers do not approve of our manufacturing
processes, we will lose the sales opportunities with those customers.

If we fail to predict our manufacturing  requirements accurately, we could incur
additional  carrying  costs and have excess and  obsolete  inventory or we could
experience  manufacturing  delays,  which  could  cause  us to  lose  orders  or
customers.

          We currently use historical data, a backlog of orders and estimates of
future  requirements  to determine our demand for components  and materials.  We
must  accurately  predict  both the demand for our  products  and the  lead-time
required  to obtain  the  necessary  components  and  materials.  Lead times for
components  and materials  vary  significantly  depending on factors such as the
specific  supplier,  the size of the order,  contract  terms and demand for each
component at a given time.  We generally  maintain  levels of  inventories  that
increase our inventory  carrying costs and periodically  cause us to have excess
and obsolete  inventory.  However,  if we were to  underestimate  our purchasing
requirements,  manufacturing  could  be  interrupted,  resulting  in  delays  in
shipments.

Our  markets  are  highly  competitive,  some  of our  customers  are  also  our
competitors,  and our other  customers  may choose to purchase our  competitors'
products  rather than our products or develop  internal  capabilities to produce
their own fiber optic subsystems and modules.

          The  market  for  fiber  optic   subsystems   and  modules  is  highly
competitive  and we expect  competition to intensify in the future.  Our primary
competitors include Avago Technologies, ExceLight Communications, Finisar, JDSU,
MRV  Communications,  OpNext,  Picolight,  and Stratos  Lightwave.  We also face
indirect  competition from public and private companies  providing products that
address the same fiber optic  network  problems that our products  address.  The
development of alternative solutions to fiber optic transmission problems by our
competitors,  particularly systems companies that also manufacture modules, such
as  Fujitsu  and  JDSU,  could  significantly  limit  our  growth  and  harm our
competitive position.

         Many of our current  competitors and potential  competitors have longer
operating histories and significantly  greater financial,  technical,  sales and
marketing  resources  than we do. As a  result,  these  competitors  are able to
devote  greater  resources to the  development,  promotion,  sale and support of
their  products.   In  addition,   our   competitors   that  have  large  market
capitalization  or cash reserves are in a much better  position to acquire other
companies in order to gain new  technologies  or products  that may displace our
products.  Any of these  potential  acquisitions  could give our  competitors  a
strategic  advantage.  In addition,  many of our  competitors  have much greater
brand  name   recognition,   more  extensive   customer  bases,  more  developed
distribution  channels and broader product offerings than we do. These companies

                                       19
<PAGE>

can use their broader customer bases and product  offerings and adopt aggressive
pricing policies to gain market share.

          In addition, existing and potential customers, especially in Japan and
other international  markets, may also become competitors.  These customers have
the internal  capabilities to integrate their  operations by producing their own
optical  subsystems and modules or by acquiring our competitors or the rights to
produce  competitive  products or  technologies,  which may allow them to reduce
their purchases or cease purchasing from us.

          We expect our competitors to introduce new and improved  products with
lower prices, and we will need to do the same to remain competitive.  We may not
be able to compete  successfully  against either  current or future  competitors
with respect to new products.  We believe that competitive  pressures may result
in price reductions, reduced margins and our loss of market share.

Our sales  cycle  runs from our  customers'  initial  design to  production  for
commercial sale. This cycle is long and  unpredictable and may cause our revenue
and operating results to vary from our forecasts.

          The period of time between our initial contact with a customer and the
receipt of a purchase  order  from that  customer  may span more than a year and
varies by product  and  customer.  During  this time,  customers  may perform or
require us to perform  extensive  evaluation  and  qualification  testing of our
products.  Generally, they consider a wide range of issues before purchasing our
products, including interoperation with other subsystems and components, product
performance  and  reliability.  We may incur  substantial  sales  and  marketing
expenses and expend significant  management effort while potential customers are
qualifying our products. Even after incurring these costs, we ultimately may not
sell any or sell only small amounts of our products to a potential customer.  If
sales forecasts to specific customers are not realized,  our revenue and results
of operations may be negatively impacted.

If we do not achieve acceptable manufacturing yields in a cost-effective manner,
or we are required to develop new manufacturing processes to improve our yields,
our operating results would be impaired.

          The  manufacture  of  our  products   involves   complex  and  precise
processes.  As a  result,  it may be  difficult  to  cost-effectively  meet  our
production goals. In addition,  changes in our manufacturing  processes or those
of our suppliers,  or our  suppliers'  inadvertent  use of defective  materials,
could  significantly  reduce our  manufacturing  yields,  increase our costs and
reduce our product  shipments.  To increase  our gross  margin,  while  offering
products  at  prices  acceptable  to  customers,  we will  need to  develop  new
manufacturing  processes  and  techniques  that will  involve  higher  levels of
automation.

We could be subjected to  litigation  regarding  intellectual  property  rights,
which may divert  management  attention,  cause us to incur significant costs or
prevent us from selling our products.

          In recent years,  there has been significant  litigation in the United
States  involving  patents  and  other  intellectual   property  rights  in  the
networking  technologies industry.  Many companies aggressively use their patent
portfolios to bring infringement claims against competitors. As a result, we may
be  a  party  to  litigation  or  be  involved  in  disputes  over  our  alleged
infringement of others'  intellectual  property in the future.  These claims and
any resulting lawsuit, if successful,  could subject us to significant liability
for damages and prevent us from making or selling  some of our  products.  These
lawsuits,  regardless  of  their  merit,  would  likely  be  time-consuming  and
expensive  to resolve and would  divert  management's


                                       20
<PAGE>


time and attention.  Any potential  intellectual  property litigation also could
force us to do one or more of the following:

          o stop  selling,  incorporating  or using  our  products  that use the
            infringed intellectual property;
          o obtain a license to make,  sell or use the relevant  technology from
            the owner of the infringed intellectual property,  which license may
            not be available on commercially reasonable terms, if at all; or
          o redesign  the  products  to  not  use  the  infringed   intellectual
            property, which may not be technically or commercially feasible.

          If we are  forced to take any of these  actions,  we may be limited in
our ability to execute our business plan.

          We may in the  future  initiate  claims or  litigation  against  third
parties for infringement of our proprietary rights. These claims could result in
costly  litigation and the diversion of our technical and management  personnel.
In the process of asserting our intellectual property rights, these rights could
be found to be invalid,  unenforceable or not infringed. Failure to successfully
assert our intellectual property rights could result in our inability to prevent
our competitors from utilizing our proprietary rights.

If we are unable to protect our proprietary technology, this technology could be
appropriated  by others,  which would make it difficult for us to compete in our
industry.

          Our  success  and  ability  to  compete  is  dependent  in part on our
proprietary technology.  We rely primarily on patent,  copyright,  trademark and
trade secret laws, as well as confidentiality  agreements and other methods,  to
establish  and protect  our  proprietary  rights.  Existing  patent,  copyright,
trademark  and trade  secret laws afford only limited  protection.  While we are
pursuing foreign patent  protections,  the laws of some foreign countries do not
protect the unauthorized use of our proprietary  technology and processes to the
same extent as do the laws of the United States,  and policing the  unauthorized
use  of  our  products  is  difficult.  Many  U.S.  companies  have  encountered
substantial  infringement  problems in some foreign  countries.  Because we sell
some of our products overseas, we have exposure to foreign intellectual property
risks.  Any  infringement  of our  proprietary  rights  could  result  in costly
litigation,  and any failure to adequately  protect our proprietary rights could
result in our competitors  offering similar products,  potentially  resulting in
the loss of some of our competitive advantage and a decrease in our revenue.

If we are  unable to  generate  adequate  additional  revenue as a result of the
expansion of our sales  operations,  our competitive  position may be harmed and
our revenue or margins may decline.

          Historically,  we have  relied  primarily  on a limited  direct  sales
force, supported by third party manufacturers' representatives and distributors,
to sell our products.  Our sales  strategy  focuses  primarily on developing and
expanding   our  direct  sales   force,   manufacturers'   representatives   and
distributors.  We have  incurred  and may  continue to incur  significant  costs
related to the expansion of our sales operations.  If the expansion of our sales
operations does not generate adequate additional revenue,  our operating margins
may decline.  To the extent we are  unsuccessful  in developing our direct sales
force,   we  will  likely  be  unable  to  compete   successfully   against  the
significantly  larger and well-funded sales and marketing  operations of many of
our  current  or  potential  competitors.  In  addition,  if we fail to  develop
relationships with significant  manufacturers'  representatives or distributors,
or if these representatives or distributors are not successful in their sales or
marketing  efforts,  sales of our  products  may  decrease  and our  competitive
position would be harmed. Our representatives or distributors may not market our

                                       21
<PAGE>

products  effectively  or may not continue to devote the resources  necessary to
provide us with effective sales,  marketing and technical support. Our inability
to  effectively  manage our  domestic  and foreign  sales and  support  staff or
maintain   existing   or   establish   new   relationships   with   manufacturer
representatives  and distributors would harm our revenue and result in declining
margins.

The market for our products is new and is characterized  by rapid  technological
changes and evolving industry standards.  If we do not respond to the changes in
a timely manner, our products likely will not achieve market acceptance.

          The market for our products is  characterized  by rapid  technological
change, new and improved product introductions, changes in customer requirements
and evolving industry standards. Our future success will depend to a substantial
extent on our  ability to develop,  introduce  and  support  cost-effective  new
products and technology on a successful and timely basis.  Because the costs for
research  and  development  of new  products  and  technology  are  expensed  as
incurred,  we expect a negative impact on our reported net operating results. If
we fail to develop and deploy new  cost-effective  products and  technologies or
enhancements of existing  products on a timely basis, or if we experience delays
in  the   development,   introduction   or   enhancement  of  our  products  and
technologies,  our products will no longer be  competitive  and our revenue will
decline.

          The development of new, technologically advanced products is a complex
and uncertain  process  requiring  high levels of innovation  and highly skilled
engineering and development  personnel,  as well as the accurate anticipation of
technological  and market  trends.  We cannot assure you that we will be able to
identify, develop, manufacture,  market or support new or enhanced products on a
timely basis, if at all. Furthermore, we cannot assure you that our new products
will gain market  acceptance or that we will be able to respond  effectively  to
product announcements by competitors, technological changes or emerging industry
standards.  Our  failure  to respond  to  product  announcements,  technological
changes or industry  changes in standards would likely prevent our products from
gaining market acceptance and harm our competitive position.

Terrorist  activities and resulting military and other actions and the potential
outbreak of Avian Flu could adversely affect our business.

          The  September  11, 2001  terrorist  attacks in the United  States and
recent  terrorist  attacks  in other  parts of the world,  as well as  continued
threats of global  terrorism,  current and future military response to them, the
United States military  action in Iraq, and the potential  outbreak of Avian Flu
have created many  economic and political  uncertainties  that make it extremely
difficult for us, our  customers  and our  suppliers to accurately  forecast and
plan future business activities. The potential outbreak of Avian Flu, especially
in China,  where we have significant  customer and supply  relationships,  could
also disrupt our operations,  sales, and supply chain or those of our customers,
which  has made it more  difficult  to  predict  and plan  for  future  business
activities.  This  reduced  predictability  challenges  our  ability  to operate
profitably or to grow our business.  In  particular,  it is difficult to develop
and implement strategies,  sustainable business models and efficient operations,
and effectively manage contract manufacturing and supply chain relationships. In
addition,  the continued threats of terrorism,  the heightened security measures
in response to such threats, and the potential outbreak of Avian Flu have caused
and may continue to cause  significant  disruption  to commerce  throughout  the
world.  Disruption in air  transportation in response to these threats or future
attacks,   or  Avian  Flu,  may  result  in   transportation   and  supply-chain
disruptions,  increase our costs for both  receipt of inventory  and shipment of
products  to our  customers,  and  cause  customers  to defer  their  purchasing
decisions.  Disruptions  in commerce  could also cause  consumer  confidence and
spending to decrease or result in increased volatility in the U.S. and


                                       22
<PAGE>


worldwide  financial  markets and  economy.  They also could  result in economic
recession  in  the  U.S.  or  abroad.  Any of  these  occurrences  could  have a
significant impact on our operating results, revenue and costs and may result in
the  volatility  of the  market  price for our  Class A common  stock and on the
future price of our Class A common stock.

Our success depends on our key personnel,  including our executive officers, the
loss of any of whom could harm our business.

          Our  success  depends  on the  continued  contributions  of our senior
management  and other key  research and  development,  sales and  marketing  and
operations  personnel,  including Muoi Van Tran, our Chief Executive Officer and
President,  Susie  Nemeti,  our Chief  Financial  Officer and Vice  President of
Finance and Administration, and Mohammad Ghorbanali, our Chief Operating Officer
and Vice  President of Technical  Operations.  Competition  for employees in our
industry is intense.  We do not have life insurance policies covering any of our
executives.  There can be no assurance  that we will be  successful in retaining
such key  personnel,  or that we will be  successful in hiring  replacements  or
additional key personnel.  Our loss of any key employee,  the failure of any key
employee  to perform in his or her current  position,  or the  inability  of our
officers  and key  employees to expand,  train and manage our employee  base may
prevent us from executing our growth strategy.

          We will need to attract and retain highly  qualified  managers,  sales
and marketing and technical support personnel. We have had difficulty hiring the
necessary engineering, sales and marketing and management personnel in the past.
If we fail to hire and retain  qualified  personnel  when  needed,  our  product
development  efforts and  customer  relations  will suffer.  Our key  management
personnel  have limited  experience  in managing  the growth of  technologically
complex businesses in a rapidly evolving environment. If we are unable to manage
our growth  effectively,  we will incur additional expenses that will negatively
impact our operating results.

Our products may have defects that are not detected  until full  deployment of a
customer's  system.  Any of these  defects  could result in a loss of customers,
damage to our reputation and substantial costs.

          We design our products for large and complex fiber optic networks, and
our products must be  compatible  with other  components of the network  system,
both current and future.  We have  experienced  in the past, and may continue to
experience in the future,  defects in our  products.  Defects in our products or
incompatibilities  in our products may appear only when deployed in networks for
an extended  period of time.  In  addition,  our  products  may fail to meet our
customers'  design  specifications,  or our  customers  may change  their design
specifications  after the  production  of our  product.  A  failure  to meet our
customers' design  specification  often results in a loss of the sale due to the
length of time required to redesign the product.  We may also experience defects
in  third  party  components  that we  incorporate  into our  products.  We have
experienced,  and may continue to experience  the following due to our inability
to detect or fix errors:

          o increased  costs   associated  with  the  replacement  of  defective
            products,   redesign   of   products   to   meet   customer   design
            specifications and/or refund of the purchase price;
          o diversion of development resources; and
          o increased service and warranty costs.

                                       23
<PAGE>

Our  products and the systems  into which our  products  are  incorporated  must
comply with  domestic and  international  governmental  regulations,  and if our
products do not meet these regulations, our ability to sell our products will be
restricted.

          Our  products are subject to various  regulations  of U.S. and foreign
governmental  authorities  principally in the areas of radio frequency  emission
standards and eye safety.  Radio frequency  emission  standards govern allowable
radio interference with other services. Eye safety standards govern the labeling
and  certification  of laser products to ensure that they are used in a way that
does not create a hazard to the human eye.  Our  products  and the systems  into
which they are incorporated  must also comply with  international  standards and
governmental standards of the foreign countries where our products are used. Our
inability,  or the  inability  of our  customers,  to comply  with  existing  or
evolving standards  established by regulatory  authorities,  or to obtain timely
domestic or foreign  regulatory  approvals  or  certificates  will  restrict our
ability to sell our products.

We are subject to environmental  laws and other legal requirements that have the
potential to subject us to substantial  liability and increase our cost of doing
business.

          Our properties  and business  operations are subject to a wide variety
of  federal,  state and local  environmental,  health and safety  laws and other
legal requirements,  including those relating to the storage, use, discharge and
disposal  of  toxic,  volatile  or  otherwise  hazardous  substances.  We may be
required  to incur  substantial  costs to comply  with  current or future  legal
requirements.  In addition,  if we fail to obtain required  permits or otherwise
fail to operate within these or future legal requirements, we may be required to
pay substantial penalties,  suspend our operations or make costly changes to our
manufacturing  processes or  facilities.  We believe our properties and business
operations  are in  compliance  with  applicable  environmental  laws. We do not
anticipate  any  material  capital   expenditures  for   environmental   control
facilities for the 2006 fiscal year.

We face risks associated with our international operations that could prevent us
from marketing and distributing our products internationally.

          Although a significant  portion of our sales has historically  been in
North  America,  a growing  percentage  of our revenue is  generated  from sales
outside North America. Sales of our products outside North America accounted for
approximately  39.5%,  43.4%  and 42.9% of our  revenue  for the  periods  ended
September  30,  2003,  2004 and 2005,  respectively.  We  expect  that our sales
outside of North America will continue to contribute  materially to our revenue.
We  have  limited   experience  in  marketing  and   distributing  our  products
internationally. One of our objectives is to expand our international operations
in the future.  Significant  management  attention and  financial  resources are
needed to develop our international sales, support and distribution channels and
manufacturing.  We may not be able to establish or maintain international market
demand for our products.

          In  addition,  international  operations  are subject to other  risks,
including:

          o greater  difficulty  in accounts  receivable  collection  and longer
            collection periods;
          o difficulties and costs of staffing and managing  foreign  operations
            with personnel who have expertise in fiber optic technology;
          o unexpected  changes in regulatory or certification  requirements for
            optical networks; and
          o political or economic instability.

                                       24
<PAGE>

          A portion of our international revenue 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.  These factors could  adversely  impact our  international  sales or
increase our costs of doing business abroad or impair our ability to expand into
international markets, and therefore could significantly harm our business.

Disruption of our  operations at our Woodland  Hills,  California  manufacturing
facility could require us to lease alternative manufacturing facilities or limit
our manufacturing operations.

          In  August  2003,  we  relocated  our  headquarters  from  Chatsworth,
California to Woodland Hills,  California.  All of our manufacturing  operations
are  conducted  in our  Woodland  Hills,  California  headquarters.  Due to this
geographic   concentration,   a  disruption  of  our  manufacturing  operations,
resulting  from  sustained  process  abnormalities,   human  error,   government
intervention  or natural  disasters,  such as earthquakes,  fires or floods,  or
other causes, could require us to cease or limit our manufacturing operations.

Our  limited  experience  in  acquiring  other  businesses,  product  lines  and
technologies  may make it difficult for us to overcome  problems  encountered in
connection with any acquisition we may undertake.

          We expect to review opportunities to buy other businesses, products or
technologies  that would  enhance our  technical  capabilities,  complement  our
current  products or expand the  breadth of our  markets or which may  otherwise
offer growth  opportunities.  Our acquisition of businesses or technologies will
require significant  commitment of resources.  We may be required to pay for any
acquisition with cash, but we cannot be certain that additional  capital will be
available to us on favorable  terms, if at all. In lieu of paying cash, we could
issue stock as  consideration  for an  acquisition  that would  dilute  existing
stockholders' percentage ownership,  incur substantial debt or assume contingent
liabilities.  We have  little  experience  in  acquiring  other  businesses  and
technologies. Potential acquisitions also involve numerous risks, including:

          o problems  assimilating  the purchased  operations,  technologies  or
            products;
          o unanticipated costs associated with the acquisition;
          o diversion of management's attention from our core business;
          o adverse effects on existing  business  relationships  with suppliers
            and customers;
          o risks  associated  with  entering  markets  in  which  we have no or
            limited prior experience; and
          o potential loss of key employees of purchased organizations.

Our stock price is likely to be volatile and could drop unexpectedly.

          Our Class A common stock has been  publicly  traded since  November 3,
2000.  The  market  price  of our  Class A common  stock  has  been  subject  to
significant  fluctuations  since the date of our initial  public  offering.  The
stock  market  has from time to time  experienced  significant  price and volume
fluctuations  that have affected the market prices of  securities,  particularly
securities of  telecommunications  and fiber optic companies.  As a result,  the
market price of our Class A common stock may materially  decline,  regardless of
our operating  performance.  In the past, following periods of volatility in the
market  price of a  particular  company's  securities,  securities  class action
litigation has often been brought  against that company.  We may become involved
in this  type of  litigation  in the  future.  Litigation  of this type is often
expensive and diverts management's attention and resources.

                                       25
<PAGE>

We may not be able to maintain our listing on the Nasdaq  National Market and if
we fail to do so,  the  price  and  liquidity  of our  Class A common  stock may
decline.

          The Nasdaq Stock Market has quantitative  maintenance criteria for the
continued  listing of  securities  on the Nasdaq  National  Market.  The current
requirements  affecting us include  maintaining a minimum bid price per share of
$1. Our bid price has been below $1 in the past. If the bid price of our Class A
common stock drops below $1 per share and remains at that level for more than 30
consecutive trading days, we will be in violation of Nasdaq's listing standards.
If within 90 days  thereafter,  our Class A common stock does not have a minimum
bid price of $1 per share for 10 consecutive  trading days, Nasdaq will commence
proceedings to delist our Class A common stock from the Nasdaq National  Market.
If we fail to maintain  continued listing on the Nasdaq National Market and must
move to a market with less liquidity,  our stock price would likely decline.  If
we are delisted, it could have a material adverse effect on the market price of,
and the liquidity of the trading market for, our Class A common stock.

We have potential business  conflicts of interest with Furukawa,  the resolution
of  which  may  not  be  as  favorable  to us as if  we  were  dealing  with  an
unaffiliated third party.

          We have  historically  relied on Furukawa's  research and  development
capabilities to provide us with technologically  advanced lasers and fiber optic
components that we purchase from Furukawa for inclusion in our products,  and we
expect to continue to rely on Furukawa in the future. We currently  purchase the
majority of lasers from Furukawa under a Master  Purchase  Agreement.  We cannot
assure  you that  Furukawa  will  renew the  Agreement  upon its  expiration  on
September  30,  2006 or  whether  it  will  continue  to  provide  services  and
components  to us, and if not,  whether or on what terms we could find  adequate
alternative sources for these services and components.

          In the last two years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  the laser price  reductions that we
have been able to obtain from Furukawa have been less than the price  reductions
for the  associated  products  that we have given our  customers  in response to
market conditions. As a result, our gross margins have been negatively impacted,
and may be  negatively  impacted in the future.  While we continue to  negotiate
with  Furukawa  with respect to the pricing of the lasers we purchase from them,
and while we are  exploring  alternative  sources  of supply  for the  lasers we
purchase  from  Furukawa,  we  cannot  assure  you that  these  efforts  will be
successful in addressing this negative impact on our gross margins.

          Furukawa  can  control  the  outcome  of  any  stockholder  votes,  as
discussed below. The terms of future  transactions  with Furukawa may or may not
be comparable to those that would be available from unaffiliated third parties.

          Potential  conflicts of interest  exist  between  Furukawa and us in a
number of areas,  including  the nature  and  quality of  services  rendered  by
Furukawa  to  us,   potential   competitive   business   activities,   sales  or
distributions by Furukawa of all or any portion of its ownership interest in us,
or Furukawa's ability to control our management and affairs. It is possible that
business  decisions  made by  management  that are in the best  interest  of our
stockholders may conflict with Furukawa's interests.  For example, we may decide
to enter  into or  acquire a line of  business  competitive  with  Furukawa,  or
Furukawa may decide to enter into or acquire a line of business competitive with
us. Any of these events may alter or  eliminate  our ability to rely on Furukawa
to supply key  components  to us in the future,  increase our costs of producing
our  products  and result in increased  competition  in our  markets.  We cannot
assure  you that we

                                       26
<PAGE>

will be able to resolve any  conflicts  we may have with  Furukawa or, if we are
able to do so, that the resolution will be favorable to us.

Furukawa  will  control  the outcome of  stockholder  voting and there may be an
adverse effect on the price of our Class A common stock due to disparate  voting
rights of our Class A common stock and our Class B common stock.

          Furukawa  beneficially  owns all of our outstanding  shares of Class B
common stock,  which as of December 20, 2005  represented  93.4% voting  control
over all stockholder issues. The holders of our Class A common stock and Class B
common  stock have  identical  rights  except that holders of our Class A common
stock are  entitled  to one vote per share  while  holders of our Class B common
stock  are  entitled  to ten  votes  per  share  on  matters  to be  voted on by
stockholders.  The differential in the voting rights of our Class A common stock
and Class B common stock could adversely  affect the price of our Class A common
stock to the extent that  investors  or any  potential  future  purchaser of our
shares of Class A common stock give greater value to the superior  voting rights
of our  Class B common  stock.  Each  share of our  Class B  common  stock  will
automatically  convert  into  one  share  of  Class  A  common  stock  if  it is
transferred to any entity,  other than an entity  controlling,  controlled by or
under common control with Furukawa.  In addition,  our Class B common stock will
automatically  convert  into  shares  of our  Class A common  stock if the total
number of  outstanding  shares of Class B common  stock falls below 20% of total
number of  outstanding  shares of our common  stock.  As long as Furukawa  has a
controlling  interest,  it will continue to be able to elect our entire board of
directors  and  generally  be able to  determine  the  outcome of all  corporate
actions  requiring  stockholder  approval.  As a result,  Furukawa  will be in a
position to continue to control all matters affecting us, including:

          o a change of control, including a merger;
          o our acquisition or disposition of assets;
          o our future issuances of common stock or other securities;
          o our incurrence of debt; and
          o our payment of dividends on our common stock.

          Three  members  of our  board  of  directors  are also  executives  of
Furukawa.  These  individuals  have obligations to both our company and Furukawa
and may have  conflicts  of  interest  with  respect to matters  potentially  or
actually  involving or affecting us, such as  acquisitions  and other  corporate
opportunities that may be suitable for both Furukawa and us.


Our exploration of strategic alternatives may not be successful.

          We have a special  committee of our board of directors  that evaluates
strategic alternatives.  The special committee,  which is comprised of our three
independent  directors,  has retained  Bear,  Stearns & Co. Inc. to advise it in
evaluating  strategic   alternatives,   including  a  special  dividend,   share
repurchase, strategic merger or sale of the Company.

          We are uncertain as to what strategic alternatives may be available to
us or what impact any particular  strategic  alternative  will have on our stock
price if  accomplished.  Uncertainties  and risks relating to our exploration of
strategic alternatives include:

                                       27
<PAGE>

          o the exploration of strategic alternatives may disrupt operations and
            distract  management,  which could have a material adverse effect on
            our operating results;
          o the process of  exploring  strategic  alternatives  may be more time
            consuming and expensive than we currently anticipate;
          o we may not be able  to  successfully  achieve  the  benefits  of the
            strategic alternative undertaken by us; and
          o perceived  uncertainties  as to the future  direction of the Company
            may result in the loss of employees or business partners.

The current  audit by the  Internal  Revenue  Service of our federal tax returns
could result in adverse adjustments to our financial statements.

          In March 2005, the Internal Revenue Service  commenced an audit of our
federal tax returns for our 2001 and 2003 fiscal years.  At the current stage of
the audit,  we are unable to predict  whether any adjustments to our tax returns
will be required,  and if so,  whether these  adjustments  will be adverse or in
favor of us. In addition,  we cannot predict  whether any  adjustment  resulting
from the IRS audit will be material,  or whether such an adjustment will require
us to change our previously reported financial results.

Our  internal  controls  over  financial  reporting  may not be adequate and our
independent  auditors  may not be able to  certify as to their  adequacy,  which
could have a significant and adverse effect on our business and reputation.

           We are evaluating our internal  controls over financial  reporting in
order to allow  management to report on, and our independent  auditors to attest
to, our internal controls over financial  reporting,  as required by Section 404
of the  Sarbanes-Oxley  Act  of  2002  and  rules  and  regulations  of the  SEC
thereunder,  which we refer to as Section 404.  Section 404 requires a reporting
company such as ours to, among other things,  annually  review and report on its
internal controls over financial reporting, and evaluate and disclose changes in
its internal controls over financial reporting quarterly. We will be required to
comply with Section 404 as of September 30, 2007.  We are  currently  performing
the system and  process  evaluation  and  testing  required  (and any  necessary
remediation)  in an effort to comply with management  certification  and auditor
attestation   requirements  of  Section  404.  In  the  course  of  our  ongoing
evaluation,  we  have  identified  areas  of  our  internal  controls  requiring
improvement, and plan to design enhanced processes and controls to address these
and any other issues that might be identified  through this review. As a result,
we expect to incur  additional  expenses and diversion of management's  time. We
cannot be certain as to the timing of completion of our evaluation,  testing and
remediation  actions or the impact of the same on our  operations and may not be
able to ensure that the process is effective  or that the internal  controls are
or will be effective  in a timely  manner.  If we are not able to implement  the
requirements of Section 404 in a timely manner or with adequate compliance,  our
independent  auditors may not be able to certify as to the  effectiveness of our
internal control over financial  reporting and we may be subject to sanctions or
investigation by regulatory  authorities,  including the SEC. As a result, there
could  be an  adverse  reaction  in the  financial  markets  due  to a  loss  of
confidence in the reliability of our financial  statements.  In addition, we may
be required to incur costs in  improving  our  internal  control  system and the
hiring of additional personnel.  Any such action could have a material effect on
our business, results of operations and financial condition.

                                       28
<PAGE>

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

          In   August   2003,   we   relocated   our   corporate   headquarters,
manufacturing,  research and development  and sales  operations to a building in
Woodland Hills,  California with approximately  149,000 square feet. We acquired
the building in June 2001 for $18,750,000.  The purchase price was paid from our
existing cash on-hand.  We are  occupying an aggregate of  approximately  89,000
square feet and are currently leasing an aggregate of 41,400 square feet of this
building to an unrelated party.

          In June 2004, we sold the building  located in Chatsworth,  California
which was our former corporate headquarters.  Net proceeds from this transaction
were  approximately  $5.7 million.  In November  2002, we leased a 21,660 square
foot  building in  Broomfield,  Colorado,  which serves as a research and design
facility.   This  lease  expires   January  31,  2006,  and  the  base  rent  is
approximately $21,700 per month. In December 2003, we leased a 6,800 square foot
building  in Elkton,  Maryland,  which will also serve as a research  and design
facility. This lease expires in November 2006 and the base rent is approximately
$5,700 per month. In addition,  we lease small sales  facilities in Nashua,  New
Hampshire;  Richardson, Texas; Santa Clara, California; Ottawa, Canada; and Bury
St. Edmunds,  England. Our leases for the facilities in Ottawa, Canada and Santa
Clara,  California are on a month-to-month  basis. Our leases for the facilities
in Nashua,  New Hampshire,  Richardson,  Texas,  and Bury St.  Edmunds,  England
expire in April 2006, May 2007, and July 2011, respectively.

          We  believe  that our  existing  space  is  adequate  for our  current
operations.  We believe that suitable  replacement  and  additional  spaces,  if
needed, will be available in the future on commercially reasonable terms.

ITEM 3.   LEGAL PROCEEDINGS

          We are not currently  involved in any material legal  proceedings.  We
are not aware of any other  material  legal  proceedings  threatened  or pending
against  us. From time to time,  however,  we may become  subject to  additional
legal  proceedings,  claims,  and litigation  arising in the ordinary  course of
business.  In  addition,  in the past we have  received,  and we may continue to
receive  in the  future,  letters  alleging  infringement  of  patent  or  other
intellectual  property  rights.  Our  management  believes  that  these  letters
generally are without merit and intend to contest them vigorously.

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

          None.

                                       29
<PAGE>

                                    PART II.

ITEM 5.   MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY,  UNRELATED  STOCKHOLDER
          MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

Market Information

          Our Class A common  stock has  traded on The  Nasdaq  National  Market
under the symbol  "OCPI".  The following  table sets forth the range of high and
low intra-day  sales prices (rounded to the nearest cent) reported on The Nasdaq
National Market for our Class A common stock for the periods indicated.

<TABLE>
<CAPTION>

                                                                                            Price range of
                                                                                             Common Stock
                                                                                    -------------------------------
                                                                                        High              Low
                                                                                    -------------    --------------
<S>                                                                                       <C>               <C>
Fiscal Year Ended September 30, 2004:
   First Quarter ...............................................................          $ 4.30            $ 2.31
   Second Quarter...............................................................          $ 4.80            $ 2.37
   Third Quarter................................................................          $ 3.83            $ 1.87
   Fourth Quarter...............................................................          $ 2.44            $ 1.66

Fiscal Year Ended September 30, 2005:
   First Quarter ...............................................................          $ 2.68            $ 1.90
   Second Quarter...............................................................          $ 2.65            $ 1.67
   Third Quarter................................................................          $ 1.99            $ 1.53
   Fourth Quarter...............................................................          $ 2.15            $ 1.72
</TABLE>

          Our Class B common stock is not publicly  traded and is held  entirely
by Furukawa.  Each share of our Class B common stock will automatically  convert
into one share of Class A common stock if it is transferred to any entity, other
than an entity controlling, controlled by or under common control with Furukawa.
In addition,  our Class B common stock will automatically convert into shares of
our Class A common  stock if the total number of  outstanding  shares of Class B
common stock falls below 20% of total number of outstanding shares of our common
stock.

Recent Share Prices

          The  following  table sets forth the closing sales prices per share of
our Class A common stock on The Nasdaq National Market on (i) September 30, 2005
and (ii) December 20, 2005. Because the market price of our Class A common stock
is subject to fluctuation,  the market value of the shares of our Class A common
stock may increase or decrease.

<TABLE>
<CAPTION>

                                                                                              Closing Price
                                                                                              ---------------
<S>                                                                                               <C>
        September 30, 2005...................................................................     $    1.88
        December 20, 2005....................................................................     $    2.32
</TABLE>

                                       30
<PAGE>

Holders

          As of December  20,  2005 there were 91 record  holders of our Class A
common stock and 1 record holder of our Class B common stock.

Dividend Policy

          We have not declared or paid any cash  dividends on our capital  stock
since our inception and we intend to retain future earnings,  if any, for use in
the operation and expansion of our business and do not anticipate paying regular
or periodic cash dividends in the foreseeable future.  However, on September 29,
2003,  we  announced  that a  special  committee  of our board of  directors  is
evaluating  strategic  alternatives to enhance  shareholder value and liquidity,
including a special dividend to our shareholders.


Securities Authorized For Issuance Under Equity Compensation Plans

          The following table summarizes the number of shares issuable under our
equity compensation plans, the weighted-average exercise price and the number of
shares available for issuance, as of September 30, 2005.

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
Plan Category                 Number of securities to be  Weighted-average exercise  Number of securities
                              issued upon exercise of     price of outstanding       remaining available for
                              outstanding options,        options, warrants and      future issuance under
                              warrants and rights         rights                     equity compensation plans
                                                                                     (excluding securities
                                                                                     reflected in column (a))
                                                                                                 (c)
                                          (a)
                                                                           (b)
-----------------------------------------------------------------------------------------------------------------
<S>                                    <C>                           <C>                      <C>
Equity compensation plans              4,690,202                     $6.73                    5,739,146
approved by security holders
-----------------------------------------------------------------------------------------------------------------
Equity compensation plans              3,301,680                     $11.00                        0
not approved by security
holders (1)
-----------------------------------------------------------------------------------------------------------------
Total                                  7,991,882                     $8.49                    5,739,146
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1) These were shares granted on August 29, 2000 to certain  executive  officers
prior to our initial public offering.

Recent Sales of Unregistered Securities

          There have been no recent  purchases by OCP or  affiliated  parties of
any of its securities.

ITEM 6.   SELECTED FINANCIAL DATA

          The following selected  consolidated  financial data should be read in
conjunction with, and are qualified by reference to, our consolidated  financial
statements and related notes and Item 7 "Management's Discussion and Analysis of
Financial  Condition and Results of Operations."  The selected


                                       31
<PAGE>


income  statement data for the three fiscal years ended September 30, 2003, 2004
and 2005 and the selected  balance  sheet data as of September 30, 2004 and 2005
are derived  from,  and  qualified  by  reference  to, the audited  consolidated
financial  statements  included elsewhere in this Form 10-K. The selected income
statement  data for the fiscal years ended  September  30, 2001 and 2002 and the
selected  balance sheet data as of September 30, 2001, 2002 and 2003 are derived
from audited financial statements not included in this Form 10-K.

<TABLE>
<CAPTION>

                                                                      Fiscal years ended September 30,
                                               --------------------------------------------------------------------------------
     Income statement data                                 2001           2002            2003            2004            2005
                                                                    (In thousands, except per share data)
     --------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>           <C>              <C>              <C>

     Revenue                                          $ 144,012       $ 37,207      $   38,880       $  57,143        $ 55,978
     Cost of revenue                                     94,684         26,375          25,048          32,648          34,326
     Gross profit                                        49,328         10,832          13,832          24,495          21,652

     Operating Expenses:
       Research and development                           2,958          5,261          16,246          17,022          14,621
       Sales and marketing                                3,799          3,717           4,562           5,021           4,710
       General and administrative                         4,553          4,671           7,011           5,849           5,012
         Total operating expenses                        11,310         13,649          27,819          27,892          24,343

     Gain from sale of real property                       -              -               -                942            -

     Income (loss) from operations                       38,018        (2,817)        (13,987)         (2,455)         (2,691)

     Other income, net                                    6,081          3,391           1,834           1,517           3,633

     Income (loss) before income taxes                   44,099            574        (12,153)           (938)             942

     Income taxes provision (benefit)
                                                         17,655          (265)         (1,952)             369               1
     Net income (loss)                                $  26,444       $    839      $ (10,201)       $ (1,307)        $    941

     Earnings (loss) per share:
     Basic                                          $      0.26 $         0.01 $        (0.09) $        (0.01) $          0.01
     Diluted                                        $      0.24 $         0.01 $        (0.09) $        (0.01) $          0.01
     Shares outstanding:
       Basic                                            100,263        108,391         111,074         112,553         112,894
       Diluted                                          111,430        112,578         111,074         112,553         113,810

                                                                                 September 30,
                                               --------------------------------------------------------------------------------
                                                           2001           2002            2003             2004           2005
                                               --------------------------------------------------------------------------------
     Balance sheet data                                                         (In thousands)

     Cash and cash equivalents                        $  62,529       $ 85,426      $   64,895       $  75,423        $ 83,975
     Working capital                                    166,416        167,865         145,353         156,580         162,692
     Total assets                                       204,268        205,061         200,143         199,967         200,252
     Long-term portion of debt                            1,825          1,353             864            -               -
     Stockholders' equity                               194,713        197,196         188,360         187,260         188,308
</TABLE>

                                       32
<PAGE>

ITEM 7.   MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL  CONDITION  AND
          RESULTS OF OPERATIONS.

          The following  discussion  of our  financial  condition and results of
operations  should be read in conjunction with our financial  statements and the
related notes to such  financial  statements  included  elsewhere in this Report
beginning  on  page  F-1.  The  following  discussion  contains  forward-looking
statements  that involve risks and  uncertainties.  The  statements are based on
current  expectations  and actual  results  could differ  materially  from those
discussed herein.  Factors that could cause or contribute to the differences are
discussed in Item 1A "Risk Factors" and elsewhere in this Report.


Overview

          We  design,   manufacture  and  sell  a  comprehensive  line  of  high
performance,  highly reliable fiber optic subsystems and modules for fiber optic
transmission  systems  that are used to address  the  bandwidth  limitations  in
metropolitan area networks,  or MANs, local area networks,  or LANs, and storage
area networks,  or SANs,  markets.  Our subsystems and modules  include  optical
transmitters,  receivers,  transceivers and transponders that convert electronic
signals into optical signals and back to electronic signals, enabling high-speed
communication  of voice and data  traffic over public and private  networks.  We
began our operations and shipped our first products in November of 1991.

          Furukawa  beneficially  owns  all of our  outstanding  Class B  common
stock, representing 58.4% of our outstanding shares of common stock and 93.4% of
the  combined  voting  power of all of our  outstanding  common  stock as of the
fiscal year ended  September 30, 2005.  Since our  inception,  we have purchased
substantially  all of our  lasers  and the  majority  of our other  fiber  optic
components from Furukawa.  We have relied on Furukawa's research and development
capabilities to provide us with technologically  advanced lasers and fiber optic
components  that we purchase from  Furukawa for  inclusion in our  products.  We
currently  purchase the majority of lasers from Furukawa under a Master Purchase
Agreement which we entered into with Furukawa on October 1, 2003. This Agreement
automatically  renewed  on  October  1,  2004 and  October  1,  2005 and  renews
automatically  each year thereafter  unless it is terminated upon written notice
by either Furukawa or us prior to renewal.

          In the last two years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  the laser price  reductions that we
have been able to obtain from Furukawa have been less than the price  reductions
for the  associated  products  that we have given our  customers  in response to
market conditions. As a result, our gross margins have been negatively impacted,
and may be  negatively  impacted in the future.  While we continue to  negotiate
with  Furukawa  with respect to the pricing of the lasers we purchase from them,
and while we are  exploring  alternative  sources  of supply  for the  lasers we
purchase  from  Furukawa,  there can be no assurance  that these efforts will be
successful in addressing this negative impact on our gross margins.

          We operate in one  industry  segment,  the design and  manufacture  of
fiber optic  subsystems  and  modules.  We sell our  products  to  communication
equipment  manufacturers  or CEMs,  their  contract  manufacturers  or CMs,  who
incorporate  them into systems they  assemble for CEMs and to  distributors.  We
define  our  customers  as CEMs who have  purchased  our  products  directly  or
indirectly  through CMs and  distributors.  We  recognize  revenue  upon product
shipment,   and  sales   returns  and   allowances   have  been   insignificant.
Historically,  a relatively  small number of end customers  have accounted for a

                                       33
<PAGE>

significant  percentage of our revenue.  Our 10 largest customers  accounted for
approximately  68.0% and 66.2% of our total  revenue for the fiscal  years ended
September  30,  2004 and 2005,  respectively  with  Alcatel  and  Cisco  Systems
(including  sales  to each  of  their  contract  manufacturers)  accounting  for
approximately  17.5%  and 14.9% of our total  revenue,  respectively,  in fiscal
2005.  Alcatel  and Cisco  Systems  (including  sales to each of their  contract
manufacturers)  accounted for approximately 16.7%, and 11.2%,  respectively,  of
our total  revenue  for the  fiscal  year ended  September  30,  2004.  No other
customer accounted for more than 10.0% of our total revenue for the fiscal years
ended September 30, 2004 and 2005.

          For financial reporting purposes,  we consider our customers to be the
CEMs, CMs and distributors  who place purchase orders with us directly.  For the
fiscal year ended  September  30,  2005 no direct  order  contract  manufacturer
accounted  for more than 10% of our total  revenue.  For the  fiscal  year ended
September 30, 2004 Comstar  Communications  accounted for approximately 11.1% of
our total revenue.  No other direct sales customer accounted for more than 10.0%
of our total revenue for the fiscal year ended September 30, 2004.  Although our
revenue from sales to our other customers continues to increase,  we expect that
significant customer concentration will continue for the foreseeable future. Our
sales are made on a purchase  order  basis  rather  than by  long-term  purchase
commitments.  Our customers may cancel or defer purchase  orders without penalty
on short notice.

          In October 1999,  Methode  Electronics,  Inc. filed a lawsuit  against
Infineon Technologies Corporation and us seeking unspecified damages,  including
monetary damages,  injunctive relief, attorneys' fees and costs arising from our
alleged  infringement  of some of the claims  contained  in patents  assigned to
Methode, including patents relating to our 1x9 pin configuration products. After
Methode initiated the lawsuit, it assigned to Stratos Lightwave, Inc., a Methode
spin-off,  all of Methode's  rights,  title and interest in the patent at issue.
The court subsequently added Stratos as a plaintiff to the lawsuit. On April 12,
2002,  we  resolved  our  patent  infringement   litigation  with  Stratos.  The
settlement  resolved all claims in the lawsuit among us and Stratos.  As part of
the  settlement,  we entered  into a five-year  license  agreement  with Stratos
covering  Stratos'   portfolio  of  optoelectronic   transceiver   patents.   In
consideration  of the license  agreement,  we are  required to pay a total of $2
million over the license  term.  As of September  30,  2005,  $400,000  remained
outstanding  and is expected to be paid by fiscal year 2007. Our  optoelectronic
products  covered by this license include our 1x9, GBIC, small form factor (SFF)
and  small  form-factor  pluggable  (SFP)  product  families.  At the end of the
five-year term, we have the option to renegotiate  with Stratos for an extension
of the license.

          The unfavorable economic conditions in the United States that began in
2001 detrimentally affected the U.S. manufacturing industry,  particularly sales
of fiber  optics  equipment to service  providers  and  communication  equipment
companies.  Announcements  by fiber  optics  equipment  manufacturers  and their
customers at the time indicated that there was a reduction in spending for fiber
optic  equipment  as a result of the  economic  slowdown  and  efforts to reduce
then-existing  inventories.  Based  on  these  and  other  factors,  some of our
customers  reduced,  modified,  cancelled or rescheduled orders for our products
and  expressed   uncertainty  as  to  their  future  requirements.   Despite  an
improvement in general economic conditions in the United States since that time,
capital spending by service providers in the fiber optic communications industry
on network  infrastructure  has remained  substantially  below pre-2001  levels.
During  the  fourth  quarter  of fiscal  2005,  we have  seen a higher  level of
activity from our customers  which resulted in an increase in new orders compare
to previous  quarters.  We cannot  provide any  assurance  that the  increase in
customer  activity  will  continue or that our business  will not be  negatively
impacted  in the  future  as a  result  of  our  customers'  declining  business
activities.

                                       34
<PAGE>

           On  October   9,  2002,   we   acquired   certain   assets  of  Cielo
Communications,  Inc.,  ("Cielo  Communications")  a research and design company
located in Broomfield,  Colorado, focused on creating VCSEL technology for fiber
optic  communication  networks  for a cash  purchase  price of $5.0  million and
direct costs of $1.6 million.  The purchase  price  included the  acquisition of
capital equipment and intellectual property.

          In October 2002 we acquired  certain assets of Cielo  Communications,
Inc., a research and design company located in Broomfield,  Colorado, focused on
creating 1300 nm VCSEL technology for fiber optic  communication  networks.  The
purchase price was $5 million and included the acquisition of capital equipment,
inventory  and  intellectual  property.  We expect to cease the operation of our
Colorado facility as of January 31, 2006, because the cost of Fabry-Perot lasers
has been  decreasing,  making  1300 nm VCSEL  technology  less  attractive  as a
cost-effective replacement,  and because of the delay in development of the next
generation  of optical  modules.  As a result,  we expect to cease the immediate
development  of  products  based on 1300 nm VCSEL  technology,  although we will
retain the related intellectual property for future development.

          On January 31, 2003, we acquired  parallel  optical  module assets and
intellectual  property from Gore  Photonics,  an industry leader in the research
and development of VCSEL parallel optical modules for fiber optic  communication
networks located in Elkton, Maryland, for a cash purchase price of $3.4 million.
The purchase price includes the acquisition of capital equipment and inventory.

          The average selling prices of our products  generally  decrease as the
products mature from factors such as increased competition,  the introduction of
new products,  increased  unit volumes,  and price  concessions  required by our
customers.  We anticipate that average  selling prices of our existing  products
will continue to decline in future periods although the timing and degree of the
declines cannot be predicted with any certainty. We must continue to develop and
introduce  new products  that  incorporate  features  that can be sold at higher
average selling prices on a timely basis.

          Our cost of revenue  consists  principally  of  materials,  as well as
salaries  and  related  expenses  for  manufacturing  personnel,   manufacturing
overhead and provisions for excess and obsolete  inventory.  We purchase several
key components for our products from a limited number of suppliers.

          Our research and development  expenses  consist  primarily of salaries
and related expenses for design engineers and other technical personnel, cost of
developing prototypes,  and depreciation of test and prototyping equipment.  Our
research and  development  expenses also consist of materials and overhead costs
related  to major  product  development  projects.  We charge all  research  and
development  expenses to  operations  as  incurred.  We believe  that  continued
investment  in research  and  development  is  critical  to our future  success.
Accordingly, we may expand our internal research and development capabilities in
the future to develop new products.  As a result,  our research and  development
expenses in absolute dollar amounts may increase in future periods.

          Sales and marketing expenses consist primarily of salaries and related
expenses for sales and marketing personnel,  commissions paid to sales personnel
and independent manufacturers'  representatives,  marketing and promotion costs.
We may expand our sales and  marketing  efforts in order to  increase  sales and
market  awareness  of our  products.  We believe  that  investment  in sales and
marketing is critical to our success and that these expenses may increase in the
future.

          General and  administrative  expenses  consist  primarily of salaries,
stock  compensation  and related  expenses for our  administrative,  finance and
human resources  personnel,  professional fees and other corporate expenses.  We
expect  that our legal and  consulting  fees  will  increase  as a result of our
analysis of strategic  alternatives,  including future market opportunities that
may be  pursued  by our  management  and board of  directors.  As a result,  our
general and  administrative  expenses in absolute dollars may increase in future
periods.

Critical Accounting Policies

          The  preparation of financial  statements  and related  disclosures in
conformity with accounting  principles  generally  accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts  reported in the  Consolidated  Financial  Statements  and  accompanying
notes. Note 2 to our Financial  Statements  describe the significant  accounting
policies and

                                       35
<PAGE>

methods used in the preparation of our Financial Statements.  Estimates are used
for, but not limited to, the accounting for the allowance for doubtful  accounts
and sales returns, the allowance for inventory obsolescence,  warranty accruals,
long-lived  assets and income  taxes.  Actual  results  could  differ from these
estimates. The following critical accounting policies are impacted significantly
by judgments, assumptions and estimates used in the preparation of our Financial
Statements.

Allowance for Doubtful Accounts and Sales Returns

          Our  accounts  receivable  balance,  net  of  allowance  for  doubtful
accounts and sales returns,  was $9.5 million as of September 30, 2005, compared
with $8.6 million as of September 30, 2004. The allowance for doubtful  accounts
and sales returns as of September 30, 2005 was $426,000,  compared with $362,000
as of  September  30, 2004.  The  allowance  is based on our  assessment  of the
collectibility of customer accounts and potential  returns.  We regularly review
the  allowance by  considering  factors such as  historical  experience,  credit
quality,  age of the accounts receivable  balances,  current economic conditions
that may affect a customer's ability to pay and historical  customer returns. If
a major  customer's  creditworthiness  deteriorates,  or if actual  defaults are
higher than our historical experience, or if actual future customer returns were
to deviate from our expectations, our estimates of the recoverability of amounts
due to us could be  overstated,  and  additional  allowances  could be required,
which could have an adverse impact on our operations.

Inventory Write-downs

          Our  inventory  balance was $15.3  million as of  September  30, 2005,
compared  with $8.7 million as of September  30, 2004. At September 30, 2005 and
2004  inventory  with a  historical  cost of $9.0  million  and  $10.5  million,
respectively,  has been  written  down as  excess  and  obsolete  inventory.  We
estimate  our excess and  obsolete  inventory  primarily  through  reference  to
historical usage and future demand forecasts. At the point of write down, a new,
lower-cost  basis for that inventory is established,  and subsequent  changes in
facts and  circumstances  do not result in the  restoration  or increase in that
newly  established cost basis. Our write-down for excess and obsolete  inventory
was  $576,000,  $759,000  and $1.6  million  for fiscal  2005,  2004,  and 2003,
respectively.  If there were to be a sudden and  significant  decrease in demand
for our products, or if there were a higher incidence of inventory  obsolescence
because of rapidly changing  technology and customer  requirements,  we could be
required  to  increase  inventory  write-downs,  and our gross  margin  could be
adversely affected.

Warranty Accruals

          The  liability  for  product  warranties,  included  in other  accrued
liabilities,  was $14,000 as of September 30, 2005,  compared with $31,000 as of
September 30, 2004. See Note 9 to the  Consolidated  Financial  Statements.  Our
products sold are generally  covered by a warranty for periods  ranging from one
to five years.  We accrue for warranty  costs as part of our cost of sales based
on  associated  material  costs,  and labor  costs.  The  provision  for product
warranties  issued  during fiscal 2005,  2004 and 2003 was $14,000,  $11,000 and
$19,000,  respectively. If we experience an increase in warranty claims compared
with our historical  experience,  or if the cost of servicing warranty claims is
greater  than the  expectations  on which the accrual has been based,  our gross
margin could be adversely affected.

Long-Lived Assets

          We monitor and evaluate the  recoverability  of our long-lived  assets
whenever events or changes in circumstances  indicate that the carrying value of
an asset may no longer be recoverable. If the carrying

                                       36
<PAGE>

amount  of  a  long-lived   asset   exceeds  the  expected   future  cash  flows
(undiscounted  and  without  interest  charges)  from the use of the  asset,  we
recognize  an  impairment  loss in the  amount  of the  difference  between  the
carrying  amount and the fair value of the asset.  For  purposes  of  estimating
future cash flows from potentially impaired assets, the Company groups assets at
the lowest  level for which there are  identifiable  cash flows that are largely
independent of the cash flows of other groups of assets.  Our long-lived  assets
subject to impairment  are our property,  plant and equipment and our intangible
assets which had net carrying values of $24.9 million and $902,000, respectively
at September 30, 2005. We currently estimate that undiscounted future cash flows
will be sufficient to recover the value of our long-lived assets.  However,  our
estimates  of future  cash flows are subject to change  because  the  underlying
assumptions,  such as revenues and expenses,  are based on projections  that may
differ from actual future results.  Should our estimates of future  undiscounted
cash flows indicate that the carrying value of our long-lived  assets may not be
recoverable,  we would be required to  determine  the fair value of those assets
and record a loss for the difference, if any, between the carrying value and the
fair value of those assets.

Income Taxes

          At September 30, 2005,  the  unadjusted net book value of our deferred
income tax assets  totaled  approximately  $4.6 million,  which was  principally
comprised of federal and state net operating loss  carry-forwards  and/or credit
carryforwards and differences between the book and tax bases or our inventories.
The  provisions  of SFAS No.  109  "Accounting  for  Income  Taxes,"  require  a
valuation allowance when, based upon currently  available  information and other
factors, it is more likely than not that all or a portion of the deferred income
tax asset  will not be  realized.  Our  valuation  allowance  was  increased  by
$447,000  during the year ended  September  30,  2005.  We intend to  maintain a
valuation  allowance until  sufficient  evidence exists to support its reversal.
Also, until an appropriate  level of profitability is reached,  we do not expect
to recognize any domestic income tax benefits in future results of operations.


Results of Operations

          The  following  table  sets forth  statement  of  operations  data and
percentage of change for the twelve months ended September 30, 2005 and 2004:

<TABLE>
<CAPTION>

                                                    Twelve Months Ended Sept 30,                                  %
                                             ---------------------------------------------------             ------------
                                                     2005                  2004                   Change        Change
--------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>    <C>            <C>    <C>                    <C>
REVENUE                                          $       55,978  100.0% $      57,143  100.0% $      (1,165)        -2.0%
COST OF REVENUE                                          34,326   61.3%        32,648   57.1%         1,678          5.1%
                                                 ---------------        --------------        ---------------

GROSS PROFIT                                             21,652   38.7%        24,495   42.9%        (2,843)       -11.6%

EXPENSES:
        Research and development                         14,621   26.1%        17,022   29.8%        (2,401)       -14.1%
        Selling and marketing                             4,710    8.4%         5,021    8.8%          (311)        -6.2%
        General and administrative                        5,012    9.0%         5,849   10.2%          (837)       -14.3%
                                                 ---------------        --------------        ---------------

                       Total expenses                    24,343   43.5%        27,892   48.8%        (3,549)       -12.7%

Gain from sale of real property                                                   942    1.6%
                                                 ---------------        --------------        ---------------

LOSS FROM OPERATIONS                                     (2,691)  -4.8%        (2,455)  -4.3%          (236)        -9.6%

                                       37
<PAGE>

OTHER INCOME, Net                                         3,633    6.5%         1,517    2.7%         2,116        139.5%
                                                 ---------------        --------------        ---------------
INCOME (LOSS) BEFORE INCOME TAXES                           942    1.7%          (938)  -1.6%         1,880        200.5%

INCOME TAXES                                                  1    0.0%           369    0.6%          (368)       -99.7%
                                                 ---------------        --------------        ---------------
NET INCOME (LOSS)                                $          941    1.7% $      (1,307)  -2.3% $       2,248        172.0%
                                                 ===============        ==============        ===============
</TABLE>

Fiscal years ended September 30, 2005 and 2004

          Revenue - Revenue  decreased  2.0% to $56.0 million in the fiscal year
ended  September 30, 2005 from $57.1 million in the fiscal year ended  September
30, 2004.  Revenue  attributable to our top ten customers was approximately $1.9
million less in the fiscal year ended September 30, 2005 as compared to the year
ended  September  30,  2004.  The most  significant  product  decreases  were in
Receivers  and  Transmitters.  This  reflects  slightly  softer  demand  for our
products as compared to fiscal 2004. We have also experienced pressure for price
concessions  from customers during the current fiscal year. We cannot assure you
that our  decrease in revenue  will  reverse in future  periods,  as the average
selling  prices for  existing  products  may  continue to decline in response to
product  introductions  by competitors  or us, or other  factors,  including the
reduction of customer  demand for our products or pressure  from  customers  for
price concessions.

          The  following  table sets forth revenue  attributable  to each of our
product groups as a percentage of revenue for the periods presented.

                                      Fiscal years ended September 30,
                                    ------------------------------------
                                        2004                     2005
                                    ------------------------------------
                Receivers
                                           7.2%                  5.1%
                Transceivers              83.0                  87.5
                Transmitters               9.0                   6.4
                Other                      0.8                   1.0
                                    ------------------------------------
                Revenue                    100.0%                100.0%

          Cost of Revenue - Cost of revenue  increased  5.1% to $34.3 million in
the fiscal year ended  September  30, 2005 from $32.6 million in the fiscal year
ended  September  30, 2004.  Gross margin  decreased to 38.7% in the fiscal year
ended September 30, 2005 from 42.9% in fiscal 2004. The decrease in gross margin
was  primarily  due to the increase in cost of material to 40.6% as a percentage
of revenues from 35.2 % of revenues in fiscal years ended September 30, 2005 and
2004,  respectively.  The most significant component of the increase in material
cost was a decrease in  inventory  used in  production  in the fiscal year ended
September 30, 2005 that was previously written down as excess inventory compared
to the fiscal year ended September 30, 2004. The Company utilized  approximately
$2.6 million of inventory in production  during fiscal 2005 that had  previously
been written down to zero, compared to

                                       38
<PAGE>

$5.2  million  during  fiscal  2004.  This $2.6  million  decrease in the use of
written down inventory is approximately 4.6% as a percentage of the revenues for
the current fiscal year.

          Research and Development - Research and development expenses decreased
14.1% to $14.6  million in the fiscal year ended  September  30, 2005 from $17.0
million in the fiscal  year ended  September  30,  2004.  This most  significant
components of the decrease were a decrease in bonus expense of $1.0 million,  in
supplies of $329,000 and in compensation and benefits of $799,000 related to the
reduction  in the number of employees  in research  and  development.  We do not
expect the current year decrease in expense or any potential decrease in expense
in fiscal 2006 to have a material impact on our ongoing research and development
efforts.

          Sales and Marketing - Sales and marketing  expenses  decreased 6.2% to
$4.7  million in the fiscal year ended  September  30, 2005 from $5.0 million in
the fiscal year ended  September  30, 2004.  The decrease was primarily due to a
decrease in bonus expense.  We believe that investment in sales and marketing is
critical to our success and these  expenses may increase in absolute  dollars in
the future.

          General  and  Administrative  - General  and  administrative  expenses
decreased 14.3% to $5.0 million in the fiscal year ended September 30, 2005 from
$5.8  million in the fiscal year ended  September  30,  2004.  The  decrease was
primarily  due to a decrease in bonus  expense of $312,000 and a decrease in the
Company's  premiums for  Directors'  and  Officers'  insurance.  Our general and
administrative  expenses  may  increase  in  absolute  dollars in fiscal 2006 as
compared to fiscal 2005 as a result of an increase in legal and consulting  fees
associated with analysis of strategic  alternatives that have been undertaken by
our management and board of directors.

          Gain from sale of real  property - On June 30, 2004,  the Company sold
the building  located in Chatsworth,  California  which was its former corporate
headquarters  and  recognized  a gain of $942,000.  The net  proceeds  from this
transaction were approximately $5.7 million.

          Other Income, net - Other income, net increased 139.5% to $3.6 million
in the fiscal year ended September 30, 2005 from $1.5 million in the fiscal year
ended  September  30, 2004.  The  increase was due to an increase in  investment
income as a result of rising interest rates.

          Income Taxes - Income tax expense was $1,000 for the fiscal year ended
September  30, 2005  compared  to income tax expense of $369,000  for the fiscal
year ended  September  30,  2004.  Income tax  expense for the fiscal year ended
September  30, 2005 was  comprised of foreign taxes in the amount of $90,000 and
federal  alternative  minimum  taxes in the amount of $32,000  offset by a state
income tax  benefit of  $121,000  related to current  year  estimated  liability
offset by prior year benefits taken in the current year.  Income tax expense for
the fiscal year ended  September  30, 2004 was comprised of foreign taxes in the
amount of $44,000,  state income  taxes in the amount of $133,000,  and $192,000
resulting from an adjustment to prior year's net deferred tax assets.

                                       39
<PAGE>

          The  following  table  sets forth  statement  of  operations  data and
percentage of change for the twelve months ended September 30, 2004 and 2003:

<TABLE>
<CAPTION>

                                                    Twelve Months Ended Sept 30,                                  %
                                             ---------------------------------------------------             ------------
                                                     2005                  2004                   Change        Change
--------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>    <C>            <C>    <C>                    <C>
REVENUE                                          $       57,143  100.0% $      38,880  100.0% $      18,263         47.0%
COST OF REVENUE                                          32,648   57.1%        25,048   64.4%         7,600         30.3%
                                                 ---------------        --------------        ---------------

GROSS PROFIT                                             24,495   42.9%        13,832   35.6%        10,663         77.1%

EXPENSES:
        Research and development                         17,022   29.8%        16,246   41.8%           776          4.8%
        Selling and marketing                             5,021    8.8%         4,562   11.7%           459         10.1%
        General and administrative                        5,849   10.2%         7,011   18.0%        (1,162)       -16.6%
                                                 ---------------        --------------        ---------------

                         Total expenses                  27,892   48.8%        27,819   71.6%            73          0.3%

Gain from sale of real property
                                                            942
                                                 ---------------        --------------        ---------------

LOSS FROM OPERATIONS
                                                         (2,455)  -4.3%       (13,987) -36.0%        11,532         82.4%

OTHER INCOME, Net                                         1,517    2.7%         1,834    4.7%          (317)       -17.3%
                                                 ---------------        --------------        ---------------

LOSS BEFORE INCOME TAXES
                                                           (938)  -1.6%       (12,153) -31.3%        11,215         92.3%

INCOME TAXES                                                369    0.6%        (1,952)  -5.0%         2,321        118.9%
                                                 ---------------        --------------        ---------------

NET LOSS                                         $       (1,307)  -2.3% $     (10,201) -26.2% $       8,894         87.2%
                                                 ===============        ==============        ===============
</TABLE>

Fiscal years ended September 30, 2004 and 2003

          Revenue - Revenue  increased 47.0% to $57.1 million in the fiscal year
ended  September 30, 2004 from $38.9 million in the fiscal year ended  September
30, 2003. This increase was due  substantially to an increase in demand from our
existing  customers.  Revenue from our largest ten customers  increased to $39.0
million in fiscal year ended  September  30,  2004 from $23.8  million in fiscal
year  September  30, 2003,  or  approximately  63.9% of the increase in absolute
dollars. Sales of our products for metropolitan area networks were approximately
86.7% of revenue  for the fiscal  year ended  September  30,  2004  compared  to
approximately  84.1% of revenue for the fiscal year ended  September  30,  2003.
Sales  of  our  products  for  local  area  and  storage  area   networks   were
approximately  12.5% of revenue for the fiscal year ended September 30, 2004 and
for the fiscal year ended  September 30, 2003. We do not expect that our rate of
year-over-year  growth in revenue will be sustainable in future periods,  as the
average selling prices for existing  products may decline in response to product
introductions by competitors or us, or other factors, including the reduction of
customer   demand  for  our  products  or  pressure  from  customers  for  price
concessions.

                                       40
<PAGE>

          The  following  table sets forth revenue  attributable  to each of our
product groups as a percentage of revenue for the periods presented.

                                     Fiscal years ended September 30,
                                     -----------------------------------
                                            2003                2004
                                     -----------------------------------
                 Receivers                 10.8%                7.2%
                 Transceivers              72.7                 83.0
                 Transmitters              13.5                  9.0
                 Other                      3.0                  0.8
                                     -----------------------------------
                 Revenue                  100.0%               100.0%


          Cost of Revenue - Cost of revenue  increased 30.3% to $32.6 million in
the fiscal year ended  September  30, 2004 from $25.0 million in the fiscal year
ended  September 30, 2003.  The increase in cost of revenue is mainly due to the
increase in sales  volume.  Gross  margin  increased to 42.9% in the fiscal year
ended  September 30, 2004 from 35.6% in the same period last year.  The increase
in gross margin was primarily due to a $1.5 million  increase in inventory  used
in  production in the fiscal year ended  September 30, 2004 that was  previously
written down as excess inventory compared to the fiscal year ended September 30,
2003 and a decrease in overhead  costs as a percentage  of revenue in the fiscal
year ended  September 30, 2004  compared to the fiscal year ended  September 30,
2003. The Company utilized approximately $5.2 million of inventory in production
during fiscal 2004 that had  previously  been written down to zero,  compared to
$3.7 million during fiscal 2003.

          Research and Development - Research and development expenses increased
4.8% to $17.0  million in the fiscal  year ended  September  30, 2004 from $16.2
million in the fiscal year ended September 30, 2003. This increase was primarily
due to an  increase  in  engineering  supplies  resulting  from an  increase  in
research and development activities.

          Sales and Marketing - Sales and marketing  expenses increased 10.0% to
$5.0  million in the fiscal year ended  September  30, 2004 from $4.6 million in
the fiscal year ended  September 30, 2003.  The increase was primarily due to an
increase of $325,000 in salaries and benefits  resulting from  additional  sales
and marketing  personnel and an increase of $154,000 in commissions  paid to our
direct sales force and independent manufacturers' representatives as a result of
increase revenue.

          General  and  Administrative  - General  and  administrative  expenses
decreased 16.6% to $5.8 million in the fiscal year ended September 30, 2004 from
$7.0  million in the fiscal  year ended  September  30,  2003.  During the third
quarter of 2003, the Company  repurchased stock from two executives and recorded
a  $1.3  million  expense   associated  with  this  stock  repurchase  as  stock
compensation  expense. No stock compensation expense was recorded in fiscal year
ended  September  30, 2004.  In addition,  the decrease was due to a decrease in
insurance  expense  primarily  related to a decrease in directors' and officers'
insurance  premiums and bad debt expense.  These decreases were partially offset
by an increase of $300,000 in salaries and benefits  resulting  from  additional
personnel hired.

                                       41
<PAGE>

          Gain from sale of real  property - On June 30, 2004,  the Company sold
the building  located in Chatsworth,  California  which was its former corporate
headquarters  and  recognized  a gain of $942,000.  The net  proceeds  from this
transaction were approximately $5.7 million.

          Other Income,  net - Other income, net decreased 17.3% to $1.5 million
in the fiscal year ended September 30, 2004 from $1.8 million in the fiscal year
ended  September  30, 2003.  This  decrease was due to a decrease in  investment
income, which was primarily the result of a decrease in interest rates.

          Income  Taxes - Income tax  expense was  $369,000  for the fiscal year
ended  September  30, 2004 compared to an income tax benefit of $2.0 million for
the fiscal year ended September 30, 2003. Income tax expense for the fiscal year
ended September 30, 2004 is comprised of foreign taxes in the amount of $44,000,
state  income taxes in the amount of $133,000,  and $192,000  resulting  from an
adjustment  to prior year's net deferred tax assets.  The income tax benefit for
the fiscal  year ended  September  30,  2003  includes a charge of $3.5  million
related to the valuation  allowance of certain deferred tax assets and state net
operating loss and credit carry-forwards.


Supplementary Data - Quarterly Results

          The  following  table  sets  forth  some  of  our  selected  financial
information  for our eight  most  recently  completed  fiscal  quarters.  In the
opinion  of our  management,  this  unaudited  financial  information  has  been
prepared on the same basis as the audited  financial  information,  and includes
all adjustments,  consisting only of normal recurring adjustments,  necessary to
present this  information  fairly when read in  conjunction  with our  financial
statements  and the related  notes  contained  elsewhere in this  Report.  These
operating  results  are not  necessarily  indicative  of  results  of any future
period.

<TABLE>
<CAPTION>

                                                                 Three-Month Period Ended
                                   --------------------------------------------------------------------------------
                                   Dec. 31,  Mar. 31,  Jun. 30,   Sept. 30, Dec. 31,  Mar. 31,  Jun. 30,  Sept. 30,
                                      2003      2004      2004        2004     2004      2005      2005       2005
                                                          (In thousands, except per share data)
                                                          -------------------------------------
<S>                                <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>
Revenue                            $ 13,769  $ 15,909   $ 14,299  $ 13,166  $ 14,023  $ 13,527  $ 13,621  $ 14,806
Cost of revenue                       8,185     8,777      7,770     7,916     8,558     8,991     8,300     8,476
                                   --------  --------  ---------  --------  --------  --------  --------  --------
Gross profit                          5,584     7,132      6,529     5,250     5,465     4,536     5,321     6,330
                                   --------  --------  ---------  --------  --------  --------  --------  --------

Operating Expenses:
  Research and development            4,253     4,565      4,152     4,052     3,727     3,918     3,510     3,467
  Sales and marketing                 1,348     1,330      1,153     1,190     1,201     1,252     1,120     1,137
  General and administrative         _1,596     1,628      1,504     1,121    _1,194     1,248     1,219     1,352
                                   --------  --------  ---------  --------  --------  --------  --------  --------
    Total operating expenses          7,197     7,523      6,809     6,363     6,122     6,418     5,849     5,956

Gain from sale of real property           0         0        942         0         0         0         0         0
                                   --------  --------  ---------  --------  --------  --------  --------  --------

Income (Loss) from operations        (1,613      (391)       662    (1,113)     (657)   (1,882)     (528)      374

Other income, net                       262       294        344       617       626       811       996     1,201
                                   --------  --------  ---------  --------  --------  --------  --------  --------
Income (loss) before income taxes    (1,351)      (97)     1,006      (496)      (31)   (1,071)      468     1,575


Income tax  provision                   192         0          0       177         0         0         0         1
                                   --------  --------  ---------  --------  --------  --------  --------  --------
Net income (loss)                  $ (1,543) $    (97) $   1,006  $   (673) $    (31) $ (1,071) $    468  $  1,574
                                   ========  ========  =========  ========  ========  ========  ========  ========

                                       42
<PAGE>

Earnings (loss) per share:
  Basic                            $ (0.01)  $ (0.00)  $  0.01    $ (0.01)  $ (0.00)  $ (0.01)  $ 0.00    $  0.01
  Diluted                          $ (0.01)  $ (0.00)  $  0.01    $ (0.01)  $ (0.00)  $ (0.01)  $ 0.00    $  0.01
Shares outstanding:
  Basic                             112,338   112,458    112,655   112,769   112,818   112,861   112,927   112,972
  Diluted                           112,338   112,458    113,938   112,769   112,818   112,861   113,754   113,834
</TABLE>


          Our historical  operating results have varied  significantly,  and our
future quarterly  operating results are likely to continue to vary significantly
from period-to-period. We believe that period-to-period comparisons of operating
results  should not be relied upon as an  indicator  of our future  performance.
Some of the  factors  which could cause our  operating  results to vary  include
fluctuations in the demand for and sales of our products, the timing of customer
orders,  the  cancellation  of  existing  orders,  competitive  factors  such as
introductions of new products, our ability to develop, introduce and manufacture
new  products  in  a  timely  manner,  our  ability  to  control  expenses,  the
availability  of  components  for our  products,  the mix of our products  sold,
changes  in  industry   standards  and  general   economic   conditions  in  the
communications and related industries.

Liquidity and Capital Resources

          As of September 30, 2005, our primary source of liquidity was our cash
and cash  equivalents  balance of $84.0  million and $64.6 million of marketable
securities, which consist primarily of United States treasury notes and treasury
bonds. At September 30, 2004, we had $75.4 million in cash and cash  equivalents
balance and $75.1  million in marketable  securities.  The total of our cash and
cash equivalents balance and our marketable  securities balance decreased during
the fiscal year  primarily  due to  inventory  purchases  to support  increasing
backlog for our product which were partially  offset by the increase in accounts
payable.

Current assets and current liabilities

          Since inception,  we have financed our operations  primarily with cash
generated from operations.  Additional financing has been generated through term
loans and through our initial public offering of our Class A common stock, which
we completed on November 3, 2000. As of September 30, 2005, our working  capital
was $163 million with a current ratio of 15:1 compared to our working capital of
$157.0  million  with a current  ratio of 14:1 as of  September  30,  2004.  Our
working capital increased during the fiscal year primarily due to a $6.7 million
increase in inventory and a $563,000 decrease in current liabilities. We believe
that additional cash could be borrowed if necessary;  however,  our current cash
flow from operations, cash and cash equivalents,  and marketable securities, are
expected to be sufficient to fund operations for the next 12 months.

          On June  30,  2004,  we  sold  the  building  located  in  Chatsworth,
California which was our former corporate  headquarters.  Net proceeds from this
transaction were approximately $5.7 million.

          In August 2004,  we fully repaid our  long-term  debt. As of September
30, 2005, there is no balance outstanding under our term loan agreement.

                                       43
<PAGE>

Cash flows provided by/(used in)

         The following  table sets forth,  for the periods  indicated,  selected
consolidated cash flow information (dollars in thousands):

<TABLE>
<CAPTION>

                                                                       Fiscal Year Ended
                                                                          September 30
                                                                ---------------------------------
                                                                2005         2004            2003
                                                                ----         ----            ----
<S>                                                         <C>            <C>          <C>
         Operating Activities                               $(1,598)       $ 13,119     $   (284)
         Investing Activities                                 10,043        (1,462)      (19,839)
         Financing Activities                                    107        (1,129)         (408)
                                                            ----------     ----------   ---------
         Net increase (decrease) in cash and                $  8,552       $ 10,528     $(20,531)
         cash equivalents
</TABLE>


          Cash  used in  operating  activities  during  the  fiscal  year  ended
September  30,  2005 was  primarily  the result of a $6.7  million  increase  in
inventory,  particularly in the fourth fiscal quarter, to support a $5.1 million
increase in backlog during the fiscal year. In addition, the cash flow statement
indicates a reduction  in accrued  bonus of $2.5  million as we used cash to pay
out fiscal  2004  based  bonuses  during  fiscal  2005.  These uses of cash were
partially  offset by net income and non-cash  depreciation  and  amortization of
$5.8  million as well as an  increase in  accounts  payable of $2 million.  Cash
generated  by  operating  activities  during  the  previous  fiscal  year  ended
September 30, 2004 was  primarily due to an income tax refund of $11.7  million.
In the fiscal year ended September 30, 2003, the net loss was offset by non-cash
depreciation  as well as a decrease  in  inventory  and  increases  in  accounts
payable and accrued expenses.

          Cash  provided by  investing  activities  during the fiscal year ended
September 30, 2005 was primarily  related to the  maturation  and  conversion to
cash and cash equivalents of marketable securities aggregating to $10.5 million.
This was  partially  offset by $479,000 for  purchases  of  property,  plant and
equipment,   particularly   machinery  and  equipment  for   manufacturing   and
engineering.  The cash used in  investing  activities  for the fiscal year ended
September  30, 2004 was due to $5.4 million  increase in  marketable  securities
resulting from our purchases  being greater than the maturities and $1.8 million
in capital expenditures.  This was partially offset by $5.7 million net proceeds
from the sale of the building  located in  Chatsworth,  California  in the third
quarter.  In the fiscal year ended  September  30, 2003,  cash used in investing
activities  was due to the  $10.0  million  cash paid for  acquisitions,  a $6.4
million   increase  in  marketable   securities  and  $3.4  million  in  capital
expenditures.

          Cash  provided by  financing  activities  during the fiscal year ended
September  30, 2005 was from the  issuance of stock for the exercise of employee
stock options and stock plan  purchases.  During the fiscal year ended September
30, 2004, cash used by financing  activities was due to $1.3 million  retirement
of  long-term  debt,  partially  offset by $207,000  provided by the issuance of
common  stock  for the  exercise  of  employee  stock  options  and  stock  plan
purchases.  During  the fiscal  year  ended  September  30,  2003,  cash used by
financing activities was due to $489,000 retirement of long-term debt, partially
offset by $81,000  provided by the  issuance of common stock for the exercise of
employee stock options and stock plan purchases.

          We believe that our existing cash, cash equivalents and investments on
hand, together with cash that we expect to generate from our operations, will be
sufficient  to meet our  capital  needs  for at least  the next  twelve  months.
However,  it is possible that we may need or elect to raise  additional funds to
fund

                                       44
<PAGE>

our  activities  beyond  the next year or to  consummate  acquisitions  of other
businesses,  products or technologies. We could raise such funds by selling more
stock  to the  public  or to  selected  investors,  or by  borrowing  money.  In
addition,  even though we may not need  additional  funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We  cannot  assure  you  that we will be able  to  obtain  additional  funds  on
commercially favorable terms, or at all. If we raise additional funds by issuing
additional equity or convertible debt securities,  the ownership  percentages of
existing  stockholders  would  be  reduced.  In  addition,  the  equity  or debt
securities  that we issue may have rights,  preferences or privileges  senior to
those of the holders of our common stock.

          Although we believe we have sufficient  capital to fund our activities
for at least the next twelve months,  our future capital  requirements  may vary
materially from our historical expenditures.  The amount of capital that we will
need in the future will depend on many factors, including:

          o the market acceptance of our products;
          o the levels of  promotion  and  advertising  that will be required to
            launch our new  products  and  achieve  and  maintain a  competitive
            position in the marketplace;
          o price discounts on our products to our customers;
          o our  business,   product,   capital  expenditure  and  research  and
            development plans and product and technology roadmaps;
          o the levels of inventory and accounts receivable that we maintain;
          o capital improvements to new and existing facilities;
          o technological advances;
          o our competitors' response to our products;
          o our  pursuit of  strategic  alternatives,  including  future  market
            opportunities; and
          o our relationships with suppliers and customers.

          In addition,  we may require additional capital to accommodate planned
growth, hiring,  infrastructure and facility needs or to consummate acquisitions
of other businesses,  products or technologies. At this time we have no material
commitments for capital expenditures.


                                       45
<PAGE>

Contractual Obligations

          The  following  is a summary  of  future  minimum  payments  due under
operating  leases that have  initial or remaining  noncancelable  lease terms in
excess  of one  year at  September  30,  2005.  Other  liabilities  consists  of
remaining license payments due.

                                     Operating           Other
     Fiscal Year                        Leases     Liabilities           Total
                                     ---------     -----------     -----------
            2006                     $     206             200     $       406
            2007                            57             200             257
            Thereafter                     162                             162
                                     ---------     -----------     -----------
            Total                    $     425     $       400     $       825
                                     =========     ===========     ===========

          We also have purchase commitments for materials,  supplies,  equipment
and outside services in aggregate of approximately  $5.5 million for fiscal year
ending  September 30, 2006. In addition,  total purchase  commitments to related
party for fiscal  2006 is $ 4.2  million.  Based on our current  operations,  we
believe that our current cash flow from operations,  cash and cash  equivalents,
and  marketable  securities,  are expected to be  sufficient  to meet all of the
known requirements.

Inflation

          Inflation  has not had a  material  adverse  effect on our  results of
operations,  however,  our results of operations may be materially and adversely
affected by inflation in the future.

Other Events

          We have no other events or off-balance sheet  arrangements to disclose
at September 30, 2005.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

          We are  currently  exposed  to  interest  rate risk on our  investment
portfolio.

          The primary  objective  of our  investment  activities  is to preserve
capital.  We have not used  derivative  financial  instruments in our investment
portfolio.  Our cash and cash  equivalents  includes  $84.0 million  invested in
money market and other interest  bearing  accounts.  In addition,  we have $64.6
million  invested in marketable  securities,  which  represents  investments  in
United States treasury notes and treasury bonds.

          As of September 30, 2005, our investment in marketable  securities had
a  weighted-average  time to  maturity  of  approximately  198 days.  Marketable
securities represent United States treasury notes and

                                       46
<PAGE>

treasury  bonds with a maturity of greater than three months.  These  securities
are classified as held to maturity  because we have the intention and ability to
hold  the  securities  to  maturity.   Gross  unrealized  gains  and  losses  on
held-to-maturity  marketable  securities  have  historically  not been material.
Maturities on  held-to-maturity  marketable debt securities  range from three to
ten months.

          If interest rates were to increase or decrease 1%, the result would be
an annual  increase  or  decrease  of  interest  income of $1.5  million  on our
investment portfolio.  However, due to the uncertainty of the actions that would
be taken and their  possible  effects,  this  analysis  assumes no such  action.
Further,  this  analysis does not consider the effect of the change in the level
of overall economic activity that could exist in such an environment.

Foreign Currency Risk

          Sales to foreign customers are denominated in U.S. dollars and as such
we have no foreign currency fluctuation risk.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

          The  financial  statements  required by this item are included in Part
IV, Item 15 of this Report and the supplementary  data required by this item are
included in Part II, Item 7 of this Report.


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

          None.

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

          Based on their evaluation, as of the end of the period covered by this
annual report, our principal  executive officer and principal  financial officer
have concluded that our disclosure  controls and procedures (as defined in Rules
13a-15(e)  or 15d-15(e)  under the  Securities  Exchange Act of 1934  ("Exchange
Act")) are effective based on their  evaluation of these controls and procedures
required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act.

Changes in Internal Control

          There were no changes in our internal control over financial reporting
identified in connection with the evaluation  required by paragraph (d) of Rules
13a-15 or 15d-15  under the Exchange  Act that  occurred  during our last fiscal
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.

                                       47
<PAGE>

                                   PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The  information  required by this Item is included  in  "Proposal  1:
Elections of Directors",  "Management",  and "Section 16(a) Beneficial Ownership
Reporting  Compliance" sections of our Proxy Statement to be filed in connection
with our 2006  Annual  Meeting of  Stockholders  and is  incorporated  herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

          The  information  required by this Item is included in the  "Executive
Compensation and Related  Information"  section of the our Proxy Statement to be
filed  in  connection  with our  2006  Annual  Meeting  of  Stockholders  and is
incorporated herein by reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

          The  information  required by this Item is  included in the  "Security
Ownership of Certain Beneficial Owners and Management" and "Equity  Compensation
Plan Information" sections of our Proxy Statement to be filed in connection with
the our 2006  Annual  Meeting  of  Stockholders  and is  incorporated  herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information required by this Item is included in the "Compensation
Committee  Interlocks  and Insider  Participation"  and  "Certain  Transactions"
sections  of our Proxy  Statement  to be filed in  connection  with the our 2006
Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

         The information  required by this Item is included in the "Ratification
of Appointment of Independent Auditors" section of the our Proxy Statement to be
filed  in  connection  with our  2006  Annual  Meeting  of  Stockholders  and is
incorporated herein by reference.

                                       48
<PAGE>

                                    PART IV.

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

    (a) Documents filed as part of this Report:

          1. Financial Statements. The following financial statements of Optical
Communication  Products,  Inc. are included in a separate section of this Annual
Report on Form 10-K commencing on the pages referenced below:

<TABLE>
<CAPTION>

                                                                                                                  Page
                                                                                                                  ----

Optical Communication Products Financial Statements
---------------------------------------------------
<S>                                                                                                                  <C>
Report of Independent Registered Public Accounting Firm.........................................................     F-2
Balance Sheets at September 30, 2004 and 2005...................................................................     F-3
Statements of Operations for each of the three years in the period ended September 30, 2005.....................     F-4
Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2005...........     F-5
Statements of Cash Flows for each of the three years in the period ended September 30, 2005.....................     F-6
Notes to Financial Statements...................................................................................     F-7
</TABLE>


          2. Financial Statement  Schedule.  The financial statement schedule of
Optical Communication Products, Inc. is included below. All other schedules have
been omitted because they are not applicable,  not required,  or the information
is included in the financial statements or notes thereto.

                 Schedule II- Valuation and Qualifying Accounts
              For the Year Ended September 30, 2003, 2004 and 2005

<TABLE>
<CAPTION>

                                                    Balance at       Additions      (Deductions)
                                                   beginning of     charged to       recoveries      Balance at end
              Description                Period     period ($)      expense ($)          ($)         of period ($)
<S>                                      <C>              <C>              <C>              <C>               <C>
Allowance for Doubtful Accounts          2003             127,000          200,000          132,000           459,000
        and Sales Returns                2004             459,000           80,000          177,000           362,000
                                         2005             362,000          121,000           57,000           426,000
</TABLE>

                                       49
<PAGE>

          3.  Exhibits.   The  following   Exhibits  are  attached   hereto  and
incorporated herein by reference:

<TABLE>
<CAPTION>

   Exhibit
   Number                                            Exhibit Description
---------------------------------------------------------------------------------------------------------------
<S>        <C>
3.1*       Amended and Restated Certificate of Incorporation
3.2*       Bylaws
3.2.1***   Amendment Number One to Bylaws
4.1        See Exhibits 3.1, 3.2 and 3.2.1 for provisions of the  Certificate of  Incorporation  and Bylaws for
           the Registrant defining the rights of holders of common stock of the Registrant
4.2*       Specimen Stock Certificate
4.3 *      Standstill  and  Registration  Rights  Agreement,  dated as of October 26, 2000,  by and between the
           Registrant and The Furukawa Electric Co., Ltd.
10.1*+     2000 Stock Incentive Plan
10.2*+     Employee Stock Purchase Plan
10.3*      Form of Indemnification Agreement
10.5*+     Employment  Agreement,  dated  November 1, 1999, by and between the Registrant and Muoi Van Tran, as
           currently in effect
10.6*+     Employment Agreement, dated November 1, 1999, by and between the Registrant and Mohammad Ghorbanali,
           as currently in effect
10.7+      Employment Agreement, dated October 30, 2003, by and between the Registrant and Susie L. Nemeti, as
           currently in effect
10.8*+     Form of Stock Option  Agreement,  dated August 29, 2000, by and between the  Registrant  and each of
           Muoi Van Tran,  Mohammad  Ghorbanali  and Susie L. Nemeti  (including  a schedule  of  substantially
           identical terms)
10.9*+     Form of Stock Option Agreement,  dated June 28, 1993, by and between the Registrant and each of Muoi
           Van Tran, Mohammad  Ghorbanali and Susie L. Nemeti (including a schedule of substantially  identical
           terms)
10.10**    Master Purchase Agreement, dated October 1, 2003, by and between the Registrant and The Furukawa
           Electric Co., Ltd.
21.1*      List of Subsidiaries of the Registrant
23.1       Consent of Deloitte & Touche LLP
31.1       Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
           Section 302 of the Sarbanes-Oxley Act of 2002.
31.2       Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
           Section 302 of the Sarbanes-Oxley Act of 2002.
32.1       Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
           1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

*    This  exhibit  was  previously   filed  as  an  exhibit  to  the  Company's
     Registration  Statement  on Form S-1  declared  effective  November 2, 2000
     (File No. 333-44862) under the same exhibit number,  and is incorporated by
     reference herein.
+    Management  contract or  compensatory  plan or  arrangement  required to be
     filed as an exhibit pursuant to Item 15(c) of Form 10-K.
**   Filed as an exhibit  to the  Annual  Report on Form 10-K for the year ended
     September  30,  2003 on  December  24,  2003  and  incorporated  herein  by
     reference.
***  Filed as an exhibit  to the  Annual  Report on Form 10-K for the year ended
     September  30,  2002 on  December  27,  2002  and  incorporated  herein  by
     reference.

                                       50
<PAGE>

(b) Exhibit Index:

See Exhibit index.

(c) Financial Statement Schedule:

See Financial statement schedule set forth in (a)(2) above

                                       51
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934,  the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the  undersigned,  thereunto duly authorized,
in the City of Woodland Hills, State of California, on the 29th day of December,
2005.

                                   Optical Communication Products, Inc.

                                   By:   /s/ Muoi Van Tran
                                       ----------------------------------------
                                   Name:  Muoi Van Tran
                                   Title: President and Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Report has been signed by the following  persons in the  capacities  and on
the dates indicated:

<TABLE>
<CAPTION>

Signature                                 Title                                               Date
---------                                 -----                                               ----
<S>                                       <C>                                                 <C>


--------------------------------------
/s/ Muoi Van Tran                         Chairman of the Board of Directors, Chief           December 29, 2005
--------------------------------------    Executive Officer and President (principal
Muoi Van Tran                             executive officer)



--------------------------------------
/s/ Susie L. Nemeti                       Chief Financial Officer (principal financial        December 29, 2005
--------------------------------------    and accounting officer)
Susie L. Nemeti

--------------------------------------
/s/ Stewart D. Personick                  Director                                            December 29, 2005
--------------------------------------
 Stewart D. Personick


--------------------------------------
/s/ Yukimasa Shiga                        Director                                            December 29, 2005
--------------------------------------
Yukimasa Shiga


--------------------------------------
/s/ / Hobart Birmingham                   Director                                            December 29, 2005
Hobart Birmingham
--------------------------------------


--------------------------------------
/s/ David Warnes                          Director                                            December 29, 2005
--------------------------------------
David Warnes


--------------------------------------
/s/ Haruki Ogoshi                         Director                                            December 29, 2005
--------------------------------------
Haruki Ogoshi


--------------------------------------
/s/ Arinobu Sato                          Director                                            December 29, 2005
--------------------------------------
Arinobu Sato
</TABLE>

                                       52
<PAGE>



                      OPTICAL COMMUNICATION PRODUCTS, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                                  Page
                                                                                                                  ----
<S>                                                                                                                  <C>

Report of Independent Registered Public Accounting Firm.........................................................     F-2
Balance Sheets at September 30, 2004 and 2005...................................................................     F-3
Statements of Operations for each of the three years in the period ended September 30, 2005.....................     F-4
Statements of Stockholders' Equity for each of the three years in the period ended September 30, 2005...........     F-5
Statements of Cash Flows for each of the three years in the period ended September 30, 2005.....................     F-6
Notes to Financial Statements...................................................................................     F-7
</TABLE>

                                      F-1
<PAGE>

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Optical Communication Products, Inc.
Woodland Hills, California


         We  have   audited   the   accompanying   balance   sheets  of  Optical
Communication  Products, Inc. (the "Company") as of September 30, 2004 and 2005,
and the related statements of operations,  stockholders'  equity, and cash flows
for each of the three years in the period ended  September 30, 2005.  Our audits
also included the financial  statement  schedule listed in the Index at Item 15.
These  financial  statements  and  the  financial  statement  schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on the financial  statements and financial  statement  schedule based on
our audits.

         We  conducted  our audits in  accordance  with  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

         In our  opinion,  such  financial  statements  present  fairly,  in all
material  respects,  the  financial  position of the Company as of September 30,
2004 and 2005,  and the results of its operations and its cash flows for each of
the three years in the period ended  September  30,  2005,  in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.


/s/ Deloitte & Touche LLP
Los Angeles, California
December 29, 2005


                                      F-2
<PAGE>

OPTICAL COMMUNICATION PRODUCTS, INC.
OPTICAL COMMUNICATION PRODUCTS, INC.
BALANCE SHEETS
SEPTEMBER 30, 2004 AND 2005 (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>


                                                                                              September 30,
                                                                                            2004          2005
<S>                                                                                    <C>            <C>
ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                                            $     75,423   $     83,975
  Marketable securities                                                                      75,131         64,645
  Accounts receivable less allowance for doubtful accounts and sales
    returns of $362 and $426 in 2004 and 2005, respectively                                   8,566          9,481
  Inventories                                                                                 8,649         15,318
  Prepaid expenses and other current assets                                                   1,118          1,017
                                                                                       ------------   ------------
           Total current assets                                                             168,887        174,436

Property, plant and equipment, net                                                           29,278         24,914
Intangible assets, net                                                                        1,802            902
                                                                                       ------------   ------------
TOTAL                                                                                  $    199,967   $    200,252
                                                                                       ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                          $ 1,136   $      3,169
  Accounts payable to related parties                                                         3,325          4,095
  Accrued payroll related expenses                                                            2,025          1,112
  Accrued bonus                                                                               4,451          1,916
  Other accrued expenses                                                                      1,212          1,322
  Income taxes payable                                                                          158            130
                                                                                       ------------   ------------
           Total current liabilities                                                         12,307         11,744
                                                                                       ------------   ------------
OTHER LONG-TERM LIABILITIES                                                                     400            200
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Class A common stock, $0.001 par value; 200,000,000 shares authorized,
    46,771,927 and 46,903,871 shares outstanding at September 30, 2004
    and 2005, respectively.                                                                      47             47
  Class B common stock $0.001 par value; 66,000,000 shares
    authorized, 66,000,000 shares issued and outstanding at
    September 30, 2004 and 2005, respectively.                                                   66             66
  Additional paid-in capital                                                                132,917        133,024
  Retained earnings                                                                          54,230         55,171
                                                                                        ------------   ------------
           Total stockholders' equity                                                       187,260        188,308
                                                                                       ------------   ------------
TOTAL                                                                                  $    199,967   $    200,252
                                                                                       ============   ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-3
<PAGE>


OPTICAL COMMUNICATION PRODUCTS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2003, 2004, AND 2005 (In thousands,
except per share amounts)


<TABLE>
<CAPTION>

                                                                                    2003             2004            2005

<S>                                                                               <C>              <C>            <C>
REVENUE                                                                           $     38,880     $     57,143   $     55,978

COST OF REVENUE                                                                         25,048           32,648         34,326
                                                                                  ------------     ------------   ------------
GROSS PROFIT                                                                           13,832           24,495          21,652
                                                                                  ------------     ------------   ------------
EXPENSES:
  Research and development                                                              16,246           17,022         14,621
  Selling and marketing                                                                  4,562            5,021          4,710
  General and administrative (including stock compensation expense
    of $1,292 for year ended September 30, 2003)                                         7,011            5,849          5,012
                                                                                  ------------     ------------   ------------
           Total expenses                                                               27,819           27,892         24,343
                                                                                  ------------     ------------   ------------
Gain from sale of real property                                                             0              942               0
                                                                                  ------------     ------------   ------------
LOSS FROM OPERATIONS                                                                   (13,987)          (2,455)        (2,691)

OTHER INCOME, NET                                                                        1,834            1,517          3,633
                                                                                  ------------     ------------   ------------

INCOME (LOSS) BEFORE INCOME TAXES                                                      (12,153)            (938)           942

INCOME TAX (BENEFIT) PROVISION                                                          (1,952)            369              1
                                                                                  ------------     ------------   ------------

NET INCOME (LOSS)                                                                 $    (10,201)    $     (1,307)  $        941
                                                                                  ============     ============   ============

BASIC EARNINGS (LOSS) PER SHARE                                                   $      (0.09)    $      (0.01)  $       0.01

DILUTED EARNINGS (LOSS) PER SHARE                                                 $      (0.09)    $      (0.01)  $       0.01

BASIC SHARES OUTSTANDING                                                               111,074          112,553        112,894

DILUTED SHARES OUTSTANDING                                                             111,074          112,553        113,810
</TABLE>


    The accompanying notes are an integral part of the financial statements.


                                      F-4
<PAGE>

OPTICAL COMMUNICATION PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003, 2004, AND 2005 (In thousands, except share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                          Common Stock
                                      --------------------      Paid-in   Retained
                                         Shares     Amount      Capital   Earnings    Total

<S>                                     <C>         <C>       <C>          <C>       <C>
BALANCE, OCTOBER 1, 2002                109,035,110 $   109   $   131,350  $ 65,737  $197,196

  Net loss                                                                  (10,201)  (10,201)
  Issuance of common stock for exercise
    of stock options and employee stock
    purchase plan                         3,262,175       3            78                  81
  Tax benefit from exercise of
    non-qualified stock options                                     1,303               1,303
  Stock option compensation expense                                   (19)                (19)
                                        ----------- -------   -----------  --------  --------
BALANCE, SEPTEMBER 30, 2003             112,297,285     112       132,712    55,536   188,360

  Net loss                                                                   (1,307)   (1,307)
  Issuance of common stock for exercise
    of stock options and employee stock
    purchase plan                           474,642       1           205                 206

                                        ----------- -------   -----------  --------  --------
BALANCE, SEPTEMBER 30, 2004             112,771,927     113       132,917    54,230   187,260

  Net income                                                                    941       941
  Issuance of common stock for exercise
    of stock options and employee stock
    purchase plan                           209,480                   107                 107

                                        ----------- -------   -----------  --------  --------
BALANCE, SEPTEMBER 30, 2005             112,981,407 $   113   $   133,024  $ 55,171  $188,308
                                        =========== =======   ===========  ========  ========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-5
<PAGE>

OPTICAL COMMUNICATION PRODUCTS, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003, 2004, AND 2005 (in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                    2003            2004             2005
<S>                                                                             <C>             <C>               <C>
OPERATING ACTIVITIES:
  Net income (loss)                                                             $   (10,201)    $    (1,307)      $       941
  Adjustments to reconcile net income (loss) to net cash provided by
    operating activities:
    Depreciation and amortization                                                     5,642           5,383             5,807
    Amortization of premium (discount) on marketable securities                       1,543             959               (36)
    Gain from sale of real property                                                       -            (942)                -
    Tax benefit from exercise of non-qualified stock options                          1,303               -                 -
    Stock option compensation expense                                                   (19)              -                 -
    Changes in operating assets and liabilities:
      Accounts receivable                                                            (3,497)         (1,606)             (914)
      Income taxes receivable                                                       (10,735)         11,743
      Inventories                                                                     2,123          (3,057)           (6,670)
      Deferred income taxes                                                           9,138               -                 -
      Prepaid expense and other assets                                                   25            (242)              100
      Accounts payable                                                                  515            (104)            1,970
      Accounts payable to related parties                                             1,031           2,264               771
      Accrued payroll and benefits                                                      556             608              (913)
      Accrued bonuses                                                                 2,131              18            (2,535)
      Other accrued expenses                                                            403            (530)              110
      Income taxes payable                                                              (92)            132               (29)
      Other long-term liabilities                                                      (150)           (200)             (200)
                                                                                -----------     -----------       -----------
           Net cash provided by (used in) operating activities                         (284)         13,119            (1,598)
                                                                                -----------     -----------       -----------
INVESTING ACTIVITIES:
  Purchase of marketable securities                                                 (71,424)        (70,435)          (69,478)
  Maturities of marketable securities                                                65,000          65,000            80,000
  Net proceeds from sale of real property                                                 -           5,693                 -
  Purchase of property, plant and equipment                                          (3,410)         (1,774)             (479)
   Cash paid for acquisitions                                                       (10,005)             -                  -
                                                                                -----------     -----------       -----------
           Net cash provided by (used in) investing activities                      (19,839)         (1,462)           10,043
                                                                                -----------     -----------       -----------
FINANCING ACTIVITIES:
  Principal payments on long-term debt                                                 (489)         (1,335)                -
  Issuance of common stock                                                              81             206                107
                                                                                -----------     -----------       -----------
           Net cash provided by (used in) financing activities                         (408)         (1,129)              107
                                                                                -----------     -----------       -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (20,531)         10,528             8,552

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                         85,426          64,895            75,423
                                                                                -----------     -----------       -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                          $    64,895     $    75,423       $    83,975
                                                                                ===========     ===========       ===========

SUPPLEMENTAL CASH FLOW INFORMATION:

  Cash paid during the year for interest expense                                $        54     $        36       $        22
  Cash paid (received) during the year for income taxes, net                    $    (1,567)    $   (11,522)      $       110

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
  Purchase of property, plant and equipment through accounts payable            $        31     $        71       $        63
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-6
<PAGE>

OPTICAL COMMUNICATION PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1. GENERAL INFORMATION

         The  accompanying   financial   statements  of  Optical   Communication
         Products,  Inc., a Delaware  corporation (the "Company"),  includes its
         balance  sheets as of  September  30,  2004 and 2005 and  reflects  the
         results of its operations for the years ended  September 30, 2003, 2004
         and 2005. The Company's  operations  are primarily  located in Woodland
         Hills,  California.  The  Company  is a  majority-owned  subsidiary  of
         Furukawa  Electric  Company,  Ltd.  of  Japan  ("Furukawa").   Furukawa
         beneficially owns 58.4% of the Company's capital stock at September 30,
         2005,  which accounts for 93.4% of the combined  voting power of all of
         the Company's outstanding common stock.

         Operations  - The  Company  operates  in one  industry  segment,  which
         includes  the design and  manufacture  of fiber optic  components.  The
         Company's   products  consist  of  optical   transmitters,   receivers,
         transceivers and  transponders  which convert  electronic  signals into
         optical signals and back to electronic signals.

         The Company sells its products to communication equipment manufacturers
         or CEMs, their contract manufacturers or CMs, who incorporate them into
         systems they assemble for the CEMs and to  distributors.  For financial
         reporting purposes, the Company considers its direct sales customers to
         be either CEMs, CMs or distributors  who place purchase orders with the
         Company  directly.  Revenue  from the  Company's  largest  direct  sale
         customer  amounted to 11.0% and 11.1% for the years ended September 30,
         2003 and 2004,  respectively,  and less than  10.0% for the year  ended
         September 30, 2005.

2. SIGNIFICANT ACCOUNTING POLICIES

          Use of Estimates in the Preparation of the Financial  Statements - The
         preparation  of financial  statements  in  conformity  with  accounting
         principles  generally accepted in the United States of America requires
         management  to make  estimates  and  assumptions  that  affect  amounts
         reported therein.  Due to the inherent  uncertainty  involved in making
         estimates,  actual  results  reported in future periods may differ from
         those estimates.

          Cash  and  Cash  Equivalents  -  Cash  and  cash  equivalents  include
         unrestricted deposits and short-term investments with a maturity at the
         date of purchase of three months or less.

          Marketable  Securities - Marketable securities represent United States
         treasury notes and treasury bonds with an original  maturity of greater
         than three months.  These securities are classified as held to maturity
         because the  Company has the intent and ability to hold the  securities
         to  maturity.  Gross  unrealized  gains and losses on  held-to-maturity
         marketable  securities have  historically  not been material.  Should a
         decline in the fair value of an  individual  security or  securities be
         judged to be other than temporary, the cost basis of the security would
         be written down to fair value and the amount of the write-down would be
         accounted  for  as a  realized  loss.  Maturities  on  held-to-maturity
         marketable debt securities range from three to ten months.

          Investments in marketable securities were as follows:

                                      F-7
<PAGE>

<TABLE>
<CAPTION>

                                                                   Unrealized    Unrealized
         Type of Security             Book/Cost     Fair Value       gains        (losses)
---------------------------------------------------------------------------------------------
                                                         (in thousands)
<S>                                 <C>             <C>             <C>          <C>
United States Treasury Notes
     2004                           $       75,131  $     74,959    $         -  $       (172)
     2005                                   64,645        64,489              -          (156)
</TABLE>

         Inventories  -  Inventories  are  stated  at the  lower  of cost or net
         realizable  value.  Cost is determined  using the  first-in,  first-out
         method.  The Company  establishes  its inventory  write-downs  based on
         excess and obsolete  inventories  determined  primarily  by  historical
         usage and future demand  forecasts.  Provisions for excess and obsolete
         inventory  result in a new,  lower-cost  basis for that  inventory  and
         subsequent  changes  in facts and  circumstances  do not  result in the
         restoration or increase in that newly established cost basis.

         Property,  Plant and  Equipment -  Property,  plant and  equipment  are
         recorded at cost.  Provision for  depreciation has been made based upon
         the  estimated  useful  lives of the assets,  which range from three to
         thirty-nine   years,   using  the   straight-line   method.   Leasehold
         improvements are amortized over the shorter of the term of the lease or
         estimated  useful life.  Significant  improvements  and betterments are
         capitalized  if they  extend  the  useful  life of the  asset.  Routine
         repairs and maintenance are expensed when incurred.

         Impairment  of  Long-Lived  Assets - The Company  evaluates  long-lived
         assets for  impairment  whenever  events or  changes  in  circumstances
         indicate  that  the  carrying  value  of an  asset  may  no  longer  be
         recoverable.  If the  estimated  future  cash flows  (undiscounted  and
         without  interest  charges)  from the use of an asset are less than the
         carrying  value,  a write-down  would be recorded to reduce the related
         asset to its estimated  fair value.  For purposes of estimating  future
         cash flows from  impaired  assets,  the  Company  groups  assets at the
         lowest  level for which  there are  identifiable  cash  flows  that are
         largely independent of the cash flows of other groups of assets.  There
         have been no impairment charges recorded by the Company.

         Income Taxes - Income taxes are provided for taxes currently payable or
         refundable,   and  deferred   income  taxes  arising  from  future  tax
         consequences  of  events  that have been  recognized  in the  Company's
         financial  statements  or tax returns.  Deferred  income tax assets and
         liabilities  are recognized for the estimated  future tax  consequences
         attributable to differences  between the financial  statement  carrying
         amounts of existing  assets and  liabilities  and their  respective tax
         basis.  Deferred  income tax assets and  liabilities are measured using
         enacted tax rates  expected to apply to taxable  income in the years in
         which those  temporary  differences  are  expected to be  recovered  or
         settled.  Valuation allowances are established when necessary to reduce
         deferred income tax assets to the amounts expected to be realized.

         Earnings per Share - Basic  earnings  per share are computed  using the
         weighted-average number of common shares outstanding during the period.
         Diluted  earnings  per share are  computed  using the  weighted-average
         number  of  common   shares  and  dilutive   potential   common  shares
         outstanding  during the period,  using the  treasury  stock  method for
         stock options.

         Revenue Recognition - The Company recognizes revenue from product sales
         upon  shipment,   as  shipments  are  FOB  shipping   point,   assuming
         collectibility of the resulting receivable is probable.  The history of
         sales returns is analyzed in order to reasonably  estimate an allowance
         for sales returns.

                                      F-8
<PAGE>

         Research and Development  Costs - Costs associated with the development
         of new products are charged to expense when incurred.

         Common  Stock - At September  30, 2005,  the Company had two classes of
         common  stock with a par value of $0.001 per share.  Holders of Class A
         common  stock  generally  have  identical  rights to holders of Class B
         common stock,  except that holders of Class A common stock are entitled
         to one vote per  share  while  holders  of  Class B  common  stock  are
         entitled to ten votes per share on matters  submitted  to a vote of the
         stockholders.  Furukawa  owns all  66,000,000  shares of the  Company's
         outstanding Class B common stock.

         Fair Value of Financial Instruments - The recorded values of marketable
         securities,  accounts receivable, accounts payable and accrued expenses
         approximate their fair values based on their short-term  nature.  Other
         liabilities,  consisting  of the  long-term  portion of  licensing  fee
         payments,  approximate fair value based on the constant, contract based
         payment schedule over their remaining two year term. The Company has no
         other long-term debt at September 30, 2005.

         Concentration  of Credit Risk - Financial  instruments that potentially
         subject the Company to  concentrations of credit risk consist primarily
         of  cash  and  cash  equivalents,   placed  with  high  credit  quality
         institutions,  and accounts receivable.  The Company sells products and
         extends  credit to  customers,  primarily  in the  United  States,  and
         periodically  monitors its  exposure to credit  losses,  and  maintains
         allowances for anticipated  losses.  The direct sales customer with the
         largest  accounts   receivable   amounted  to  $1,745,000  (19.5%)  and
         $1,352,000  (13.8%) at September 30, 2004 and 2005,  respectively.  For
         the fiscal years ended September 30, 2003 and 2004,  respectively,  one
         customer  accounted  for  approximately  11.0%  and  11.1% of our total
         revenue.  No other direct sales customer  accounted for more than 10.0%
         of our total revenue for the fiscal years ended  September 30, 2003 and
         2004 and no direct sales  customer  accounted  for more than 10% of our
         total revenue for the fiscal year ended September 30, 2005.

         Segment  Reporting  -  Statement  of  Financial   Accounting  Standards
         ("SFAS") No. 131,  "Disclosures  about  Segments of an  Enterprise  and
         Related  Information,"  establishes  standards  for the manner in which
         public companies report  information about operating segments in annual
         and  interim  financial  statements.  SFAS  No.  131  also  establishes
         standards  for  related   disclosures   about  products  and  services,
         geographic areas and major  customers.  The method for determining what
         information  to report  is based on the way  management  organizes  the
         operating segments within a Company for making operating  decisions and
         assessing financial performance.

         The  Company's  chief  executive  officer  ("CEO") and chief  financial
         officer ("CFO") are its chief operating  decision  makers.  The Company
         has  determined  that it  operates  in one  reportable  segment,  which
         includes  the design and  manufacture  of fiber optic  components.  The
         Company has a subsidiary  in England,  which  provides  commercial  and
         technical  support to the  Company's  customers in Europe.  The Company
         does not have foreign operations.

         Stock Based  Compensation - The Company accounts for its employee stock
         option plan under the intrinsic  value method  prescribed by Accounting
         Principles  Board  Opinion  No.  25,  Accounting  for  Stock  Issued to
         Employees,  and related  interpretations.  The Company's  September 30,
         2003 operating  results  include  compensation  expense  related to the
         repurchase of stock from certain executives of the Company. All options
         granted have an exercise  price equal to the quoted market price of the
         underlying  common  stock on the date of  grant.  The  following  table
         illustrates  the effect on the operating  results and per share amounts
         if the fair value  recognition  provisions of SFAS No. 123,  Accounting
         for Stock-Based Compensation, as amended by SFAS No.

                                      F-9
<PAGE>

         148 Accounting for Stock-Based  Compensation--Transition and Disclosure
         an amendment of FASB  Statement No. 123 had been applied to stock-based
         employee compensation:

<TABLE>
<CAPTION>

                                                                                     Year Ended September 30,
                                                                            2003               2004                 2005
                                                                               (in thousands, except per share amounts)
<S>                                                                     <C>                <C>                 <C>
Net income (loss):
  As reported                                                           $   (10,201)       $    (1,307)        $         941
   Add: The stock-based employee compensation cost, net
   of related tax effects, included in the determination of
   net income (loss) as reported                                                852
   Deduct:  Total stock-based employee compensation
   expense determined under fair value based method for
   all awards, net of related tax effects                                    (6,972)             (6,118)                (974)
                                                                       --------------------------------------------------------
  Pro forma net loss                                                    $   (16,321)       $     (7,425)       $         (33)
                                                                       ========================================================
Basic income (loss) per share
  As reported                                                           $     (0.09)       $      (0.01)       $        0.01
  Pro forma                                                             $     (0.15)       $      (0.07)       $       (0.00)

Diluted income (loss) per share
  As reported                                                           $     (0.09)       $      (0.01)       $        0.01
  Pro forma                                                             $     (0.15)       $      (0.07)       $       (0.00)
</TABLE>

         The fair value of each option grant estimated on the date of grant used
         to compute pro forma net income  (loss) and pro forma net income (loss)
         per share is estimated  using the  Black-Scholes  option pricing model.
         The following assumptions were used in completing the model:

                                                      September 30,
                                            ------------------------------
                                             2003         2004       2005

Dividend yield                                  0 %         0 %        0 %
Expected volatility                           104 %        99 %       91 %
Risk-free rate of return                     3.67 %      3.98 %     4.15 %
Expected life (years)                         8.2         8.1        8.0

         Recent Accounting Pronouncements




                                      F-10
<PAGE>

         In November 2004, the FASB issued SFAS 151,  Inventory Costs.  SFAS 151
         requires that allocation of fixed production  overheads to the costs of
         conversion be based on the normal capacity of the production facilities
         and unallocated overheads are recognized as an expense in the period in
         which they are  incurred.  In  addition,  other  items such as abnormal
         freight,  handling  costs  and  amounts  of  wasted  materials  require
         treatment  as  current  period  charges  rather  than a portion  of the
         inventory  cost.  SFAS 151 is effective  for inventory  costs  incurred
         during the first  fiscal  year that  begins  after June 15,  2005.  The
         Company is currently assessing the impact of adopting SFAS 151.

         In December 2004,  the Financial  Accounting  Standards  Board ("FASB")
         issued Statement of Financial  Accounting  Standards  ("SFAS") No. 123R
         Share-Based  Payment that will require  compensation  costs  related to
         share-based  payment  transactions  to be  recognized  in the financial
         statements.  With limited  exceptions,  the amount of compensation cost
         will be measured  based on the  grant-date  fair value of the equity or
         liability  instruments  issued.  In addition,  liability awards will be
         remeasured each reporting period.  Compensation cost will be recognized
         over the period that an employee  provides  service in exchange for the
         award. SFAS No. 123R replaces SFAS No. 123,  Accounting for Stock-Based
         Compensation,  and supersedes APB Opinion No. 25,  Accounting for Stock
         Issued to Employees.  In April 2005 the SEC changed the effective  date
         for SFAS 123R to the first fiscal year that begins after June 15, 2005.
         We will adopt SFAS No. 123R in the quarter  ending  December  31, 2005.
         The Company is in the process of determining the method of adoption and
         the effect of  adopting  SFAS No.  123R.

         In November  2005,  the FASB  issued FSP FAS 115-1 and FAS 124-1,  "The
         Meaning  of  Other-Than-Temporary  Impairment  and its  Application  to
         Certain   Investments"  ("FSP  115-1"),   which  provides  guidance  on
         determining when investments in certain debt and equity  securities are
         considered impaired,  whether that impairment is  other-than-temporary,
         and  on  measuring  such  impairment  loss.  FSP  115-1  also  includes
         accounting   considerations   subsequent  to  the   recognition  of  an
         other-than-temporary  impairment and requires certain disclosures about
         unrealized losses that have not been recognized as other-than-temporary
         impairments.  FSP 115-1 is required to be applied to reporting  periods
         beginning after December 15, 2005. The Company is currently  evaluating
         the effect that the adoption of FSP 115-1 will have on its consolidated
         results of operation and financial  condition but does not expect it to
         have a material impact.

         Reclassifications  -  Certain  reclassifications  have been made in the
         prior periods to conform to the current period presentation.

3. ACQUISITIONS

         On  October 9,  2002,  the  Company  acquired  certain  assets of Cielo
         Communications,   Inc.,  a  research  and  design  company  located  in
         Broomfield,  Colorado,  focused on creating VCSEL  technology for fiber
         optic communication networks for a cash purchase price and direct costs
         of $6.6 million. The purchase price included the acquisition of capital
         equipment  and  intellectual  property.  The  Company  refers  to  this
         location as the "Colorado facility".

         On January 31,  2003,  the Company  acquired  parallel  optical  module
         assets and  intellectual  property  from Gore  Photonics,  an  industry
         leader  in the  research  and  development  of VCSEL  parallel  optical
         modules  for fiber  optic  communication  networks  located  in Elkton,
         Maryland, for a cash purchase price of $3.4 million. The purchase price
         includes the acquisition of capital equipment and inventory.

         As a result of the  acquisitions,  the Company recorded $7.5 million in
         capital  equipment,  $2.2 million of intangible assets, and $300,000 of
         inventory.

4. INVENTORIES

         Inventories consist of the following:

                                      F-11
<PAGE>

                                                           September 30,
                                                  ------------------------------
                                                        2004           2005
                                                           (in thousands)

Raw materials                                       $     4,911    $    8,393
Work-in-process                                           2,927         5,094
Finished goods                                              811         1,831
                                                    -----------    ----------
Total                                               $     8,649    $   15,318
                                                    ===========    ==========

5. PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consist of the following:

                                                    September 30,        Useful
                                           ----------------------------  Lives
                                              2004            2005
                                                 (in thousands)

Land                                       $     6,729   $    6,729
Buildings                                       14,949       14,949     39 years
Machinery and equipment                         19,965       20,419      5 years
Furniture and fixtures                             382          382      5 years
Computer hardware and software                   1,592        1,681      3 years
Leasehold improvements                             181          181      9 years
                                           -----------   ----------
                                                43,798       44,341
Less: accumulated depreciation                 (14,520)     (19,427)
                                           -----------   ----------
Total                                      $    29,278   $   24,914
                                           ===========   ==========


         Depreciation and  amortization  expense for fixed assets for 2003, 2004
         and  2005  was  approximately  $4,778,000,  $4,483,000  and  $4,907,000
         respectively.

         On June 8, 2001,  the Company  purchased land and a 145,720 square foot
         building  in  Woodland  Hills,  California  for the  purchase  price of
         $18,750,000.  The Company is occupying  an  aggregate of  approximately
         89,000 square feet and  currently  leases an aggregate of 41,400 square
         feet of this  building to one unrelated  party under a lease  agreement
         expiring  February  2006.  In fiscal 2003,  fiscal 2004 and the first 8
         months of fiscal 2005, the Company had two lessees.  Rental income from
         leases was  $398,000,  $473,000 and $399,000 for the fiscal years ended
         September  30,  2003,  2004 and 2005,  respectively.  Rental  income is
         included  in other  income in the  accompanying  financial  statements.
         Future rental income is expected to be $163,000 in 2006.

                                      F-12
<PAGE>

         On June 30, 2004, the Company sold the building  located in Chatsworth,
         California which was its former corporate headquarters and recognized a
         gain  of  $942,000.   The  net  proceeds  from  this  transaction  were
         approximately $5.7 million.

6. INTANGIBLE ASSETS

         The Company evaluates  long-lived assets for impairment whenever events
         or changes in  circumstances  indicate  that the  carrying  value of an
         asset may no longer be recoverable.  If the estimated future cash flows
         (undiscounted  and without  interest  charges) from the use of an asset
         are less than the carrying  value,  a  write-down  would be recorded to
         reduce the related asset to its estimated  fair value.  For purposes of
         estimating  future cash flows from  potentially  impaired  assets,  the
         Company  groups  assets  at  the  lowest  level  for  which  there  are
         identifiable cash flows that are largely  independent of the cash flows
         of other groups of assets.  The Company completed an impairment test of
         the Company's long-lived assets during the fourth quarter of the fiscal
         year ended  September 30, 2005 and no impairment  was  identified.  The
         following sets forth the intangible assets by major asset class:

                                                                Weighted Average
                                              September 30,       Amortization
                                          2004            2005        Period
                                        ----------------------------------------
                                             (in thousands)          (Years)

Licensing Fees                         $    2,000  $    2,000          3.5
Accumulated Amortization                   (1,534)     (2,000)

Patents                                       950         950          5.0
Accumulated Amortization                     (364)       (554)

Acquired Technology                         1,216       1,216          5.0
Accumulated Amortization                     (466)       (710)
                                       -----------------------
Total intangible assets                $    1,802  $      902
                                       ==========  ==========

         Aggregate   amortization  expense  related  to  intangible  assets  was
         approximately  $864,000,  $900,000  and  $900,000  for the years  ended
         September  30,  2003,  2004  and  2005,  respectively.   There  was  no
         impairment loss recorded during fiscal years 2003, 2004 or 2005.

         Following  is a summary of future  amortization  expense in each of the
next three fiscal years.

                                      F-13
<PAGE>

                                                                  (in thousands)

fiscal 2006                                                                433
fiscal 2007                                                                433
fiscal 2008                                                                 36
                                                                   -----------
                                                                   $       902
                                                                  ============

7. LONG-TERM DEBT

         Term  Loan - The  term  loan  was  used to  fund  the  purchase  of the
         Company's land and building located in Chatsworth, California. The term
         loan bore interest on the amount  outstanding at various time intervals
         based on the Company's election at a per annum rate equal to either (a)
         the prime rate or (b) LIBOR plus  1.80%.  This term loan was fully paid
         in August 2004 and the Company has no other term loans outstanding.


8. EARNINGS PER SHARE

         The following is a calculation of basic and diluted  earnings per share
         ("EPS"):

<TABLE>
<CAPTION>

                                                                                            Year Ended September 30,
                                                                             ------------------------------------------------------
                                                                                2003                2004                 2005
                                                                                     (in thousands, except per share data)
         <S>                                                                  <C>                 <C>                 <C>
         BASIC EPS COMPUTATION:
         Net income (loss) applicable to common stock                         $ (10,201)          $  (1,307)          $     941
                                                                              =========           =========           =========

         Weighted average common shares outstanding                             111,074             112,553             112,894
                                                                              ---------           ---------           ---------
         Basic earnings (loss) per share                                      $   (0.09)          $   (0.01)          $    0.01
                                                                              =========           =========           =========
         DILUTED EPS COMPUTATION:
         Net income (loss) applicable to common stock                         $ (10,201)          $  (1,307)          $     941
                                                                              =========           =========           =========
         Weighted average common shares outstanding                             111,074             112,553             112,894
         Effect of diluted securities:
              Common stock options                                                 -                   -                    916
                                                                              ---------           ---------           ---------
         Diluted shares outstanding                                             111,074             112,553             113,810
                                                                              =========           =========           =========
         Diluted earnings (loss) per share                                    $   (0.09)          $   (0.01)          $    0.01
                                                                              =========           =========           =========
</TABLE>

         The weighted average diluted common shares  outstanding for years ended
         September  30, 2003,  2004,  and 2005  excludes the dilutive  effect of
         approximately 5,974,306, 5,561,188 and 5,930,364


                                      F-14
<PAGE>


         options,  respectively.  The options are excluded when the options have
         an  exercise  price  in  excess  of the  average  market  value  of the
         Company's  Common  Stock  during the fiscal  year or as a result of the
         Company's net loss.

9. COMMITMENTS AND CONTINGENCIES

         Operating  Leases  - The  Company  has  operating  leases  for  certain
         facilities.  Lease payments are made monthly.  The Company's leases are
         renewable  either  monthly,  semiannually,  annually or for five years.
         Rent expense for these leases for the years ended  September  30, 2003,
         2004, and 2005 was $488,000, $516,000 and $ 508,000, respectively.


         The  following  is a  summary  of  future  minimum  payments  due under
         operating  leases that have  initial or remaining  noncancelable  lease
         terms in excess of one year at September 30, 2005:

         (in thousands)
         Fiscal Year
              2006                                               $  206
              2007                                                   57
              2008                                                   42
              2009                                                   42
              2010                                                   42
              Thereafter                                             36
                                                                 ------
         Total minimum lease payments                           $   425
                                                                =======



         Legal  Proceedings - On April 12, 2002, the Company resolved its patent
         infringement  litigation with Stratos Lightwave,  Inc. ("Stratos").  As
         part of the settlement,  the Company  entered into a five-year  license
         agreement with Stratos covering  Stratos'  portfolio of  optoelectronic
         transceiver  patents.  In consideration of the license  agreement,  the
         Company is required to pay a total of $2 million over the license term.
         At the  end of the  five-year  term,  the  Company  has the  option  to
         renegotiate  with  Stratos  for  an  extension  of the  license.  As of
         September 30, 2005, the remaining amount the Company is required to pay
         under the  settlement  is  $400,000  which will be payable  annually in
         equal  installments  in the next two years.  Accordingly,  $200,000  is
         included  in  other  accrued  expenses  and the  remaining  outstanding
         balance of $200,000 is included in the Other Long Term  Liabilities  in
         the 2005 balance sheet.

         We are not currently involved in any material legal proceedings. We are
         not aware of any other material legal proceedings threatened or pending
         against  us.  From time to time,  however,  we may  become  subject  to
         additional legal  proceedings,  claims,  and litigation  arising in the
         ordinary course of business.

         Purchase  Commitments  - As of  September  30,  2005,  the  Company has
         entered into purchase  commitments for materials,  supplies,  equipment
         and outside  services in  aggregate of  approximately  $5.5 million for
         fiscal year ending  September  30, 2006.  In addition,  total  purchase
         commitments to a related party is $4.2 million for fiscal 2006.

         Warranty  Accruals - The Company  provides a warranty  of its  products
         from defects in materials and  workmanship.  The warranty is limited to
         repair or replacement, at the Company's option, of

                                      F-15
<PAGE>

         defective items  authorized for return within one year from the date of
         the sale.  The table  below sets forth the  activity  of the  Company's
         warranty reserve.

<TABLE>
<CAPTION>

                                                    Balance at       Additions                          Balance at
                                        Fiscal      beginning of     charged to                           end of
                                          year        period          expense       (Deductions)          period
<S>                                       <C>         <C>             <C>            <C>                  <C>
               Warranty Reserve           2003        $   43,000      $    19,000    $    (16,000)        $ 46,000
                                          2004        $   46,000      $    11,000    $    (26,000)        $ 31,000
                                          2005        $   31,000      $    14,000    $    (31,000)        $ 14,000
</TABLE>


10. STOCKHOLDERS' EQUITY

         Initial Public  Offering - On November 3, 2000,  the Company  completed
         its initial public offering of 12,075,000  newly issued shares of Class
         A common  stock,  which  included  the  exercise  of the  underwriters'
         over-allotment  option of  1,575,000  shares,  at an offering  price of
         $11.00 per share.  Proceeds from the offering were  $123,572,000,  less
         underwriting discounts and commissions.

         Preferred  and  Common  Stock  -  On  October  27,  2000,  the  Company
         reincorporated  in Delaware and created two new classes of common stock
         with a par value of $0.001 per share. All of the Company's  outstanding
         shares of common stock and convertible  preferred  stock  automatically
         converted   into   shares  of  Class  A  and  Class  B  common   stock,
         respectively.  Holders of Class A common stock generally have identical
         rights to holders of Class B common stock, except that holders of Class
         A common  stock are  entitled  to one vote per share  while  holders of
         Class B common  stock are  entitled  to ten votes per share on  matters
         submitted  to a vote of the  stockholders.  As of  September  30,  2005
         Furukawa owns all 66,000,000 shares of the Company's  outstanding Class
         B common stock,  which accounts for 93.4% of the combined  voting power
         of all of the Company's outstanding common stock.

         Stock Options - In September  1992,  the  Company's  Board of Directors
         approved  the 1992 Stock  Option  Plan for the  issuance  of  6,666,680
         shares of the  Company's  common  stock to certain  key  employees.  In
         August 2000, the Company's  Board of Directors  approved the 2000 Stock
         Option/Stock  Issuance Plan for the issuance of 1,000,000 shares of the
         Company's  common stock to certain key  employees.  These plans provide
         that options may have a term of up to 10 years, and become  exercisable
         and  generally  vest in annual  increments  of 25 percent per year over
         four years. In addition,  key executives  were granted  9,670,360 stock
         options that were separate  from the  Company's  stock option plans and
         are fully vested. All options were granted at fair value.

         On August 29,  2000,  the Board of  Directors  approved  the 2000 Stock
         Incentive Plan. Upon the  effectiveness  of the Company's IPO, the 1992
         Stock Option Plan and the 2000 Stock  Option/Stock  Issuance  Plan were
         terminated and no further options grants may be made under these plans.
         All options  outstanding  from the 1992 Stock  Option Plan and the 2000
         Stock  Option/Stock  Issuance Plan were  transferred  to the 2000 Stock
         Incentive Plan. The 2000 Stock Incentive Plan provides that options may
         have a term of up to 10  years,  and  become  exercisable  and  vest in
         increments.  The normal  vesting is 25 percent per year.  However,  the
         vesting  period can vary.  All options  were  granted with the exercise
         price equal to the fair value of the Company's common stock on the date
         of grant.

                                      F-16
<PAGE>

         In July 2002,  the Company  granted  stock options under the 2000 Stock
         Incentive  Plan to a member of the Board of  Directors  for  consulting
         services to be performed through January 2004. The options vest ratably
         in  monthly   increments  over  the  term  of  the  services  rendered.
         Compensation  cost  has been  determined  on the  basis  of fair  value
         pursuant to SFAS No. 123 "Accounting for Stock-Based  Compensation" and
         EITF 96-18 "Accounting for Equity  Instruments That Are Issued to Other
         Than Employees for Acquiring,  or  Conjunction  with Selling,  Goods or
         Services."  Compensation  expense  recognized on the vested options for
         fiscal year ended  September  30, 2002 was $85,700.  On November  2002,
         that member of the Board of  Directors  terminated  performance  of the
         consulting  services.  Compensation  expense  for the fiscal year ended
         September  30,  2003  was  ($19,500),  representing  an  adjustment  of
         compensation expense previously recognized due to the early termination
         of the consulting services.

         On May 1, 2003, the Company  purchased in a private sale 829,746 shares
         of its Class A common  stock from Muoi Van Tran,  the  Company's  Chief
         Executive  Officer  and  President  and  536,833  shares of its Class A
         common stock from Mohammad  Ghorbanali,  the Company's  Chief Operating
         Officer and Vice President of Technical  Operations.  In each case, the
         purchase  price  was  $0.96  per  share,  representing  a 12%  discount
         relative to the closing  price of the  Company's  stock on May 1, 2003,
         resulting in an aggregate cash payment of approximately $1,312,000. The
         stock  repurchased by the Company was purchased  within six months from
         the exercise of stock  options and  therefore  compensation  expense of
         $1,311,000  has been recorded for the net cash paid for the shares less
         the intrinsic value of the options on the original grant date.

         There  were  5,739,146  shares  available  for future  grant  under the
         Company's 2000 Stock Incentive Plan at September 30, 2005. Stock option
         activity,  including  the  options  granted  outside  the plans,  is as
         follows:

                                      F-17
<PAGE>

<TABLE>
<CAPTION>

                                                                                                    Weighted
                                                                  Number       Exercise Price        Average
                                                                of Options       per Option       Exercise Price
<S>                                                              <C>             <C>                     <C>

Options outstanding - September 30, 2002                         11,977,050     0.0003 to 17.38           5.78
  Options granted                                                   946,504        0.68 to 2.29           1.02
  Options exercised                                              (3,186,651)     0.0003 to 0.39          0.007
  Options canceled*                                              (1,843,555)    0.0003 to 17.38           1.25
                                                             ---------------- ------------------- --------------

Options outstanding - September 30, 2003                          7,893,348     0.0562 to 17.38           8.60
  Options granted                                                   451,140        1.69 to 4.05           2.98
  Options exercised                                                (370,710)      0.562 to 2.57           0.29
  Options canceled                                                 (224,997)      0.68 to 13.38           4.87
                                                             ---------------- ------------------- --------------

Options outstanding - September 30, 2004                          7,748,781    $0.100 to $17.38     $     8.78
  Options granted                                                   647,316        1.58 to 2.30           1.99
  Options exercised                                                (121,122)       0.10 to 2.06           0.43
  Options canceled                                                 (283,093)      0.90 to 17.38           5.53
                                                             ---------------- ------------------- --------------

Options outstanding - September 30, 2005                          7,991,882    $0.100 to $17.38     $     8.49
                                                             ================ =================== ==============
</TABLE>

         *  Cancelled  options  include  1,366,579  options  repurchased  by the
         Company from two executive officers. These options were granted outside
         of the Company's stock option plan.

         The  following   table   summarizes   information   regarding   options
         outstanding at September 30, 2005:

<TABLE>
<CAPTION>

                                  Options Outstanding                                  Options Exercisable
                            ---------------------------------------------------------------------------------------
                                             Weighted Average     Weighted                             Weighted
        Range of                Number          Remaining          Average           Shares            Average
    Exercise Prices           Outstanding    Contractual Life   Exercise Price     Exercisable      Exercise Price
<S>                              <C>                <C>          <C>                 <C>           <C>
  $0.00 - $1.71                  1,309,451          5.3          $    0.6646           981,492     $       0.5608
  $1.81 - $3.50                  1,475,796          8.4          $    2.2877           459,635     $       2.3279
  $3.56 - $5.15                     37,000          7.1          $    3.9054            19,250     $       3.9574
  $8.05 - $9.72                     67,520          5.8          $    8.4200            67,520     $       8.4200
  $11.00 - $11.14                4,034,915          4.9          $   11.0000         4,034,915     $      11.0000
  $13.38 - $17.38                1,067,200          5.3          $   17.3575         1,067,200     $      17.3575
                              ------------      -------          -----------       -----------     --------------

                                 7,991,882          5.7          $    8.4928         6,630,012     $       9.8309
                              ============      =======          ===========       ===========     ==============
</TABLE>

         The weighted  average  estimated fair value of options granted in 2003,
         2004,  and 2005 was $1.00  $3.00  and  $1.66,  respectively.  The total
         number of shares exercisable were 5,686,086, 6,093,018 and 6,630,012 as
         of September 30, 2003, 2004 and 2005, respectively.

                                      F-18
<PAGE>

11. PROFIT SHARING PLAN

         The Company has a deferred  cash and profit  sharing plan  covering all
         employees,  subject to certain  participation and vesting requirements.
         The plan  provides  that the Company  will  partially  match  employees
         contributions  or provide  discretionary  contributions up to a certain
         amount.   Total  contributions  by  the  Company  were  $1,462,000  and
         1,254,000   for  the  years   ended   September   30,  2003  and  2004,
         respectively. The Company has $354,000 accrued for year ended September
         30, 2005 contributions.

12. INCOME TAXES

         The components of income tax (benefit) expense are as follows:


<TABLE>
<CAPTION>
                                                                             Year Ended September 30,
                                                                -------------------------------------------------
                                                                       2003            2004           2005
                                                                                   (in thousands)

Current:
<S>                                                              <C>             <C>            <C>
   Federal                                                       $     (12,408)  $        192   $          32
   State                                                                    19            133            (121)
   Foreign                                                                  26             44              90
                                                                 -------------   -------------  -------------
Total current                                                          (12,363)           369               1
                                                                 -------------   -------------  -------------
Effect of non-qualified stock option exercises
   upon inome taxes currently payable                                    1,273              0               0

Deferred:
   Federal                                                               7,453              0               0
   State                                                                 1,685              0               0
                                                                 -------------   -------------  -------------
Total deferred                                                           9,138              0               0
                                                                 -------------   -------------  -------------
(Benefit) provision for income taxes                             $      (1,952)  $        369  $            1
                                                                 =============   =============  =============
</TABLE>

         The components of deferred income taxes are as follows:

                                      F-19
<PAGE>
<TABLE>
<CAPTION>
                                                                 September 30,
                                                      ----------------------------------
                                                         2003        2004        2005
<S>                                                      <C>         <C>         <C>
Allowance for doubtful accounts                         $  195      $  247      $  177
Uniform capitalization and obsolete inventory            1,542       1,145       1,059
State NOL and credit carry-forwards                      1,738       1,742       1,138
Federal credit carry-forwards                                0         698       1,160
Depreciation                                              (259)        464       1,012
Other                                                      246         194         391
                                                        -------     -------      ------

Net deferred tax asset                                   3,462       4,490       4,937
Valuation allowance                                     (3,462)     (4,490)     (4,937)
                                                        -------     -------     ------

Net deferred tax asset                                  $    -      $    -      $    -
                                                        =======     =======     ======

Valuation allowance at beginning of period                   0      (3,462)     (4,490)
Valuation allowance at end of period                    (3,462)     (4,490)     (4,937)
                                                        -------     -------     ------
Change in valuation allowance during period             (3,462)     (1,028)       (447)

</TABLE>






          A reconciliation of the Company's (benefit) provision for income taxes
          to the U.S. federal statutory rate is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                     -----------------------------------------------------------------------------------
                                                  2003                       2004                         2005
                                     --------------------------- --------------------------- ---------------------------
                                         Amount          %            Amount        %          Amount         %
<S>                                     <C>             <C>           <C>          <C>         <C>           <C>
(Benefit) provision for income taxes
   at statutory rate                    $ (4,254)       (35.0)%       $ (328)      (35.0)%     $  330        35.0%
State taxes, net of federal
   benefit                                 1,107          9.1             86         9.2           61         6.5
Federal valuation allowance                1,373         11.3            413        44.0        1,059       112.4
Research and development credit                                                                (1,257)     (133.5)
Adjustment of prior year tax                                             192        20.5         (141)      (15.0)
Other                                       (178)        (1.5)             6         0.6          (51)       (5.4)
                                         --------       ------        ------       -----       ------      ------

                                         $(1,952)       (16.1)%       $  369        39.3%      $    1           0%
                                         ========      =======       =======      ======       ======      ======
</TABLE>


                                      F-20

<PAGE>



         The Company has state net operating loss  carryforwards and tax credits
         of approximately $14,800,000 and $180,000,  respectively,  which expire
         through 2011 and 2013,  respectively.  The Company has federal research
         and development credit carryforwards of approximately $1,160,000, which
         will begin to expire in 2024.


13.   RELATED PARTY TRANSACTIONS

         The Company is a subsidiary of Furukawa  Electric North America,  which
         is a  wholly  owned  subsidiary  of  Furukawa.  Three  members  of  the
         Company's  board of directors  are Furukawa  executives.  The Company's
         related  party  transactions  occur between  itself and other  Furukawa
         owned subsidiaries and affiliates.

         The Company  sells fiber optic  components  and purchases raw materials
         from some of these entities in the regular course of business. Sales of
         fiber  optic  subsystems  and  modules to related  parties  amounted to
         $481,000,  $218,000 and $46,000 for the years ended September 30, 2003,
         2004, and 2005,  respectively.  Purchases of raw materials from related
         parties  amounted to $6,690,000,  $13,285,000  and  $14,911,000 for the
         years ended September 30, 2003, 2004, and 2005, respectively.  Accounts
         receivable due from related parties were $7,000 and $5,000 at September
         30, 2004 and 2005,  respectively.  Accounts  payable to related parties
         were  $3,325,000  and  $4,095,000  at  September  30,  2004  and  2005,
         respectively.  No  management  fees were paid in the fiscal years ended
         September 30, 2003, 2004, and 2005.

14.   SEGMENT AND GEOGRAPHIC INFORMATION

         The Company  operates in one  reportable  segment,  which  includes the
         design and  manufacture  of fiber optic  subsystems  and  modules.  The
         following  are  summaries  of sales to  geographic  areas  based on the
         location of the entity purchasing the Company's  products and sales for
         each of the components within the segment. Sales are by region unless a
         particular  country  represents 5% or more of the Company's revenues in
         fiscal 2005:



                                      F-21
<PAGE>

<TABLE>
<CAPTION>
                                                                           September 30,
                                                           --------------------------------------------
                                                              2003             2004             2005
                                                                          (in thousands)
<S>                                                         <C>              <C>              <C>
Revenue by Geographical Area:
  United States                                             $ 19,933         $ 26,358         $ 26,051
  China                                                        1,662            6,708            7,956
  Canada                                                       3,578            6,004            5,935
  Israel                                                       3,129            7,639            2,974
  Thailand                                                     -                1,745            2,893
  Asia                                                         4,733            1,263              968
  Europe                                                       5,565            7,148            7,974
  Other                                                          280              278            1,227
                                                            --------         --------         --------

                                                            $ 38,880         $ 57,143         $ 55,978
                                                            ========         ========         ========

Long lived assets, net, by Geographical Area:
  United States                                             $ 38,932         $ 30,791         $ 25,656
  Europe                                                         491              289              160
                                                            --------         --------         --------

                                                            $ 39,423         $ 31,080         $ 25,816
                                                            ========         ========         ========

Revenue by Component:
  Receivers                                                 $  4,208         $  4,164         $  2,872
  Transceivers                                                28,249           47,601           48,892
  Transmitters                                                 5,254            5,140            3,558
  PTC                                                          -                -                  317
  Other                                                        1,169              238              339
                                                            --------         --------         --------

                                                            $ 38,880         $ 57,143         $ 55,978
                                                            ========         ========         ========
</TABLE>


15.   SUBSEQUENT EVENT

         The  Company  expects to cease  operations  at its  Colorado  facility,
         effective January 31, 2006,  because the cost of Fabry-Perot lasers has
         been  decreasing,  making 1300 nm VCSEL technology less attractive as a
         cost-effective replacement,  and because of the delay in development of
         the next  generation  of  optical  modules.  The net book  value of the
         Colorado facility long-lived assets, including intangible assets, as of
         December 29, 2005 is approximately $985,000.








                                      F-22
<PAGE>





                                INDEX TO EXHIBITS

Exhibit
Number                             Exhibit Description
--------------------------------------------------------------------------------
3.1*       Amended and Restated Certificate of Incorporation
3.2*       Bylaws
3.2.1***   Amendment Number One to Bylaws
4.1        See Exhibits 3.1, 3.2 and 3.2.1 for provisions of the Certificate of
           Incorporation and Bylaws for the Registrant defining the rights of
           holders of common stock of the Registrant
4.2*       Specimen Stock Certificate
4.3*       Standstill and Registration Rights Agreement, dated as of October
           26, 2000, by and between the Registrant and The Furukawa Electric
           Co., Ltd.
10.1*+     2000 Stock Incentive Plan
10.2*+     Employee Stock Purchase Plan
10.3*      Form of Indemnification Agreement
10.5*+     Employment Agreement, dated November 1, 1999, by and between the
           Registrant and Muoi Van Tran, as currently in effect
10.6*+     Employment Agreement, dated November 1, 1999, by and between the
           Registrant and Mohammad Ghorbanali, as currently in effect
10.7+      Employment Agreement, dated October 30, 2003, by and between the
           Registrant and Susie L. Nemeti, as currently in effect
10.8*+     Form of Stock Option Agreement, dated August 29, 2000, by and between
           the Registrant and each of Muoi Van Tran, Mohammad Ghorbanali and
           Susie L. Nemeti (including a schedule of substantially identical
           terms)
10.9*+     Form of Stock Option Agreement, dated June 28, 1993, by and between
           the Registrant and each of Muoi Van Tran, Mohammad Ghorbanali and
           Susie L. Nemeti (including a schedule of substantially identical
           terms)
10.10**    Master Purchase Agreement, dated October 1, 2003, by and between the
           Registrant and The Furukawa Electric Co., Ltd.
21.1*      List of Subsidiaries of the Registrant
23.1       Independent Registered Public Accounting Firm Consent
31.1       Certification of Chief Executive Officer pursuant to 18 U.S.C.
           Section 1350, as adopted pursuant to Section 302 of the
           Sarbanes-Oxley Act of 2002.
31.2       Certification of Chief Financial Officer pursuant to 18 U.S.C.
           Section 1350, as adopted pursuant to Section 302 of the
           Sarbanes-Oxley Act of 2002.
32.1       Certification of Chief Executive Officer and Chief Financial Officer
           pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
           906 of the Sarbanes-Oxley Act of 2002.

*    This exhibit was previously filed as an exhibit to the Company's
     Registration Statement on Form S-1 declared effective November 2, 2000
     (File No. 333-44862) under the same exhibit number, and is incorporated by
     reference herein.
+    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit pursuant to Item 15(c) of Form 10-K.
**   Filed as an exhibit to the Annual Report on Form 10-K for the year ended
     September 30, 2003 on December 24, 2003 and incorporated herein by
     reference.
***  Filed as an exhibit to the Annual Report on Form 10-K for the year ended
     September 30, 2002 on December 27, 2002 and incorporated herein by
     reference.