##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|  |  |                                                                                                                                         
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 28, 2003,
or

|  |  |                                                                                                                                                                        
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o |  | 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 0-31162

O P T I C N E T, I N C.




(Exact name of Registrant as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 94-3368561                          
|                         |  |                                     
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

One Post Street, Suite 2500
San Francisco, California 94104




(Address of principal executive office)


(415) 956-4477




(Registrants telephone number)


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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

|      |  |     
|----- |  | ----
|Yes o |  | No x

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

Common Stock: $.0001 Par Value; 3,093,202 shares of Voting Common Stock and
2,998,902 shares of Nonvoting Common Stock outstanding as of August 7, 2003.

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TABLE OF CONTENTS



|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. FINANCIAL STATEMENTS (UNAUDITED)                                                     
|                              |                                                                                               | CONDENSED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                              | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|                              | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|Exhibit 32.1                 
|Exhibit 32.2                 



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##### Table of Contents



OPTICNET, INC.
(a development stage company)

INDEX

|        |  |                                                                                                                                                                      |  |     
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                                                      |  | PAGE
|        |  |                                                                                                                                                                      |  |     
|PART 1. |  | FINANCIAL INFORMATION                                                                                                                                                |  |     
|Item 1. |  | Financial Statements (Unaudited)                                                                                                                                     |  |     
|        |  | Condensed Balance Sheets June 28, 2003 and September 28, 2002                                                                                                       |  | 3   
|        |  | Condensed Statements of Operations Quarter and Nine Months ended
June 28, 2003 and June 29, 2002 and the period from
February 23, 2000 (inception) to June 28, 2003 |  | 4   
|        |  | Condensed Statements of Cash Flows Quarter and Nine Months ended
June 28, 2003 and June 29, 2002 and the period from
February 23, 2000 (inception) to June 28, 2003 |  | 5   
|        |  | Notes to Condensed Financial Statements June 28, 2003                                                                                                               |  | 6   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations                                                                                |  | 12  
|Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk                                                                                                            |  | 17  
|Item 4. |  | Controls and Procedures                                                                                                                                              |  | 17  
|PART II |  | OTHER INFORMATION                                                                                                                                                    |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                     |  | 18  
|        |  | (a) Exhibits                                                                                                                                                         |  |     
|        |  | (b) Reports on Form 8-K                                                                                                                                              |  |     
|        |  | SIGNATURES                                                                                                                                                           |  | 19  

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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. FINANCIAL STATEMENTS (UNAUDITED)




OPTICNET, INC.
(a development stage company)
CONDENSED BALANCE SHEETS

|                                                                                         |                           |   |             |           |                  |   |            |           | 
|---------------------------------------------------------------------------------------- | ------------------------- | - | ----------- | --------- | ---------------- | - | ---------- | --------- | 
|                                                                                         |                           |   | June 28,    |           | September 28,   
|                                                                                         |                           |   | 2003        |           | 2002            
|                                                                                         |                           |   | (Unaudited) |           | (See note below)
|                                                                                         |                           |   |             |           |                 
|ASSETS                                                                                   |                           |   |             |           |                  |   |            |          
|Cash and cash equivalents                                                                |                           | $ | 24,711      |           |                  | $ | 4,881      |          
|Trade receivables, less customer allowance for doubtful accounts (2003$0; 2002$57,080) |                           |   |            |           |                  |   |           |          
|Receivable from prototype deliveries                                                     |                           |   | 59,392      |           |                  |   |           |          
|Prepaid expenses                                                                         |                           |   | 4,583       |           |                  |   | 3,263      |          
|Other current assets                                                                     |                           |   | 324         |           |                  |   | 324        |          
|                                                                                         |                           |   |             |           |                  |   |            |          
|                                                                                         | Total current assets      |   |             | 89,010    |                  |   |            | 8,468     | 
|                                                                                        
|Other assets                                                                             |                           |   | 728         |           |                  |   | 728        |          
|                                                                                         |                           |   |             |           |                  |   |            |          
|                                                                                         |                           | $ | 89,738      |           |                  | $ | 9,196      |          
|                                                                                         |                           |   |             |           |                  |   |            |          
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                    |                           |   |             |           |                  |   |            |          
|Accounts payable                                                                         |                           | $ | 45,678      |           |                  | $ | 13,713     |          
|Accrued expenses and other liabilities                                                   |                           |   | 124,760     |           |                  |   | 40,394     |          
|Other related party liability                                                            |                           |   | 265,324     |           |                  |   | 214,078    |          
|Note payable to related party                                                            |                           |   | 2,656,338   |           |                  |   | 2,656,338  |          
|Customer funded research and development liability                                       |                           |   | 72,500      |           |                  |   |           |          
|                                                                                         |                           |   |             |           |                  |   |            |          
|                                                                                         | Total current liabilities |   |             | 3,164,600 |                  |   |            | 2,924,523 | 
|                                                                                        
|Stockholders deficit                                                                    |                           |   | (3,074,862  | )         |                  |   | (2,915,327 | )        
|                                                                                         |                           |   |             |           |                  |   |            |          
|                                                                                         |                           | $ | 89,738      |           |                  | $ | 9,196      |          
|                                                                                         |                           |   |             |           |                  |   |            |          

Note: The balance sheet at September 28, 2002 has been derived from the audited balance sheet at that date.

See notes to condensed financial statements.

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##### Table of Contents






OPTICNET, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|------------------------------------------------------------------------------------------ |  | ------------- | --------- | ----------------- |  | -------- | ---------- | -------- |  | ------------------- | --------- | - |  | - | ---------- | - |  | ------------------------ | ---------- | -
|                                                                                           |  | Quarter Ended |           | Nine Months Ended |  |          |            |         
|                                                                                           |  |               |           |                   |  |          |            |         
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  | Period from February 23,
|                                                                                           |  | June 28,      |           | June 29,          |  | June 28, |            | June 29, |  | 2000 (inception) to
|                                                                                           |  | 2003          |           | 2002              |  | 2003     |            | 2002     |  | June 28, 2003      
|                                                                                           |  |               |           |                   |  |          |            |          |  |                    
|Revenues                                                                                   |  | $             |          |                   |  | $        | 25,000     |          |  | $                   |          |   |  | $ | 112,500    |   |  | $                        | 611,500    |  
|Cost of revenues                                                                           |  |               |          |                   |  |          | 12,500     |          |  |                     |          |   |  |   | 56,252     |   |  |                          | 343,441    |  
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|Gross margin                                                                               |  |               |          |                   |  |          | 12,500     |          |  |                     |          |   |  |   | 56,248     |   |  |                          | 268,059    |  
|                                                                                          
|Selling, general and administrative expenses                                               |  |               | 266,435   |                   |  |          | 431,702    |          |  |                     | 458,604   |   |  |   | 1,199,570  |   |  |                          | 2,621,612  |  
|Research and development expenses                                                          |  |               | 142,824   |                   |  |          | 688,746    |          |  |                     | 375,113   |   |  |   | 2,409,045  |   |  |                          | 4,207,952  |  
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|Loss from operations                                                                       |  |               | (409,259  | )                 |  |          | (1,107,948 | )        |  |                     | (833,717  | ) |  |   | (3,552,367 | ) |  |                          | (6,561,505 | )
|                                                                                          
|Interest expense                                                                           |  |               | 38,193    |                   |  |          | 42,175     |          |  |                     | 116,009   |   |  |   | 86,742     |   |  |                          | 265,324    |  
|Other income                                                                               |  |               |          |                   |  |          | 622        |          |  |                     |          |   |  |   | 3,897      |   |  |                          | 65,173     |  
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|Deficit accumulated in the development stage                                               |  | $             | (447,452  | )                 |  | $        | (1,149,501 | )        |  | $                   | (949,726  | ) |  | $ | (3,635,212 | ) |  | $                        | (6,761,656 | )
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|                                                                                          
|Basic and Diluted Net Loss per Common Share                                               
|                                                                                          
|Basic and diluted net loss per common share                                                |  | $             | (0.07     | )                 |  | $        | (0.20      | )        |  | $                   | (0.16     | ) |  | $ | (0.66      | ) |  | $                        | (1.39      | )
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  
|Weighted average shares used in computation
of basic and diluted net loss per common
share |  |               | 6,109,053 |                   |  |          | 5,622,237  |          |  |                     | 6,101,092 |   |  |   | 5,519,293  |   |  |                          | 4,865,717  |  
|                                                                                           |  |               |           |                   |  |          |            |          |  |                     |           |   |  |   |            |   |  |                          |            |  

See notes to condensed financial statements.

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OPTICNET, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |           |  
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | - | ------------- | ------- | ----------------- | - | ---------- | --------- | -------- | --------- | -------- | ------- | - | ----- | ---------- | --------- | - | --------- | ----------------- | --------- | -
|                                                |                                                                                                                 |                                                              |   | Quarter Ended |         | Nine Months Ended |   |            |           |         
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |         
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           | Period from      
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           | February 23, 2000
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           | (inception) to   
|                                                |                                                                                                                 |                                                              |   | June 28,      |         | June 29,          |   | June 28,   |           | June 29, |           | June 28,
|                                                |                                                                                                                 |                                                              |   | 2003          |         | 2002              |   | 2003       |           | 2002     |           | 2003    
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |         
|                                                | Cash flows from operating activities:                                                                           |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |          
|                                                | Deficit accumulated in the development stage                                                                    |                                                              | $ | (447,452      | )       |                   | $ | (1,149,501 | )         |          | $         | (949,726 | )       |   | $     | (3,635,212 | )         |   | $         | (6,761,656        | )        
|                                                | Adjustments to reconcile deficit accumulated in the
development stage to net cash used by operating activities: |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |          
|                                                |                                                                                                                 | Depreciation and amortization                                |   |               | 5,091   |                   |   |            | 3,775     |          |           |          | 15,273  |   |       |            | 18,044    |   |           |                   | 66,832    |  
|                                                |                                                                                                                 | Other                                                        |   |               | 178,692 |                   |   |            | (118,440  | )        |           |          | 179,365 |   |       |            | 142,233   |   |           |                   | 443,963   |  
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|                                                | Net cash used by operating activities                                                                           |                                                              |   | (263,669      | )       |                   |   | (1,264,166 | )         |          |           | (755,088 | )       |   |       | (3,474,935 | )         |   |           | (6,250,861        | )        
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |           |  
|                                                | Cash flows from investing activities:                                                                           |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |          
|                                                |                                                                                                                 | Purchase of property and equipment                           |   |               |        |                   |   |            |          |          |           |          |        |   |       |            | (1,158    | ) |           |                   | (24,492   | )
|                                                |                                                                                                                 | Other                                                        |   |               |        |                   |   |            | 21,297    |          |           |          |        |   |       |            | 21,297    |   |           |                   | (728      | )
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|                                                | Net cash provided (used) by investing activities                                                                |                                                              |   |              |         |                   |   | 21,297     |           |          |           |         |         |   |       | 20,139     |           |   |           | (25,220           | )        
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |           |  
|                                                | Cash flows from financing activities:                                                                           |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |          
|                                                |                                                                                                                 | Proceeds from borrowing on line of credit from
related party |   |               |        |                   |   |            |          |          |           |          |        |   |       |            | 1,489,730 |   |           |                   | 2,820,331 |  
|                                                |                                                                                                                 | Principal payments on line of credit from related party      |   |               |        |                   |   |            |          |          |           |          |        |   |       |            |          |   |           |                   | (163,993  | )
|                                                |                                                                                                                 | Proceeds from equity funding from a related party            |   |               | 274,175 |                   |   |            | 1,156,903 |          |           |          | 774,918 |   |       |            | 1,156,903 |   |           |                   | 2,589,560 |  
|                                                |                                                                                                                 | Proceeds from issuance of convertible preferred stock, net   |   |               |        |                   |   |            |          |          |           |          |        |   |       |            |          |   |           |                   | 1,000,000 |  
|                                                |                                                                                                                 | Proceeds from issuance of common stock                       |   |               |        |                   |   |            | 787       |          |           |          |        |   |       |            | 1,329     |   |           |                   | 54,894    |  
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|                                                | Net cash provided by financing activities                                                                       |                                                              |   | 274,175       |         |                   |   | 1,157,690  |           |          |           | 774,918  |         |   |       | 2,647,962  |           |   |           | 6,300,792         |          
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|                                                | Net increase (decrease) in cash and cash equivalents                                                            |                                                              |   | 10,506        |         |                   |   | (85,179    | )         |          |           | 19,830   |         |   |       | (806,834   | )         |   |           | 24,711            |          
|                                                | Cash and cash equivalents at beginning of period                                                                |                                                              |   | 14,205        |         |                   |   | 106,834    |           |          |           | 4,881    |         |   |       | 828,489    |           |   |           |                  |          
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|                                                | Cash and cash equivalents at end of period                                                                      |                                                              | $ | 24,711        |         |                   | $ | 21,655     |           |          | $         | 24,711   |         |   | $     | 21,655     |           |   | $         | 24,711            |          
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|Supplemental Disclosure of Non Cash Items:      |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                  
|                                                |                                                                                                                 |                                                              |   |               |         |                   |   |            |           |          |           |          |         |   |       |            |           |   |           |                   |           |  
|Grants of restricted stock                      |                                                                                                                 | $                                                            |  |               |         | $                 |  |            |           | $        |          |          |         | $ |      |            |           | $ | 95,040    |                  
|Contribution of treasury stock                  |                                                                                                                 |                                                              |  |               |         |                   |  |            |           |          |          |          |         |   |      |            |           |   | 14,720    |                  
|Reacquisition of restricted stock               |                                                                                                                 |                                                              |  |               |         |                   |  |            |           |          |          |          |         |   | 3,625 |            |           |   | 19,208    |                  
|Conversion of equity funding to preferred stock |                                                                                                                 |                                                              |  |               |         |                   |  |            |           |          | 1,814,642 |          |         |   |      |            |           |   | 1,814,642 |                  
|Reclassification of prior period funding        |                                                                                                                 | $                                                            |  |               |         | $                 |  |            |           | $        | 33,062    |          |         | $ |      |            |           | $ | 33,062    |                  

See notes to condensed financial statements.

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OPTICNET, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim periods presented are not necessarily indicative of the
results that may be expected for the fiscal year ending September 27, 2003.
For further information, refer to the financial statements and footnotes
thereto in the Companys annual report on Form 10-K, as amended January 24,
2003.

OpticNet, Inc. (OpticNet or the Company) was incorporated on February 23,
2000 in the State of Delaware. From its inception (February 23, 2000) through
December 31, 2000, OpticNet operated as a controlled subsidiary of BEI
Technologies, Inc. (BEI Technologies). BEI Technologies accumulated the
costs associated with OpticNets operations in the period from February 23,
2000 through December 31, 2000 including all expenses directly attributable to
OpticNet and an allocation of the costs of shared facilities, salaries and
employee benefits attributable to OpticNet based on relative headcount. These
allocations were based on assumptions that management believes are reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs that would have resulted if OpticNet had
been operated on a stand-alone basis during this period.

As of October 30, 2000, BEI Technologies distributed 3,578,387 shares of the
Companys common stock to BEI Technologies stockholders (the Distribution),
substantially all of the Companys voting common stock held by BEI
Technologies. In the Distribution, each holder of record of BEI Technologies
common stock as of October 30, 2000 received one share of OpticNet common stock
for every two shares of BEI Technologies common stock held, and cash in lieu of
any fractional share of OpticNet common stock. After the Distribution, BEI
Technologies continued to hold securities of the Company in the form of
convertible preferred and common stock, representing an aggregate ownership
interest of approximately 25% in the Company. During November 2002, the
Company issued 18,146,420 shares of Series B nonvoting and nonconvertible
preferred stock to BEI Technologies, increasing its total ownership interest.

The principal focus of the Companys business is to develop, manufacture and
market fiber optic components and subsystems for the telecommunications market.

OpticNets primary activities since inception have been devoted to developing
its product offerings and related technologies, recruiting key management and
technical personnel and attempting to raise capital to fund operations.
OpticNet has not recognized significant revenues since inception. All revenue
recognized to date consists of engineering work performed under engineering
agreements with unaffiliated customers and not from the sale of fiber optic
components and subsystems. As a result, the accompanying financial statements
are presented in accordance with Financial Accounting Standard (FAS) No. 7,
Accounting and Reporting by Development Stage Enterprises.

OpticNets operations are subject to significant risks and uncertainties,
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory and other risks associated with an
emerging business.

These financial statements have been prepared assuming that the Company will
continue as a going concern. Since its inception, the Company has had
recurring operating losses and negative cash flows from operations and has an
accumulated deficit of $6.8 million at June 28, 2003. These conditions raise
substantial doubt about the Companys ability to continue as a going concern.

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During fiscal 2002 and the first nine months of fiscal 2003, the Company
continued to be unsuccessful in attracting outside financing despite
managements efforts and continued operations on a reduced basis. Management
and the Companys board of directors decided in March 2002 to reduce the level
of incremental spending for research and development and to reduce operations
to a level that would solely support the current customer base. Managements
plan to enable the Company to continue as a going concern calls for the
Companys operations to be frozen at a minimal level, sufficient to support
current product delivery commitments. The Company reduced its fixed cost base
to an absolute minimum and no longer maintains any employees of its own other
than officers of the Company, each of whom provide services to the Company on a
part time basis. The majority of OpticNets operating costs are paid by BEI
Technologies, who shares the Hayward facility and from whom engineering and
other services are rented on an as required basis. The cash outlay for the
Companys portion of these costs is recorded as an additional investment in the
Company by BEI Technologies. The parties had contemplated that equity would be
issued, however BEI Technologies has recently made a proposal to acquire
OpticNet which transaction may ensue instead. New prototype or product
contracts will not be initiated by the Company if these contracts cannot
generate positive cash flows within 12 months. Management believes that funding
for fiscal 2003 of less than $1.0 million will enable the Company to continue
on a reduced basis as a going concern through September 30, 2003, and that such
funding will be available from BEI Technologies, if required. However,
management cannot be certain such additional funding will be on desirable or
acceptable terms to the Company. Management continues to seek additional
equity financing from existing sources on an opportunistic and as available
basis. Management plans to defer substantially all research and development
activity in the absence of additional equity financing.

During the fiscal quarter ended March 29, 2003, the Company received a letter
from BEI Technologies stating that BEI Technologies is interested in acquiring
those shares of the Companys common stock that are not currently owned by that
company. See Schedule 13D as filed by BEI Technologies on March 24, 2003. If
this transaction is approved, the Company expects that upon acquisition of a
sufficient number of OpticNets shares of common stock, BEI Technologies would
effect a merger of OpticNet with a wholly owned subsidiary of BEI Technologies.
OpticNet would accordingly become a subsidiary of BEI Technologies, and its
common stock would be deregistered with the Securities and Exchange Commission.
The Company expects the aggregate purchase price for all common stock not
already owned by BEI Technologies will not exceed $250,000 for the stock.

These financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

During the third and fourth quarters of fiscal 2002, BEI Technologies provided
the Company with approximately $1.8 million in financing, which was advanced
with the understanding that such amount would be converted into a form of
nonvoting equity in the Company. Effective September 28, 2002, the Company and
BEI Technologies determined the Company would authorize and issue to BEI
Technologies a series of nonvoting preferred stock. In November 2002, the
Company issued a total of 18,146,420 shares of the Companys newly authorized
nonvoting Series B Preferred Stock to BEI Technologies, in consideration of the
approximately $1.8 million advanced.

The Company received approximately $0.8 million in equity funding from BEI
Technologies during the first nine months of fiscal 2003, used for general
operating expenses.

Use of Estimates

The preparation of the Companys financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ materially from those estimates. The judgments and assumptions
used by management are based on historical experience and other factors, which
are believed to be reasonable under the circumstances.

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Long-Lived Assets

The Company recognizes impairment losses in accordance with FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Long-lived
assets, including property and equipment and other assets, are reviewed and
impairment recognized when indicators of impairment are present and
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of the assets. Indicators of impairment were present
during the periods presented. Total net realizable fair value of all
long-lived assets at June 28, 2003 was $728.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities. The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
(variable interest entities or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary).
This new model for consolidation applies to an entity in which either (1) the
equity investors (if any) do not have a controlling financial interest or (2)
the equity investment at risk is insufficient to finance that entitys
activities without receiving additional subordinated financial support from
other parties. In addition, FIN 46 requires that both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE make
additional disclosures. FIN 46 is effective for the Companys quarter ended
September 27, 2003 with transitional disclosure required with these financial
statements. The Company will adopt these provisions in its quarter ended
September 27, 2003, however the Company does not believe it is a primary
beneficiary of a VIE or holds any significant interests or involvement in a VIE
and does not expect there to be an impact on the Companys financial
statements.

In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation: Transition and Disclosure (FAS No. 148). FAS No.148 amends
FAS No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation (transition provisions). In
addition, FAS No. 148 amends the disclosure requirements of Accounting
Principals Board (APB) Opinion No. 28, Interim Financial Reporting, to
require pro forma disclosure in interim financial statements by companies that
elect to account for stock-based compensation using the intrinsic value method
prescribed in APB Opinion No. 25 (disclosure provisions). The transition
methods of FAS No. 148 are effective for the Companys September 27, 2003 Form
10-K. The Company continues to use the intrinsic value method of accounting for
stock-based compensation. As a result, the transition provisions will not have
an effect on the Companys financial statements. The Company has adopted the
interim disclosure requirements as presented below.

In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (FAS No.
150). FAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. FAS No. 150 applies specifically to a number of financial
instruments that companies have historically presented within their financial
statements as either equity or between the liabilities section and the equity
section, rather than as liabilities. FAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not believe that FAS No. 150 will have a material
impact on its financial statements.

Stock-Based Compensation

The Companys 2000 Equity Incentive Plan provides for the granting of stock
options to consultants, employees and directors. The Company accounts for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 whereby the options are granted at market price, and therefore
no compensation costs are recognized. The Company has elected to retain its
current method of accounting as described above and has adopted the disclosure
requirements FAS Nos. 123 and 148.

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If compensation expense for the Companys stock option plan had been determined
based upon fair values at the grant dates for awards under those plans in
accordance with FAS No. 123, the Companys pro-forma net earnings, basic and
diluted earnings per common share would have been as follows:

|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  |                   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- |  | ------------- | ---------- | ------------- |  | ------------- | -------- | - |  | - | ---------- | - |  | ----------------- | ---------- | -
|                                                                                                                                            |  | Three Months Ended |          | Nine Months Ended |  |               |            |              
|                                                                                                                                            |  |                    |          |                   |  |               |            |              
|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  | Period from      
|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  | February 23, 2000
|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  | (inception) to   
|                                                                                                                                            |  | June 28, 2003      |          | June 29, 2002     |  | June 28, 2003 |            | June 29, 2002 |  | June 28, 2003
|                                                                                                                                            |  |                    |          |                   |  |               |            |              
|Deficit accumulated during the
development stage, as reported                                                                               |  | $                  | (447,452 | )                 |  | $             | (1,149,501 | )             |  | $             | (949,726 | ) |  | $ | (3,635,212 | ) |  | $                 | (6,761,656 | )
|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  |                   |            |  
|Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |  |                    |         |                   |  |               |           |               |  |               |         |   |  |   | (652       | ) |  |                   | (4,445     | )
|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  |                   |            |  
|Pro forma deficit accumulated during
the development stage                                                                                  |  | $                  | (447,452 | )                 |  | $             | (1,149,501 | )             |  | $             | (949,726 | ) |  | $ | (3,635,864 | ) |  | $                 | (6,766,101 | )
|                                                                                                                                            |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  |                   |            |  
|Basic and Diluted Net Loss per Share:                                                                                                       |  |                    |          |                   |  |               |            |               |  |               |          |   |  |   |            |   |  |                   |            |  
|Basic-as reported                                                                                                                           |  | $                  | (0.07    | )                 |  | $             | (0.20      | )             |  | $             | (0.16    | ) |  | $ | (0.66      | ) |  | $                 | (1.39      | )
|Basic-pro forma                                                                                                                             |  | $                  | (0.07    | )                 |  | $             | (0.20      | )             |  | $             | (0.16    | ) |  | $ | (0.66      | ) |  | $                 | (1.39      | )
|Diluted-as reported                                                                                                                         |  | $                  | (0.07    | )                 |  | $             | (0.20      | )             |  | $             | (0.16    | ) |  | $ | (0.66      | ) |  | $                 | (1.39      | )
|Diluted-pro forma                                                                                                                           |  | $                  | (0.07    | )                 |  | $             | (0.20      | )             |  | $             | (0.16    | ) |  | $ | (0.66      | ) |  | $                 | (1.39      | )

NOTE 2. TRANSACTIONS WITH RELATED PARTIES

On October 6, 2000, the Company and BEI Technologies entered into a Technology
Transfer and Distribution Agreement (the Distribution Agreement) whereby BEI
Technologies contributed to the Company certain assets and intellectual
property related to the fiber optic components technology developed by BEI
Technologies and BEI Technologies majority owned subsidiary, SiTek, Inc.
(SiTek) in exchange for 3,616,000 shares of the Companys common stock. BEI
Technologies later distributed 3,578,387 of these shares to its stockholders on
November 21, 2000 in connection with the Companys separation from BEI
Technologies.

In connection with the Distribution Agreement, on October 6, 2000, the Company
and SiTek entered into a License and Technical Assistance Agreement whereby
SiTek agreed to license certain technology to the Company, assist the Company
in certain research and development efforts following the Distribution and also
fabricate and supply certain components utilized in the Companys products.
Further, SiTek granted to the Company a perpetual, royalty free, worldwide,
exclusive license to develop, make, use and sell products within the field of
telecommunications data transmission utilizing technology now possessed or
later developed by SiTek, and the Company has granted to SiTek a corresponding
perpetual, royalty free, worldwide, exclusive license to develop, make, use and
sell products

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outside of the Companys defined market utilizing technology now possessed or
later developed by the Company. This agreement shall continue in effect for
five years and automatically renew thereafter for consecutive one-year terms
unless either party gives written notice of termination.

On October 27, 2000, the Company and BEI Technologies entered into an
InterCompany Services Agreement (the Services Agreement) whereby BEI
Technologies agreed to make available to the Company certain office and
facility space, personnel support and supervision, financial and administrative
services, record-keeping functions and other assistance, with BEI Technologies
being reimbursed for the costs and expenses incurred in connection with the
provision of these services to OpticNet. Charges for these services were
allocated to the Company based upon usage, headcount and other methods that
management believes to be reasonable. In the fiscal quarter ended June 29,
2002, BEI Technologies agreed to suspend charges for the third and fourth
quarters of fiscal 2002 and future quarters service charges, due to the
Companys inability to obtain significant strategic partners or third party
financing and reduced services to a minimal level.

The Services Agreement further provided for a line of credit from BEI
Technologies to the Company for up to $2.0 million with interest at prime plus
1.5%, expiring on September 28, 2002, unless extended by mutual agreement of
the parties. During fiscal 2002, BEI Technologies increased this line of
credit by $1.0 million. As of September 28, 2002 and June 28, 2003, the
Company had outstanding borrowings totaling approximately $2.7 million on this
line of credit. During the fiscal quarter ended June 29, 2002, the Company was
informed by BEI Technologies that no further advances would be made to the
Company under this line of credit beyond the approximately $2.7 million funded
as of March 30, 2002. During October 2002, BEI Technologies extended the
maturity date of the line of credit to December 31, 2002. At June 28, 2003,
BEI Technologies has taken no action to seek repayment and, if discussions on
repayment were to ensue, the Company would seek a further extension from BEI
Technologies. To maintain sufficient liquidity in the future and to fund
operations absent the pursuit of alternative business strategies, the Company
would need to obtain additional financing, which may be on unfavorable terms in
light of the Companys credit position.

On September 28, 2001 the Company entered into a general equipment sublease
agreement with BEI Technologies as the lessor, which is subordinate to a master
lease agreement entered into by BEI Technologies as the lessee. On September
28, 2001, December 20, 2001 and March 28, 2002, the Company executed equipment
lease schedules under the general equipment sublease with BEI Technologies.
The total value of the scheduled equipment under the sublease agreement was
approximately $7.0 million, with an initial lease term of 36 months. Rental
payments are due on a quarterly basis and the amount determined by the
Companys level of usage of the equipment, the cost of the equipment and
applicable interest. Payment due from OpticNet for the nine months ended June
28, 2003 was approximately $115,000, however the Company has not made payment.

The Company originally entered into a sublease agreement in October 2001 with
BEI Technologies for a 15,571 square feet facility for administration, research
and development and manufacturing activities in Hayward, California, expiring
December 2005. As of March 30, 2002, the Company, in recognition of its
inability to obtain significant strategic partners or third party financing,
concluded it was necessary to reduce operating costs. The Company agreed with
BEI Technologies that this reduction in operations would lower usage of the
equipment and the subleased facilities described above. Accordingly, the
annual lease payments to BEI Technologies have been prorated since the quarter
ended June 29, 2002, based on the portion of the facilities the Company
requires to support its current customers.

In the six months ended September 28, 2002, BEI Technologies advanced an
additional $1.8 million to the Company. Effective September 28, 2002, the
Company and BEI Technologies had determined the Company would authorize and
issue to BEI Technologies a series of nonvoting preferred stock. In November
2002, the Company issued a total of 18,146,420 shares of the Companys newly
authorized nonvoting and nonconvertible Series B Preferred Stock to BEI
Technologies, in consideration of the $1.8 million advanced noted above.

The Company received approximately $0.8 million in equity funding from BEI
Technologies during the first nine months of fiscal 2003, used for general
operating expenses. These monies were advanced by BEI Technologies to the
Company on the basis that the Company would in the future issue additional
equity securities to BEI

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Technologies representing this sum, however BEI Technologies has recently
proposed to acquire those outstanding shares of the Companys common stock not
already owned by BEI Technologies, which may mean additional equity is not
issued to BEI Technologies by OpticNet.

All of the arrangements outlined above were negotiated by related parties and
may not represent transactions at arms length and the Company may not be able
to obtain terms as favorable with third parties if and when the arrangements
with BEI Technologies come to an end.

During the fiscal quarter ended March 29, 2003, the Company received a letter
from BEI Technologies stating that BEI Technologies is interested in acquiring
those shares of the Companys common stock that are not currently owned by that
company. See Schedule 13D as filed by BEI Technologies on March 24, 2003. If
this transaction is approved, the Company expects that upon acquisition of a
sufficient number of OpticNets shares of common stock, BEI Technologies would
effect a merger of OpticNet with a wholly owned subsidiary of BEI Technologies.
OpticNet would accordingly become a subsidiary of BEI Technologies, and its
common stock would be deregistered with the Securities and Exchange Commission.
The Company expects the aggregate purchase price for all common stock not
already owned by BEI Technologies will not exceed $250,000 for the stock.

NOTE 3. NOTE PAYABLE TO RELATED PARTY

During fiscal 2001, the Company entered into a line of credit agreement with
BEI Technologies, an investor. Under the terms of the agreement, BEI
Technologies has made available to the Company, from time to time, until
December 31, 2002, an amount not to exceed at any time the aggregate principle
amount of $3.0 million, as amended. The Companys obligation to repay the loans
outstanding was due in full on December 31, 2002, however payment has not been
made. As of June 28, 2003, BEI Technologies has not taken action to seek
repayment from the Company. If discussions regarding repayment of the loans
were to ensue, the Company would seek a further extension of the line of credit
from BEI Technologies. During the fiscal quarter ended June 29, 2002, the
Company was informed by BEI Technologies that no further advances would be made
to the Company under this line of credit beyond the approximately $2.7 million
funded as of March 30, 2002 in view of the Companys inability to obtain
outside financing to date and other general indications of investor
disaffection with businesses in the telecommunications market. Borrowings
outstanding on the line of credit were as follows:

|                                                                                                                                                                             |  |               |           |               |  |   |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ------------- |  | - | --------- | 
|                                                                                                                                                                             |  | June 28, 2003 |           | June 29, 2002
|                                                                                                                                                                             |  |               |           |              
|Unsecured revolving promissory note from
BEI                      Technologies, at a rate
of prime plus 1.5%; 5.5% and 6.3% at
June 28, 2003 and June 29, 2002,
respectively |  | $             | 2,656,338 |               |  | $ | 2,656,338 | 
|                                                                                                                                                                             |  |               |           |               |  |   |           | 
|                                                                                                                                                                             |  | $             | 2,656,338 |               |  | $ | 2,656,338 | 
|                                                                                                                                                                             |  |               |           |               |  |   |           | 

No interest was paid during the nine months ended June 28, 2003 or in the nine
months ended June 29, 2002. Accrued interest expense was approximately
$265,000 and $111,000 at June 28, 2003 and June 29, 2002, respectively. The
interest payable of approximately $265,000 at June 28, 2003 was recorded as an
other related party liability.

NOTE 4. REDUCTION IN FORCE

In April 2002, the Company underwent a reduction in force resulting in eight
individuals departing employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 was recorded in the fiscal quarter
ending June 28, 2002 within research and development expense.

To further reduce costs for the Company in the near term, during July 2002, all
of the Companys remaining 15 employees were released from their employment
with the Company and accepted employment with a subsidiary of BEI Technologies,
as agreed to by both companies. The Companys President and Chief Technical
Officer have

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also become employees of this same subsidiary of BEI Technologies, but continue
to serve as executive officers of the Company. The Company also has executive
officers that are consultants to the Company, or consultants to BEI
Technologies who provide services to OpticNet. The services of certain key
individuals are expected to continue to be available to the Company on an as
needed basis, with reimbursement by the Company to their present employer for
the time value of their services. No material severance costs were incurred by
the Company as a result of the release of these employees.

NOTE 5. CONTINGENCIES AND LITIGATION

Legal actions may arise in the normal course of business. Management believes
that pending legal actions, individually or in the aggregate, will not have a
material impact on the Companys business, financial condition or operating
results. In fiscal 2002, the Company was named a codefendant in a dispute with
a former employee. Effective July 2003, the parties finalized litigation and
the Company recorded its portion of the settlement in accrued expenses and
other liabilities at the quarter ended June 28, 2003.




Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Companys actual results could differ materially from those
expressed in, or implied by, such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this section, and those discussed in the Companys Form
10-K, as amended January 24, 2003, in particular, within the Risk Factors
section thereof.

See Critical accounting policies and the use of estimates for a description
of the Companys critical accounting policies.

Quarters ended June 28, 2003 and June 29, 2002

There were no revenues during the third quarter of fiscal 2003. Revenue during
the third quarter of fiscal 2002 was $25,000, reflecting work performed under
engineering agreements with unaffiliated customers. The lack of revenue during
the current quarter is due to the slow down of demand for new
telecommunications equipment components compared to prior periods and the
Companys intentional reduction of operations.

Payments and receivables recorded from customers for the delivery under
contracts of prototype units of approximately $22,000 were offset against
research and development expense in the statements of operations for the
quarter ended June 28, 2003. During the third quarter of fiscal 2003, the
Company made prototype deliveries to one customer. There were no prototype
deliveries during the third quarter of fiscal 2002.

Selling, general and administrative expenses in the third quarter of fiscal
2003 decreased approximately $166,000 from $432,000 in the same quarter of the
prior fiscal year to $266,000. During fiscal 2002, the Company, in recognition
of its inability to obtain significant strategic partners or third party
financing, concluded it was necessary to reduce operating costs. The Company
agreed with BEI Technologies that this reduction in operations would lower
usage of the Companys subleased facilities. Accordingly, the annual lease
payments to BEI Technologies are now prorated based on the portion of the
facilities the Company requires to support work under agreements with its
current customers. Prior to the second quarter of fiscal 2002, selling,
general and administrative expenses included a quarterly payment of $25,000
made to BEI Technologies for accounting, human resources and other
administrative services provided by BEI Technologies pursuant to the Services
Agreement between the two companies. Commencing with the second quarter of
fiscal 2002, these charges have been waived in light of the Companys financial
position.

Research and development expenses in the third quarter of fiscal 2003 decreased
approximately $546,000 from $689,000 in the same quarter of the prior fiscal
year to $143,000 for employee compensation and subleased facilities rent. The
decrease was primarily due to the Companys decision to significantly reduce
operations to conserve cash.

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Interest expense in the third quarter of fiscal 2003 decreased approximately
$4,000 from $42,000 in the same quarter of the prior fiscal year to $38,000 due
to lower rates on the outstanding balance on the Companys line of credit
agreement with BEI Technologies during the quarter.

Nine Months ended June 28, 2003 and June 29, 2002

There were no revenues during the first nine months of fiscal 2003. Revenues
during the first nine months of fiscal 2002 of approximately $113,000 reflected
work performed under engineering agreements with two unaffiliated customers.
The decrease is due to the Companys reduced operations in light of the slow
down of demand for new telecommunications equipment components and the
Companys intentional reduction of operations. In addition, during the first
nine months of fiscal 2003, the Company recorded payments or receivables for
deliveries of prototype products to one unaffiliated customer, accounted for as
an offset against research and development expense.

Cost of revenues as a percentage of revenues was 50% in the first nine months
of fiscal 2002.

Selling, general and administrative expenses during the first nine months of
fiscal 2003 decreased approximately $741,000 from $1,200,000 in the comparable
period of the prior fiscal year to $459,000. During fiscal 2002, the Company,
in recognition of its inability to obtain significant strategic partners or
third party financing, concluded it was necessary to reduce operating costs.
The Company agreed with BEI Technologies that this reduction in operations
would lower usage of the Companys subleased facilities. Accordingly, the
annual lease payments to BEI Technologies are now prorated based on the portion
of the facilities the Company requires to support work under agreements with
its current customers. Prior to the second quarter of fiscal 2002, selling,
general and administrative expenses included a quarterly payment of $25,000
made to BEI Technologies for accounting, human resources and other
administrative services provided by BEI Technologies pursuant to the Services
Agreement between the two companies. Commencing with the second quarter of
fiscal 2002, these charges have been waived in light of the Companys financial
position.

Research and development expenses during the first nine months of fiscal 2003
decreased approximately $2,034,000 from $2,409,000 in the comparable period of
the prior fiscal year to $375,000. The decrease was primarily due to the
Companys decision to significantly reduce operations to support work under
agreements with its current customers.

Interest expense in the first nine months of fiscal 2003 increased
approximately $29,000 from $87,000 in the same quarter of the prior fiscal year
to $116,000 due primarily to the increased outstanding balance during the
period on the Companys line of credit agreement with BEI Technologies.

Financing from Related Party

Since inception, all operating capital of the Company has been provided by BEI
Technologies as debt or equity financing. The Company has been unable to gain
outside financing from independent parties to date, in light of the severe
downturn in the optical networking industry.

In October 2000, BEI Technologies agreed to provide OpticNet with a line of
credit originally established for up to $2.0 million. During fiscal 2002, the
line of credit was amended to allow for borrowings up to $3.0 million. During
the fiscal quarter ended June 29, 2002, BEI Technologies suspended the
availability of advances to the Company under the line of credit, under which
amounts outstanding at such time totaled approximately $2.7 million in
principal amount, in view of the Companys inability to obtain outside
financing to date and other general indications of investor dissatisfaction
with businesses in the telecommunications market. During October 2002, BEI
Technologies extended the maturity date of the line of credit to December 31,
2002. BEI Technologies has taken no action to date to seek repayment. If
discussions on repayment were to ensue, the Company would seek a further
extension from BEI Technologies. In the six months ending September 28, 2002,
BEI Technologies provided an additional $1.8 million of financing to the
Company, which was advanced with the intent to convert such cash

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advances into
additional equity. Effective September 28, 2002, the Company and BEI
Technologies had determined
the Company would authorize and issue to BEI Technologies a series of nonvoting
and nonconvertible preferred stock. In November 2002, the Company issued a
total of 18,146,420 shares of nonvoting and nonconvertible Series B Preferred
Stock to BEI Technologies, in consideration of the $1.8 million advanced during
the third and fourth quarters of fiscal 2002.

The Company received approximately $0.8 million in equity funding from BEI
Technologies during the first nine months of fiscal 2003, used for general
operating expenses. These monies were advanced by BEI Technologies to the
Company on the basis that the Company would in the future issue additional
equity securities to BEI Technologies representing this sum, however BEI
Technologies has recently proposed to acquire those outstanding shares of the
Companys common stock not already owned by BEI Technologies, which may mean
additional equity is not issued to BEI Technologies by OpticNet.

During the fiscal quarter ended March 29, 2003, the Company received a letter
from BEI Technologies stating that BEI Technologies is interested in acquiring
those shares of the Companys common stock that are not currently owned by that
company. See Schedule 13D as filed by BEI Technologies on March 24, 2003. If
this transaction is approved, the Company expects that upon acquisition of a
sufficient number of OpticNets shares of common stock, BEI Technologies would
effect a merger of OpticNet with a wholly owned subsidiary of BEI Technologies.
OpticNet would accordingly become a subsidiary of BEI Technologies, and its
common stock would be deregistered with the Securities and Exchange Commission.
The Company expects the aggregate purchase price for all common stock not
already owned by BEI Technologies will not exceed $250,000 for the stock.

Pursuant to the facilities sublease agreement, equipment sublease agreement and
the Services Agreement described above, payments due to BEI Technologies were
as follows:

|                                       |           |                               |                     |   |                   |         |               |   |                   |        |                   |   |         |         |           |   |             |         | 
|-------------------------------------- | --------- | ----------------------------- | ------------------- | - | ----------------- | ------- | ------------- | - | ----------------- | ------ | ----------------- | - | ------- | ------- | --------- | - | ----------- | ------- | 
|                                       |           |                               |                     |   |                   |         |               |   |                   |        |                   |   |         |         |           |   | Period from
|                                       |           |                               |                     |   | Fiscal Year Ended |         | Quarter Ended |   | Nine Months Ended |        | February 23, 2000
|                                       |           |                               |                     |   | September 28,     |         | June 28,      |   | June 28,          |        | (inception) to   
|                                       |           |                               |                     |   | 2002              |         | 2003          |   | 2003              |        | June 28, 2003    
|                                       |           |                               |                     |   |                   |         |               |   |                   |        |                  
|                                       | Subleases |                               |                     |   |                   |         |               |   |                   |        |                   |   |         |         |           |   |            
|                                       |           |                               | Facilities sublease |   | $                 | 134,585 |               |   | $                 | 4,489  |                   |   | $       | 14,361  |           |   | $           | 371,001 | 
|                                       |           |                               | Equipment sublease  |   |                   | 660,449 |               |   |                   | 29,668 |                   |   |         | 115,124 |           |   |             | 775,573 | 
|                                       |           |                               |                     |   |                   |         |               |   |                   |        |                   |   |         |         |           |  
|Total amounts financed
under subleases |           |                               | 795,034             |   |                   |         | 34,157        |   |                   |        | 129,485           |   |         |         | 1,146,574 |  
|                                       |           | Intercompany services
charges |                     |   | 50,000            |         |               |   |                  |        |                   |   |        |         |           |   | 125,000     |        
|                                       |           |                               |                     |   |                   |         |               |   |                   |        |                   |   |         |         |           |  
|                                       |           | Total payments due            |                     | $ | 845,034           |         |               | $ | 34,157            |        |                   | $ | 129,485 |         |           | $ | 1,271,574   |        
|                                       |           |                               |                     |   |                   |         |               |   |                   |        |                   |   |         |         |           |  

Recent Developments

On July 1, 2003, OpticNet entered into an Agreement and Plan of Merger with BEI
Technologies pursuant to which a wholly owned subsidiary of BEI Technologies
will commence a tender offer to purchase all of the outstanding shares of
OpticNet common stock not currently owned by BEI Technologies for $0.04 per
share in cash. The tender offer is conditioned upon, among other things, at
least a specified minimum number of shares outstanding being tendered and not
withdrawn. If completed, the tender offer will be followed by a merger in
which each share of OpticNet common stock not purchased in the tender offer
will be converted into the right to receive $0.04 per share in cash. The
Company expects the aggregate purchase price for all common stock not already
owned by BEI Technologies will not exceed $250,000 for the stock. See Note 2
for a further description of the tender offer.

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##### Table of Contents



Liquidity and Capital Resources

During the first nine months of fiscal 2003, total cash used by operations was
approximately $755,000. Cash provided by operations included the positive
impact of non-cash charges from depreciation and amortization of $15,000. In
addition, positive impacts to cash resources resulted primarily from an
increase in customer funded research and development liability of approximately
$73,000, as well as increases in accounts payable and accrued expenses and
other liabilities of $32,000 and $136,000, respectively. These cash inflows
were offset primarily by an increase in receivables from prototype deliveries
of approximately $59,000 and a net loss of $950,000. Cash provided by
financing activities consisted of net proceeds from equity funding from a
related party of approximately $775,000. The funding was used to support daily
operations and product development.

If the Company continues as a going concern, the Company anticipates incurring
substantial additional losses over at least the next several years. Since
inception, the Company has incurred recurring operating losses and negative
cash flows from operations. As of June 28, 2003, the Company had an
accumulated deficit of $6.8 million. After extensive discussions with
prospective outside investors throughout fiscal 2002, during March 2002 the
Company became aware that none of these discussions would result in near term
equity financing for the Company. As of March 30, 2002, the Company was
advised by BEI Technologies that, in view of the Companys inability to obtain
outside financing to date and other general indications of investor
disaffection with businesses in the telecommunications market, further debt
financing would not be provided by BEI Technologies. These conditions raise
substantial doubt about the Companys ability to continue as a going concern.
In the first quarter of fiscal 2003, the Company issued nonvoting preferred
stock to BEI Technologies in consideration of cash amounts advanced in the
third and fourth quarters of fiscal 2002. As of the end of the Companys March
30, 2002 fiscal quarter, management determined that the Company would not have
sufficient financing for the remainder of its 2002 fiscal year without
modifying the Companys business plan, implementing strict cost-cutting
measures and additional financing was obtained. Therefore, management and the
Companys board of directors reduced the level of spending by the Company for
research and development and facility and equipment expenditures and to reduce
operations to a level that will solely support the current customer base. The
Company intends to continue to operate in such a scaled back manner until
additional outside financing is available or other prospects are realized by
the Company. On July 1, 2003, OpticNet entered into an Agreement and Plan of
Merger with BEI Technologies, pursuant to which BEI Technologies intends to
make a cash offer to OpticNets common stock holders to purchase their shares
for $0.04 per share, followed by a merger of OpticNet with a subsidiary of BEI
Technologies.

In April 2002, the Company underwent a reduction in force resulting in eight
individuals terminating employment with the Company, including engineering,
manufacturing and marketing personnel. Severance pay for affected persons was
per Company policy, including cash payment and the acceleration of the vesting
of options for certain affected individuals. Total cash costs related to the
reduction in force of approximately $86,000 was recorded in the fiscal quarter
ending June 29, 2002. No costs related to the reduction in force were recorded
in the first nine months of fiscal 2003.

To further reduce costs for the Company in the near term, during July 2002, all
of the Companys remaining 15 employees were released from their employment
with the Company and accepted employment with a subsidiary of BEI Technologies,
as agreed to by both companies. The Companys President and Chief Technical
Officer have also become employees of this same subsidiary of BEI Technologies,
but continue to serve as executive officers of the Company. The Company also
has executive officers that are consultants to the Company, or consultants to
BEI Technologies who provide services to OpticNet. The services of certain key
individuals are expected to continue to be available to the Company on an as
needed basis, with reimbursement by the Company to their present employer for
the time value of their services. No material severance costs were incurred by
the Company as a result of the release of these employees.

Effects of Inflation

Management believes that, for the periods presented, inflation has not had a
material effect on the Companys operations.

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##### Table of Contents



Critical Accounting Policies and the Use of Estimates

Managements discussion and analysis of financial condition and results of
operations is based upon the Companys financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company reviews the accounting policies used in
reporting its financial results on a regular basis. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. The estimates are
based on historical experience and on various other assumptions that management
believes to be reasonable under the circumstances. On an ongoing basis, the
Company evaluates its estimates. Results may differ from these estimates due
to actual outcomes being different from those on which the Company based its
assumptions. The Company believes the following critical accounting policies
affect significant judgments and estimates used in the preparation of its
financial statements.

Allowance for Doubtful Accounts

The Company continuously monitors collections and payments from its customers
and from time to time maintains allowances for doubtful accounts based upon
historical experience and any specific customer collection issues that the
Company has identified. While such credit losses have historically been within
managements expectations, there can be no assurance that the Company will
continue to experience the same relative level of credit losses that it has in
the past. In addition, the Companys revenues and accounts receivable are
concentrated in a relatively few number of customers. A significant change in
the liquidity or financial position of any one of these customers or a further
deterioration in the economic environment or telecommunications industry, in
general, could have a material adverse impact on the collectability of the
Companys accounts receivable and future operating results, including a
reduction in future revenues and additional allowances for doubtful accounts.
If, at the time revenue is recognized, the Company determines that collection
of a receivable is not reasonably assured, the revenue is deferred and
recognized at the time collection becomes reasonably assured, which is
generally upon receipt of payment.

Litigation

The Company reserves for legal claims when payments associated with the claims
become probable and can be reasonably estimated. Due to the difficulty in
estimating costs of resolving legal claims, actual costs may be substantially
different than the amounts reserved. See Note 5 for a further description of
litigation.

Environmental Matters

The Company reserves for known environmental claims, of which there are none to
date, when payments associated with the claims become probable and the costs
can be reasonably estimated. The Companys environmental reserves, for all
periods presented, are recorded at the expected payment amount. The actual cost
of resolving environmental issues may be higher than that reserved primarily
due to difficulty in estimating such costs and potential changes in the status
of government regulations.

Significant Accounting Policies

Revenue Recognition

The Company recognizes revenue using the guidance from SEC Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements. Under these
guidelines, revenue recognition is deferred on transactions where (i)
persuasive evidence of an arrangement does not exist, (ii) revenue recognition
is contingent upon performance of one or more obligations of the Company, (iii)
the price is not fixed or determinable or (iv) payment is not reasonably
assured.

To date, the Company has not recognized revenue related to non-prototype
product offerings. All revenue

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##### Table of Contents



recognized to date consists of engineering work
performed under engineering agreements with unaffiliated customers. Revenue for
this engineering work is recognized based on customer acknowledgement of the
achievement of milestones in the engineering agreement.

Research and Development Expense

The Companys products are highly technical in nature and require a significant
level of research and development effort. Research and development costs are
charged to expense as incurred in accordance with FAS No. 2, Accounting for
Research and Development Costs. Payments and receivables recorded from
customers for the delivery under contracts of prototype units are offset
against research and development expense in the statements of operations in the
respective period.

Property, Plant and Equipment and Related Depreciation

The Company records property, plant and equipment at cost, which is depreciated
using the straight line method for structures and accelerated or straight line
methods for equipment over their estimated useful lives. Leasehold
improvements and assets acquired under capital leases are amortized over the
shorter of the lease term or their estimated useful lives. Management reviews
the estimated useful lives of property, plant and equipment to verify that the
assets are being depreciated in accordance with their usage and all assets no
longer in service are fully depreciated.

Accrued Expenses and Other Liabilities

The Company records liabilities for services or products received in the period
in which the benefit was recognized. Due to the difficulty in estimating costs
of these services or products received, actual costs may be substantially
different than the amounts recorded.




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company was incorporated in February 2000 and commenced independent
operations in November 2000. The Company has not yet generated revenues from
sales of its products but only from engineering work performed for three
customers to date. The Company expects to incur net losses for the foreseeable
future. The Company may never achieve profitability and may not succeed as a
going concern and its independent auditor has included a statement to this
effect in their most recently issued audit report.

The Company believes that there have been no material changes in the reported
market risks faced by the Company since those discussed in the Companys Form
10-K, as amended January 24, 2003, under the heading corresponding to that set
forth above. The Companys exposure to market risk is limited to interest
income sensitivity, which is affected by changes in the general level of U.S.
interest rates, as a portion of the Companys cash equivalents are in short
term debt securities issued by corporations. The Companys cash equivalents
are placed with high-quality issuers and the Company attempts to limit the
amount of credit exposure to any one issuer. Due to the nature of the
Companys short term investments, the Company believes that it is not subject
to any material market risk exposure. The Company does not have any foreign
currency or other derivative financial instruments.




Item 4. CONTROLS AND PROCEDURES

The Companys President and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that the
Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) are effective for
gathering, analyzing and disclosing the information the Company is required to
disclose in its reports filed under the Securities Exchange Act. There have
been no significant changes in the Companys internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the previously mentioned evaluation.

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##### Table of Contents



OPTICNET, INC.
(a development stage company)




PART II. OTHER INFORMATION




Item 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|                |  |                                                                                                                           |  |          |  | 
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | 
|Exhibit Numbers |  | Description                                                                                                               |  | Footnote
|                |  |                                                                                                                           |  |         
|99.1            |  | President Certification
Pursuant to 18 U.S.C. 1350
as adopted Pursuant to
Section 906 of the Sarbanes
- Oxley Act of 2002
|99.2            |  | CFO Certification Pursuant
to 18 U.S.C. 1350 as
adopted Pursuant to Section
906 of the Sarbanes - Oxley
Act of 2002      
|(b)             |  | Reports on Form 8-K                                                                                                      
|                |  | No reports on Form 8-K were filed by the Company during
the fiscal quarter ended June 28, 2003                           

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on August 8, 2003.

| |  |                                       
| |  | --------------------------------------
| |  | OpticNet, Inc.                        
| |  |                                       
| |  | By: /s/ Gary D. Wrench                
| |  |                                       
| |  |                                       
| |  | Gary D. Wrench
Chief Financial Officer

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##### Table of Contents



CERTIFICATION OF
PRESIDENT

I, Gerald D. Brasuell, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of OpticNet, Inc.;                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                        



| | a) |  | designed such disclosure controls
and procedures to ensure that
material information relating to
the registrant, including its
consolidated subsidiaries, is made
known to us by others within those
entities, particularly during the
period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls
and procedures as of a date within
90 days prior to the filing date
of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report
our conclusions about
effectiveness of the disclosure
controls and procedures based on
our evaluation as of the
Evaluation Date;                                                                                                                            



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in
the design or operation of
internal controls which could
adversely affect the registrants
ability to record, process,
summarize and report financial
data and have identified for the
registrants auditors any material
weakness in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not
material, that involves management
or other employees who have a
significant role in the
registrants internal controls;
and                                                                                                                                      



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     |  | 
|---------------------------------------------------- |  | 
|Dated August 8, 2003                                 |  | 
|                                                     |  | 
|/s/ Gerald D. Brasuell

Gerald D. Brasuell
President |  | 

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##### Table of Contents



CERTIFICATION OF
CHIEF FINANCIAL OFFICER

I, Gary D. Wrench, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of OpticNet, Inc.;                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                        



| | a) |  | designed such disclosure controls
and procedures to ensure that
material information relating to
the registrant, including its
consolidated subsidiaries, is made
known to us by others within those
entities, particularly during the
period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls
and procedures as of a date within
90 days prior to the filing date
of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report
our conclusions about
effectiveness of the disclosure
controls and procedures based on
our evaluation as of the
Evaluation Date;                                                                                                                            



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in
the design or operation of
internal controls which could
adversely affect the registrants
ability to record, process,
summarize and report financial
data and have identified for the
registrants auditors any material
weakness in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not
material, that involves management
or other employees who have a
significant role in the
registrants internal controls;
and                                                                                                                                      



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           |  | 
|---------------------------------------------------------- |  | 
|Dated August 8, 2003                                       |  | 
|                                                           |  | 
|/s/ Gary D. Wrench

Gary D. Wrench
Chief Financial Officer |  | 

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##### Table of Contents



INDEX TO EXHIBITS

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  | Description                                                                                                           
|        |  |                                                                                                                       
|32.1    |  | President Certification Pursuant to 18 U.S.C 1350 as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|32.2    |  | CFO Certification Pursuant to 18 U.S.C 1350 as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002      

-22-