**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




(Mark
      One)


**[X]**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the quarterly period endedJune
      30, 2007**




**or**


**|_|**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the transition period from ___________________ to
      ___________________**




**Commission
      file number 000-31861**




**OPTICAL
      COMMUNICATION PRODUCTS, INC.**


**(Exact
      name of registrant as specified in its charter)**


**Delaware**
            
            **95-4344224****(State
                or other jurisdiction of incorporation or
                organization)**
            
            **(IRS
                Employer Identification
                No.)**





**6101
                Variel Avenue, Woodland Hills, California**
            
            **91367****(Address
                of principal executive offices)**
            
            **(Zip
                Code)**




**Registrant’s
      telephone number, including area code: (818) 251-7100**




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
þ    No
      o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer  o
            Accelerated
                filer  o
            Non-accelerated
                filer  þ




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes
o    No
      þ




The
      registrant has one class of common stock authorized, Class A common stock.
      The
      holders of Class A common stock are entitled to one vote per share on matters
      to
      be voted on by stockholders.  As of August 6, 2007, there were
      113,979,795 shares of Class A common stock outstanding.







**OPTICAL
      COMMUNICATION PRODUCTS, INC.**




**INDEX
      TO FORM 10-Q FOR THE**


**QUARTERLY
      PERIOD ENDED JUNE 30, 2007**





**TABLE
      OF CONTENTS**





**PAGE****PART
                I.  FINANCIAL INFORMATION**Item
                1.
            Condensed
                Consolidated Financial Statements (Unaudited)Condensed
                Consolidated Balance Sheets at June 30, 2007 and September 30,
                2006
            1Condensed
                Consolidated Statements of Operations for the Three and Nine months
                Ended
                June 30, 2007 and 2006 and Condensed Consolidated Statements of
                Comprehensive (Loss) Income for the Three and Nine months Ended June
                30,
                2007 and 2006
            2Condensed
                Consolidated Statements of Cash Flows for the Nine months Ended June
                30,
                2007 and 2006
            3Notes
                to Condensed Consolidated Financial Statements
            4Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            24Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            42Item
                4T.
            Controls
                and Procedures
            42**PART
                II.  OTHER INFORMATION AND SIGNATURES**Item
                1.
            Legal
                Proceedings
            44Item
                1A.
            Risk
                Factors
            45Item
                6.
            Exhibits
            60Signatures
            61





1


**PART
      I.**


**FINANCIAL
      INFORMATION**





**ITEM
                1.**
            **CONDENSED
                CONSOLIDATED FINANCIAL
                STATEMENTS**




**OPTICAL
      COMMUNICATION PRODUCTS, INC.**




**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Dollars
      in thousands)**


**(Unaudited)**


**June
                30,**
              **2007**
            
            
            **September
                30, 2006****ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            88,017
            
            
            $
            57,413Marketable
                securities
            
            
            4,996
            
            
            
            69,523Accounts
                receivable, less allowance for doubtful accounts and sales returns
                of $472
                at
              June
                30, 2007 and $550 at September 30, 2006
            
            
            10,646
            
            
            
            11,185Accounts
                receivable from related party
            
            
            48
            
            
            
            -Inventories
            
            
            22,295
            
            
            
            25,715Income
                taxes receivable
            
            
            726
            
            
            
            1,284Deferred
                income taxes
            
            
            330
            
            
            
            330Prepaid
                expenses and other current assets
            
            
            1,900
            
            
            
            1,333Assets
                held for sale
            
            
            19,724
            
            
            
            -Total
                current assets
            
            
            148,682
            
            
            
            166,783Property,
                plant and equipment, net
            
            
            10,659
            
            
            
            29,313Marketable
                securities, long-term
            
            
            10,540
            
            
            
            -Goodwill
            
            
            -
            
            
            
            8,330Intangible
                assets, net
            
            
            3,152
            
            
            
            2,656Deferred
                income taxes
            
            
            102
            
            
            
            207Other
                assets
            
            
            5,154
            
            
            
            29TOTAL
                ASSETS
            
            $
            178,289
            
            
            $
            207,318**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            6,793
            
            
            $
            7,239Accounts
                payable to related party
            
            
            -
            
            
            
            2,142Accrued
                payroll related expenses
            
            
            2,317
            
            
            
            1,599Accrued
                bonus
            
            
            2,320
            
            
            
            1,688Accrued
                transitional costs for contract manufacturing
            
            
            1,234
            
            
            
            -Other
                accrued expenses
            
            
            1,625
            
            
            
            2,595Income
                taxes payable
            
            
            311
            
            
            
            180Total
                current liabilities
            
            
            14,600
            
            
            
            15,443OTHER
                LONG-TERM LIABILITIES
            
            
            160
            
            
            
            159COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITY:Class A
                common stock, $0.001 par value; 266,000,000 shares authorized,
                113,979,795
              and
                47,424,178 shares outstanding at June 30, 2007 and September 30,
                2006,
              respectively.
            
            
            114
            
            
            
            47Class B
                common stock $0.001 par value; 66,000,000 shares authorized
                (prior to June 5,
              2007),
                66,000,000 shares issued and outstanding at September 30,
                2006.
            
            
            -
            
            
            
            66Additional
                paid-in capital
            
            
            136,793
            
            
            
            135,123Accumulated
                other comprehensive loss
            
            
            (83
            )
            
            
            (86
            )Retained
                earnings
            
            
            26,705
            
            
            
            56,566Total
                stockholders’ equity
            
            
            163,529
            
            
            
            191,716TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            178,289
            
            
            $
            207,318


SEE
      NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


2


**OPTICAL
      COMMUNICATION PRODUCTS, INC.**




**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(In
      thousands, except per share data)**


**(Unaudited)**




**Three
                  Months Ended June 30,**
              
              
              
              **Nine
                  monthsEndedJune
                  30,****2007**
              
              
              
              **2006**
              
              
              
              **2007**
              
              
              
              **2006**REVENUE
              
              $
              17,151
              
              
              $
              14,913
              
              
              $
              50,566
              
              
              $
              51,003COST
                  OF REVENUE
              
              
              16,019
              
              
              
              11,557
              
              
              
              46,809
              
              
              
              34,965GROSS
                  PROFIT
              
              
              1,132
              
              
              
              3,356
              
              
              
              3,757
              
              
              
              16,038OPERATING
                  EXPENSES:Research
                  and development
              
              
              3,155
              
              
              
              2,521
              
              
              
              9,044
              
              
              
              8,280Selling
                  and marketing
              
              
              1,506
              
              
              
              1,203
              
              
              
              4,262
              
              
              
              3,705General
                  and administrative
              
              
              5,121
              
              
              
              1,612
              
              
              
              13,632
              
              
              
              5,551Transitional
                  costs for contract manufacturing
              
              
              1,097
              
              
              
              -
              
              
              
              2,408
              
              
              
              -Impairment
                  of goodwill
              
              
              -
              
              
              
              -
              
              
              
              8,486
              
              
              
              -Total
                  operating expenses
              
              
              10,879
              
              
              
              5,336
              
              
              
              37,832
              
              
              
              17,536LOSS
                  FROM OPERATIONS
              
              
              (9,747
              )
              
              
              (1,980
              )
              
              
              (34,075
              )
              
              
              (1,498
              )INVESTMENT
                  INCOME
              
              
              1,312
              
              
              
              1,601
              
              
              
              4,296
              
              
              
              4,349OTHER
                  INCOME, NET
              
              
              5
              
              
              
              101
              
              
              
              101
              
              
              
              239(LOSS)
                  INCOME BEFORE INCOME TAXES
              
              
              (8,430
              )
              
              
              (278
              )
              
              
              (29,678
              )
              
              
              3,090PROVISION
                  FOR INCOME TAXES
              
              
              140
              
              
              
              159
              
              
              
              183
              
              
              
              298NET (LOSS) INCOME
              
              $
              (8,570
              )
              
              $
              (437
              )
              
              $
              (29,861
              )
              
              $
              2,792BASIC
                  (LOSS) EARNINGS PER SHARE
              
              $
              (0.08
              )
              
              $
              (0.00
              )
              
              $
              (0.26
              )
              
              $
              0.02DILUTED
                  (LOSS) EARNINGS PER SHARE
              
              $
              (0.08
              )
              
              $
              (0.00
              )
              
              $
              (0.26
              )
              
              $
              0.02BASIC
                  SHARES OUTSTANDING
              
              
              113,846
              
              
              
              113,347
              
              
              
              113,608
              
              
              
              113,187DILUTED
                  SHARES OUTSTANDING
              
              
              113,846
              
              
              
              113,347
              
              
              
              113,608
              
              
              
              114,040








**CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE
      (LOSS) INCOME**


**(In
      thousands)**


**(Unaudited)**





**Three
                  Months Ended June 30,**
              
              
              **Nine
                  monthsEndedJune
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**NET
                  (LOSS) INCOME
              
              $
              (8,570
              )
              
              $
              (437
              )
              
              $
              (29,861
              )
              
              $
              2,792OTHER
                  COMPREHENSIVE (LOSS) INCOME:Change
                  in unrealized gains in marketable securities
              
              
              4
              
              
              
              -
              
              
              
              4
              
              
              
              -Foreign
                  currency translation adjustment
              
              
              62
              
              
              
              -
              
              
              
              (1
              )
              
              
              -COMPREHENSIVE
                  (LOSS) INCOME
              
              $
              (8,504
              )
              
              $
              (437
              )
              
              $
              (29,858
              )
              
              $
              2,792

















SEE
      NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3


**OPTICAL
      COMMUNICATION PRODUCTS, INC.**




**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**


**Nine
                monthsEndedJune
                30,****2007**
            
            
            **2006**OPERATING
                ACTIVITIES:Net
                (loss) income
            
            $
            (29,861
            )
            
            $
            2,792Adjustments
                to reconcile net (loss) income to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            3,789
            
            
            
            2,567Impairment
                of goodwill
            
            
            8,486
            
            
            
            —Inventory
                write-down
            
            
            5,108
            
            
            
            969Amortization
                of discount on marketable securities
            
            
            (560
            )
            
            
            (636
            )Deferred
                income taxes
            
            
            —
            
            
            
            (651
            )Stock-based
                compensation expense
            
            
            1,311
            
            
            
            650Deferred
                income taxes
            
            
            105
            
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            486
            
            
            
            981Accounts
                receivable from related party
            
            
            (48
            )
            
            
            —Income
                taxes receivable
            
            
            727
            
            
            
            (1,200
            )Inventories
            
            
            (2,648
            )
            
            
            (6,911
            )Prepaid
                expense and other current assets
            
            
            (539
            )
            
            
            (368
            )Accounts
                payable
            
            
            (612
            )
            
            
            254Accounts
                payable to related parties
            
            
            (2,142
            )
            
            
            (690
            )Accrued
                payroll related expenses
            
            
            716
            
            
            
            377Accrued
                bonuses
            
            
            622
            
            
            
            (522
            )Accrued
                transitional costs for contract manufacturing
            
            
            1,234
            
            
            
            —Other
                accrued expenses
            
            
            (1,845
            )
            
            
            (14
            )Income
                taxes payable
            
            
            132
            
            
            
            (420
            )Net
                cash used in operating activities
            
            
            (15,539
            )
            
            
            (2,822
            )INVESTING
                ACTIVITIES:Purchase
                of marketable securities
            
            
            (58,084
            )
            
            
            (44,379
            )Maturities
                of marketable securities
            
            
            112,635
            
            
            
            45,000Sale
                of assets to related party
            
            
            —
            
            
            
            1,000Investment
                in StrataLight Communications, Inc.
            
            
            (5,000
            )
            
            
            —Purchase
                of property, plant and equipment
            
            
            (3,345
            )
            
            
            (766
            )Purchase
                of intangible assets
            
            
            (450
            )
            
            
            —Net
                cash provided by investing activities
            
            
            45,756
            
            
            
            855FINANCING
                ACTIVITIES:Proceeds
                from the exercise of stock options and employee stock purchase
                plan
            
            
            292
            
            
            
            435Net
                cash provided by financing activities
            
            
            292
            
            
            
            435EFFECT
                OF EXCHANGE RATE CHANGES ON CASH
            
            
            95
            
            
            
            —NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            30,604
            
            
            
            (1.532
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            57,413
            
            
            
            83,975CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            88,017
            
            
            $
            82,443SUPPLEMENTAL
                CASH FLOW INFORMATION:Cash
                paid during the period for interest
            
            $
            153
            
            
            $
            0Cash
                (received) paid during the period for income taxes, net
            
            $
            (731
            )
            
            $
            2,428SUPPLEMENTAL
                DISCLOSURE OF NON-CASH TRANSACTIONS:Purchase
                of property, plant and equipment through accounts payable
            
            $
            538
            
            
            $
            13








SEE
      NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4


**NOTES
      TO CONDENSED CONSOLIDATD FINANCIAL STATEMENTS**




**1.        GENERAL
      INFORMATION**




The
      accompanying unaudited interim condensed consolidated financial statements
      of
      Optical Communication Products, Inc., a Delaware corporation (the “Company”),
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America and Article 10 of the Securities and Exchange
      Commission’s Regulation S-X.  Accordingly, they do not include all of
      the information and footnotes required by accounting principles generally
      accepted in the United States of America for complete financial
      statements.  In management’s opinion, the unaudited condensed
      consolidated financial statements contain all adjustments, consisting of normal
      recurring adjustments, necessary to present fairly the Company’s condensed
      consolidated financial statements as of June 30, 2007 and for all interim
      periods presented.  The condensed consolidated financial statements
      should be read in conjunction with the audited consolidated financial statements
      included in the Annual Report of the Company filed on Form 10-K with the
      Securities and Exchange Commission for the year ended September 30, 2006. The
      results of operations for the period ended June 30, 2007 are not necessarily
      indicative of the results that may be expected for the fiscal year ending
      September 30, 2007.  The Company’s operations are primarily located in
      Woodland Hills, California and Hsinchu, Taiwan (through the acquisition of
      GigaComm Corporation (now known as OCP Asia, Inc.) in August 2006), referred
      to
      as OCP Asia throughout the rest of this document.




The
      Company issued a press release on April 25, 2007, and subsequently filed a
      Current Report on Form 8-K on April 27, 2007, announcing that our board of
      directors had received a letter from Oplink Communications, Inc. (“Oplink”)
      indicating that Oplink had entered into a stock purchase agreement with The
      Furukawa Electric Co., Ltd. of Japan (“Furukawa”) to purchase Furukawa’s entire
      interest in the Company’s outstanding capital stock for $1.50 per share payable
      in cash and stock of Oplink.  Oplink also proposed to purchase the
      Company’s outstanding capital stock not owned by Oplink (or Furukawa) by means
      of a merger of the Company with a subsidiary of Oplink at a cash purchase price
      of $1.50 per share of the Company’s Class A common stock, subject to Oplink’s
      due diligence investigation and negotiation and approval of a definitive
      acquisition agreement.  A special committee of the Company’s board of
      directors (the “Special Committee”), comprised of its three independent
      directors, evaluated Oplink’s proposal.




On
      May 4,
      2007, the Company issued a press release and filed a Current Report on Form
      8-K
      announcing that the Special Committee had adopted a 30-day shareholder rights
      plan on May 3, 2007. Under the plan, the Company declared a dividend
      distribution of one preferred share purchase right for each outstanding share
      of
      the Company’s common stock held by shareholders of record as of May 14,
      2007.  These rights expired on June 2, 2007.





On
      May 7,
      2007, Oplink filed an action in the Delaware Court of Chancery seeking to
      invalidate certain aspects of the shareholder rights plan adopted by the Special
      Committee.  On May 9, 2007, the Company filed a motion with the
      Delaware Court of Chancery seeking the court to deny the motion filed by Oplink
      on May 7, 2007.  Oplink’s action was subsequently
      dismissed.





On
      June
      5, 2007, Oplink closed its previously announced transaction with
      Furukawa to acquire Furukawa’s entire interest (or approximately 57.9%) in
      the Company’s outstanding capital stock (all of which was held as Class B common
      stock) for $1.50 per share, payable in cash and stock of Oplink.  Upon
      transfer of Furukawa’s Class B shares to Oplink, the share automatically
      converted into shares of Class A common stock.  As of such date, the
      Company became a majority-owned subsidiary of Oplink.  Separately,
      Oplink and the Special Committee reached an agreement in principle whereby
      Oplink would


5


acquire
      the outstanding Company common stock not owned by Oplink (or Furukawa) for
      $1.65
      per share in cash.





On
      June
      19, 2007, the Company and Oplink signed a definitive merger agreement (the
      “Merger Agreement”) pursuant to which Oplink will acquire the Company's
      outstanding capital stock not owned by Oplink for $1.65 per share payable in
      cash. Upon completion of the merger, the Company will become a wholly owned
      subsidiary of Oplink.  The Company will file proxy materials with the
      Securities and Exchange Commission (“SEC”) and will call a special meeting
      of the Company’s stockholders to vote on the proposed merger. The
      completion of the transaction, which is expected to close by October 2007,
      is
      subject to the review and clearance of necessary filings with the SEC and the
      approval of holders of two-thirds of the outstanding Company shares not
      currently held by Oplink.





*Operations*–The
      Company operates in the following two reportable segments; (i) the design and
      manufacture of fiber optic components for use in metropolitan area networks
      (“MANs”) and local area networks (“LANs”) via its OCP Woodland Hills reporting
      unit and reportable segment and (ii) fiber-to-the-home (“FTTH”) network via its
      OCP Asia reporting unit and reportable segment.  The Company’s
      products consist of optical transmitters, receivers and transceivers which
      convert electronic signals into optical signals and back to electronic signals,
      enabling high-speed communication of voice and data traffic over public and
      private fiber optic networks.





*Principles
      of Consolidation*– The condensed consolidated financial statements include
      the accounts of the Company and its subsidiaries.  All significant
      intercompany amounts and transactions have been eliminated.





**2.**
            **SIGNIFICANT
                ACCOUNTING POLICIES**





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





*Cash
      and Cash Equivalents* — Cash and cash equivalents include unrestricted
      deposits and money market funds with an original maturity at the date of
      purchase of three months or less.





*Marketable
      Securities* — Marketable securities represent United States Treasury
      Notes and United States Federal government debt securities with an original
      maturity of greater than three months.





The
      United States Treasury Notes are classified as held to maturity because the
      Company has the intent and ability to hold the securities to maturity. Gross
      unrealized gains and losses on held-to-maturity marketable securities have
      historically not been material. Should a decline in the fair value of an
      individual security or securities be judged to be other than temporary, the
      cost
      basis of the security would be written down to fair value and the amount of
      the
      write-down would be accounted for as a realized loss. Maturities on
      held-to-maturity marketable debt securities range from three to eleven months
      from the date of purchase.





The
      United States Federal government debt securities, which consist of Freddie
      Mac,
      Fannie Mae, Federal Home Loan Mortgages, Ginnie Mae and Government National
      Mortgage obligations, are classified as available for sale as the Company does
      not have the intent to hold the securities until maturity.  These
      securities are recorded at market value. Unrealized gains and losses (excluding
      other


6


than-temporary
      impairments) are reflected in other comprehensive income until realized;
      realized gains and losses would be included in earnings when the underlying
      securities are sold.  There have been no realized gains or losses on
      the United States Federal government debt securities as there has been no sale
      of marketable securities that are available for sale.





Investments
      in marketable securities were as follows at June 30, 2007 and September 30,
      2006
      (in thousands):





**Type
                of  Security**
            
            **Book/Cost**
            
            
            **Fair
                Value**
            
            
            **Unrealized**
              **Gains**
            
            
            **Unrealized**
              **(Losses)***Held
                to Maturity:*United
                States Treasury NotesJune
                30, 2007
            
            $
            4,996
            
            
            $
            4,997
            
            
            $
            1
            
            
            $
            —September
                30, 2006
            
            $
            69,523
            
            
            $
            69,517
            
            
            $
            —
            
            
            $
            (6
            )*Available
                for Sale:*United
                States Federal government debt securitiesJune
                30, 2007
            
            $
            10,536
            
            
            $
            10,540
            
            
            $
            4
            
            
            $
            —September
                30, 2006
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —





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





*Property,
      Plant and Equipment* — Property, plant and equipment are recorded at
      cost. Assets held for sale, which include land and building, is recorded at
      the
      lower of cost or fair value (see Note 8). Provision for depreciation has been
      made based upon the estimated useful lives of the assets, which range from
      three
      to thirty-nine years, using the straight-line method. Leasehold improvements
      are
      amortized over the shorter of the term of the lease or estimated useful life.
      Improvements and betterments are capitalized if they extend the useful life
      of
      the asset. Routine repairs and maintenance are expensed when
      incurred.






*Impairment
      of Long-Lived Assets**and Goodwill* —****As
      discussed in Note 4, SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” requires the Company to test the recoverability of
      long-lived assets, including identifiable intangible assets with definite lives,
      whenever events or changes in circumstances indicate that the carrying amount
      may not be recoverable. In testing for potential impairment under SFAS No.
      144,
      if the carrying value of the asset group exceeds the expected undiscounted
      cash
      flows, the Company must then determine the amount by which the fair value of
      those assets exceeds the carrying value and determine the amount of impairment,
      if any.




In
      addition, SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that
      the Company review and test goodwill and indefinite lived intangible assets
      for
      impairment on at least an annual basis, rather than amortize them. The Company
      may be required to review and test for impairment more frequently if events
      or
      changes in circumstances indicate that the assets may be impaired. In testing
      for a potential impairment of goodwill, SFAS No. 142 requires the Company to:
      (1) allocate goodwill to our


7


various
      business units to which the acquired goodwill relates; (2) estimate the fair
      value of those businesses to which goodwill relates; and (3) determine the
      carrying value of the businesses. If the estimated fair value is less than
      the
      carrying value for a particular business unit, then the Company is required
      to
      estimate the fair value of all identifiable assets and liabilities of the
      business unit, in a manner similar to a purchase price allocation for an
      acquired business unit. This requires the identification of any previously
      unrecognized intangible assets. When this process is completed, the amount
      of
      goodwill impairment is determined.





*Income
      Taxes* — Income taxes are provided for taxes currently payable or
      refundable, and deferred income taxes are recognized for future tax consequences
      of events that have been recognized in the Company’s financial statements or tax
      returns. Deferred income tax assets and liabilities are recognized for the
      estimated future tax consequences attributable to differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax basis. Deferred income tax assets and liabilities are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be recovered or
      settled. Valuation allowances are established when necessary to reduce deferred
      income tax assets to the amounts that are more likely than not expected to
      be
      realized.




*Foreign
      Currency Translation* —  The functional currency of the
      Company’s foreign operations is the local currency where such operations are
      located, and as such, the Company’s foreign operations’ assets and liabilities
      are translated into U.S. dollars at the rate of exchange in effect on the
      balance sheet date. Revenue and expenses are translated at the average rates
      of
      exchange prevailing during each monthly period. The related translation
      adjustments are recorded as cumulative foreign currency translation adjustments
      in accumulated other comprehensive income as a separate component of
      stockholders’ equity. Gains and losses resulting from foreign currency
      transactions, which are not material, are included in other income, net in
      the
      condensed consolidated statements of operations.





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





*Revenue
      Recognition* — The Company generally recognizes revenue, net of sales
      returns and allowances, when persuasive evidence of an arrangement exits,
      shipment has occurred, all significant contractual obligations have been
      satisfied, the amount is fixed or determinable and collection is considered
      probable. Products are generally shipped “FOB shipping point.” In certain
      limited cases wherein customer acceptance must occur, the Company defers such
      revenue until such acceptance is obtained and all other revenue recognition
      criteria have been met. The Company records an allowance for sales returns
      based
      on an analysis of the history of sales returns in order to reasonably estimate
      the allowance.





*Research
      and Development Costs* — Costs associated with the development of new
      products and any sustaining engineering costs are charged to expense when
      incurred.


*Common
      Stock* — Prior to June 5, 2007, the Company had two classes of common
      stock with a par value of $0.001 per share, Class A common stock and Class
      B common stock. Holders of Class A common stock generally had identical
      rights to holders of Class B common stock, except that holders of
      Class A common stock were entitled to one vote per share while holders of
      Class B common stock were entitled to ten votes per share on matters
      submitted to a vote of the stockholders. As of June 5, 2007,
      all


8


of
      the
      Company’s Class B common stock converted into Class A common stock such that the
      Company has one class of common stock designated as Class A common
      stock.




*Fair
      Value of Financial Instruments* — The recorded values of marketable
      securities, accounts receivable, accounts payable and accrued expenses
      approximate their fair values based on their short-term nature. The Company
      has
      no long-term debt at June 30, 2007.





*Concentration
      of Credit Risk* — Financial instruments that potentially subject the
      Company to concentrations of credit risk consist primarily of cash and cash
      equivalents, placed with high credit quality institutions, and accounts
      receivable. The Company sells products and extends credit to customers, monitors
      its exposure to credit losses, and maintains allowances for anticipated losses.
      Accounts receivable from the Company’s customers with amounts greater than 10%
      of gross accounts receivable amounted to $1,617,000 (14.0%) and $1,345,000
      (11.7%) at June 30, 2007 and $1,648,000 (14.0%) at September 30, 2006. Revenue
      from individual customers with amounts greater than 10% of total revenues
      amounted to 16.7%, 16.1%, 13.4% and 11.4% for the nine months ended June 30,
      2007 and 19.6%, 14.1% and 13.0% for the nine months ended June 30, 2006. Revenue
      from individual customers with amounts greater than 10% of total revenues
      amounted to 12.6% and 10.8% for the three months ended June 30, 2007 and 12.2%
      for the three months ended June 30, 2006. No other individual customer
      represented more than 10% of total revenues.





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




The
      Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
      are its chief operating decision makers. Due to changes in the economic
      characteristics of the Company’s reporting units**,** primarily
      associated with negative gross margins for OCP Asia during the three months
      ended March 31, 2007 and those projected for the remainder of the current fiscal
      year, along with projected lower gross margins for OCP Asia as compared to
      OCP
      Woodland Hills for the next three years, the Company determined during the
      three
      months ended March 31, 2007 that it operates in two reportable segments: (i)
      the
      design and manufacture of fiber optic components for use in MANs and LANs (the
      OCP Woodland Hills reportable segment) and (ii) the FTTH network (the OCP Asia
      reportable segment).





*Stock-Based
      Compensation* — On December 16, 2004, the FASB issued SFAS No. 123
      (revised 2004), “Share-Based Payment,” (“SFAS No. 123”) which requires
      compensation costs related to share-based payment transactions to be recognized
      in the financial statements. With limited exceptions, the amount of compensation
      cost is measured based on the grant-date fair value of the equity or liability
      instruments issued. In addition, liability awards are remeasured each reporting
      period. Compensation cost is recognized over the period that an employee
      provides service in exchange for the award. SFAS 123(R) replaces
      SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.”





The
      Company adopted SFAS 123(R) using the modified-prospective transition
      method. Under this transition method, compensation cost includes:
      a) compensation cost for all share-based payments granted prior to
      October 1, 2005, but not yet vested, based on the grant-date fair value
      estimated in


9


accordance
      with the original provisions of SFAS 123, and b) compensation cost for
      all share-based payments granted subsequent to September 30, 2005, based on
      the grant-date fair value estimated in accordance with the provisions of
      SFAS 123(R). The results for the prior periods have not been
      restated.





The
      Company adopted the alternative transition method described in FASB Staff
      Position No. FAS 123(R)-3, “Transition Election related to Accounting
      for the Tax Effect of Share-Based Payment Awards,” in the quarter ended
      September 30, 2006.  The alternative transition method includes a
      simplified method to establish the beginning balance of the additional paid-in
      capital pool (“APIC pool”) related to the tax effects of stock-based
      compensation expense, and to determine the subsequent impact on the APIC pool
      and the consolidated statements of cash flows of the tax effects of stock-based
      awards that were outstanding upon adoption of SFAS 123(R). The Company will
      limit the use of the simplified method for determining the subsequent impact
      on
      the APIC pool to employee awards that were fully vested and outstanding upon
      the
      adoption of SFAS 123(R). The Company will track individual option exercises
      to
      evaluate if they were fully vested at the adoption date. If option exercises
      were not fully vested, the Company will offset the related deferred tax asset
      against the actual tax benefit realized before applying against the APIC pool.
      The impact on the APIC pool of awards partially vested upon, or granted after,
      the adoption of SFAS 123(R) will be determined in accordance with the guidance
      in SFAS 123(R).  The adoption of FAS 123(R)-3 did not have a
      significant impact on the Company’s condensed consolidated financial
      statements.





***Recent
      Accounting Pronouncements***





In
      June
      2006, the FASB issued FASB Interpretation No. (FIN) 48 — “Accounting for
      Uncertainty in Income Taxes — an interpretation of FASB Statement
      No. 109”. FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on accounting for derecognition, interest, penalties,
      accounting in interim periods, disclosure and classification of matters related
      to uncertainty in income taxes, and transitional requirements upon adoption
      of
      FIN 48. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. Management is currently evaluating the effect that
      adoption of this interpretation will have on the Company’s consolidated
      financial position and results of operations.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements. SFAS No. 157
      applies under other accounting pronouncements that require or permit fair value
      measurements, the FASB having previously concluded in those accounting
      pronouncements that fair value is the relevant measurement attribute.
      Accordingly, SFAS No. 157 does not require any new fair value
      measurements. This statement is effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Management is currently evaluating the effect that the
      adoption of this pronouncement will have on the Company’s consolidated financial
      position or results of operations.




In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects
      of Prior Year Misstatements When Quantifying Misstatements in Current Year
      Financial Statement.” Due to diversity in practice among registrants,
      SAB 108 expresses SEC staff views regarding the process by which
      misstatements in financial statements are evaluated for purposes of determining
      whether financial statement restatement is necessary. SAB 108 is effective
      for fiscal years ending after November 15, 2006.   The
      Company has adopted SAB 108 for the fiscal year ended September 30, 2007 and
      it
      did not have a significant impact on the Company’s consolidated financial
      statements.




10






In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Liabilities – Including an amendment of FASB Statement No. 115” (SFAS
      159), which permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. SFAS 159 is effective for the Company
      beginning October 1, 2008, and the provisions of SFAS 159 will be applied
      prospectively as of that date. Management is currently evaluating the effect
      that adoption of this statement will have on the Company’s consolidated
      financial position and results of operations when it becomes effective in
      2008.





**3.        ACQUISITION
      OF OCP ASIA**




On
      August
      24, 2006**,**the Company completed the acquisition of OCP Asia
      (formerly GigaComm Corporation, a Taiwan corporation) pursuant to the Primary
      Stock Purchase agreement by and among the Company, OCP Asia, certain
      stockholders of OCP Asia and YEONGYI (Asia) Co., Ltd., a Taiwan corporation,
      as
      a selling stockholder and the representative of the selling stockholders (the
      “Selling Stockholders”).  Pursuant to the Primary Stock Purchase
      Agreement and additional stock purchase agreements entered into with additional
      holders of common stock holding shares of OCP Asia common stock, the Company
      acquired 96.88% of the issued and outstanding shares of OCP Asia common stock
      and paid consideration of approximately $18.7 million, consisting of both cash
      payments to stockholders of OCP Asia and the repayment of all of OCP Asia’s
      outstanding debt obligations (the “Acquisition”).  As a result of the
      transaction, OCP Asia became a subsidiary of the Company and the Company was
      able to expand its market presence in Asia.  This expanded presence in
      Asia and the potential that OCP Asia will become a second source for lasers
      are
      factors contributing to the Company recording goodwill as a result of the
      Acquisition.  The Company has consolidated the financial position and
      results of operations of OCP Asia since the date of acquisition.





The
      acquisition was accounted for using the purchase method of
      accounting.  The carrying values of OCP Asia’s assets and liabilities
      were adjusted to reflect the estimated fair values of the assets and liabilities
      as of the acquisition date to the extent of the Company’s 96.88% controlling
      interest.  The remaining 3.12% was accounted for at OCP Asia’s
      historical basis.





The
      acquisition price was comprised of the following (in thousands):





Purchase
                  price
              
              $
              18,704Transaction
                  costs
              
              
              702$
              19,406




Of
      the
      $19,406,000 acquisition price, $1,050,000 is held in escrow as of June 30,
      2007.  Pursuant to a Settlement Agreement and Mutual General Release
      dated June 15, 2007, between the Company, the Selling Stockholders and TechMark
      Agencies USA (TechMark”), $265,000 was disbursed from escrow to TechMark in
      settlement of certain claims and $56,000 was disbursed from escrow to reimburse
      the Company for legal fees and expenses in connection with the TechMark claim.
      The remaining amount in escrow is to be distributed to the Selling Stockholders
      at the end of a contingency period of approximately one year from the date
      of
      the agreement pending resolution of any matters that may arise relating to
      Selling Stockholders’ indemnification provisions in the Primary Stock Purchase
      Agreement.





The
      purchase price allocation below is based on the estimated value of the
      inventory, fixed assets and intangible assets acquired and the related income
      tax impact of the purchase accounting adjustments. During
      the three and six months ended March 31, 2007, the purchase price allocation
      was
      adjusted to reduce the fair value of inventory by $641,000 and $1,128,000,
      respectively, and increase the fair value
      of





11




intangible
      assets by $872,000.  The Company
      adjusted the purchase price allocation at the end of the Company’s second fiscal
      quarter ended March 31, 2007, including the allocation to identifiable
      intangible assets.  The Company does not expect that goodwill will be
      deductible for tax purposes.




During
      the three and six months ended March 31, 2007, the purchase price allocation
      was
      adjusted to reduce the fair value of inventory by $641,000 and $1,128,000,
      respectively, and increase the fair value of intangible assets by
      $872,000.  The Company adjusted the purchase price allocation at the
      end of the Company’s second fiscal quarter ended March 31, 2007, including the
      allocation to identifiable intangible assets.  The Company does not
      expect that goodwill will be deductible for tax purposes.




The
      purchase price allocation is as follows (in thousands):




Cash
              
              $
              196Accounts
                  receivable
              
              
              2,264Inventories
              
              
              3,733Prepaids
                  and other current assets
              
              
              782Fixed
                  assets
              
              
              7,072Other
                  assets
              
              
              160Intangible
                  assets
              
              
              3,100Goodwill
              
              
              8,486Accounts
                  payable
              
              
              (4,573
              )Accrued
                  liabilities
              
              
              (1,588
              )Other
                  liabilities
              
              
              (226
              )$
              19,406




The
      allocation of the purchase price to identifiable intangible assets, along with
      their respective estimated useful lives, is as follows (in
      thousands):




Developed
                  technology (6.5 years)
              
              $
              2,325Customer
                  relationships (3 years)
              
              
              775$
              3,100




In
      accordance with SFAS No. 142, goodwill is assigned to the Company’s reporting
      units based upon the expected benefit from the synergies of the
      acquisition.  The expected benefit represents the difference in the
      fair value of the reporting units prior to and after the
      acquisition.  The Company has determined that the acquisition of OCP
      Asia will provide cost savings to OCP Woodland Hills associated with the
      manufacturing of lasers.  Prior to the acquisition, the Company was
      solely dependent upon Furukawa for certain lasers.  The increase in
      fair value of the OCP Woodland Hills reporting unit before as compared to after
      the acquisition of OCP Asia, due to the cost savings synergies, has resulted
      in
      all of the goodwill being allocated to OCP Woodland Hills (see note
      4).




The
      table
      below sets forth the changes in goodwill, which is entirely allocated to the
      OCP
      Woodland Hills segment, from September 30, 2006 to June 30, 2007 (in
      thousands):




Balance
                as of September 30, 2006
            
            $
            8,330Purchase
                price adjustments:Inventories
            
            
            1,128Intangible
                assets
            
            
            (872
            )Other
            
            
            (100
            )8,486Impairment
                of goodwill
            
            
            (8,486
            )Balance
                as of June 30, 2007
            
            $
            0







12





**4.            IMPAIRMENT
      OF LONG-LIVED ASSETS**




As
      required by SFAS No. 144, the
      Company evaluates its long-lived assets, such as property and equipment and
      intangible assets, for impairment whenever events or changes in circumstances
      indicate that the carrying value of the asset might be impaired.  In
      addition, SFAS No. 142 requires that the Company review and test goodwill for
      impairment if events or changes in circumstances indicate the goodwill may
      be
      impaired. During the three months ended March, 31 2007, due to a decline in
      the
      projected gross profit margins associated with a decline in sales volume and
      a
      reduction in sale prices primarily due to market conditions and a legacy product
      line, the Company performed an impairment analysis, pursuant to SFAS No. 144
      and
      SFAS No. 142.  As required, the Company first performed the required
      impairment analysis under SFAS No. 144 for each of the reporting
      units.  For purposes of estimating future cash flows from potentially
      impaired assets, the Company groups assets at the lowest level for which there
      are identifiable cash flows that are largely independent of the cash flows
      of
      other groups of assets.  The lowest level for which identifiable cash
      flows are determinable is at the reporting unit level.  The carrying
      value of a reporting unit is considered impaired when the anticipated
      undiscounted cash flow for such reporting unit is less than its carrying
      value.





Based
      upon our SFAS No. 144 impairment
      analysis, the Company concluded that the undiscounted cash flow over the useful
      life of the primary assets of OCP Asia (e.g. machinery and equipment) exceeded
      their carrying values.  Accordingly, there was no impairment of the
      long-lived assets of OCP Asia. The undiscounted cash flows over the useful
      life
      of the primary asset (machinery and equipment) of OCP Woodland Hills were less
      than its carrying value, including goodwill.  In accordance with SFAS
      No. 144, as the Company tests impairment at the reporting unit level, the asset
      group includes goodwill.  The Company then determined that the fair
      value of the OCP Woodland Hills reporting unit was less than its carrying value,
      including goodwill. Fair market value for OCP Woodland Hills is determined
      using
      its anticipated cash flows discounted at a rate based on its weighted average
      cost of capital.  Accordingly, there was impairment of the long-lived
      assets of OCP Woodland Hills.  Based on the Company’s SFAS No. 144
      impairment analysis, the Company concluded that the entire $8,486,000 of
      recorded goodwill for OCP Woodland Hills was impaired.  There was no
      impairment of the property and equipment and intangible assets of OCP Woodland
      Hills.  The goodwill impairment charge was expensed as a non-cash
      charge to continuing operations during the three months ended March 31,
      2007.





With
      respect to our impairment testing,
      the fair market value of our reporting units was estimated by utilizing
      forecasted discounted cash flows. Judgments and assumptions about future values
      are complex and often subjective. They can be affected by a variety of factors,
      including but not limited to, significant negative industry or economic trends,
      significant changes in the manner or use of the acquired assets, the strategy
      of
      our overall business and significant underperformance relative to expected
      historical or projected future operating results. Although the Company believes
      the judgments and assumptions used in the impairment tests are reasonable and
      appropriate, there is nonetheless a high degree of uncertainty and judgment
      involved.





**5.        TRANSITION
      TO CONTRACT MANUFACTURING**




On
        November 1, 2006, the Company announced that it reached an agreement with
        SAE
        Magnetics (H.K.) Limited (SAE), a wholly-owned subsidiary of TDK Corporation,
        which enabled the Company to begin manufacture of certain of its product
        lines
        in China in July 2007.  The Company expects to maintain its existing
        manufacturing facilities but has begun reducing its manufacturing workforce
        in
        Woodland Hills, California and at OCP Asia.  In connection with this
        workforce reduction, the Company expects to incur transitional charges of
        approximately $3.4 million during the fiscal year ending September 30, 2007,
        which includes approximately $2.6 million for the OCP Woodland Hills reporting
        segment and $0.8 million for the OCP Asia reporting segment, and $0.3 million
        during the





13




fiscal year ending September 30, 2008, which is attributable
      to the OCP Woodland Hills reporting segment. These transitional charges, which
      are primarily estimated severance and retention payments, along with expenses
      incurred to relocate certain fixed assets and product qualification associated
      with the manufacturing of certain of our product lines in China which began
      in
      July 2007, are being recorded in accordance with SFAS 146, “Accounting for Costs
      Associated with Exit or Disposal Activities,” and SFAS 112, “Employees’
Accounting for Postemployment Benefits.”  During the three and nine
      months ended June 30, 2007, the Company charged $1,097,000 and $2,408,000,
      respectively, to transitional costs for contract manufacturing, of which
      $905,000 and $1,895,000 was charged by OCP Woodland Hills and $192,000 and
      $513,000 was charged by OCP Asia during the respective
      periods.  Seventeen employees have been terminated as of June 30,
      2007.  The Company anticipates that the transition will be completed
      by June 30, 2008 and will incur approximately $1.1 million and $0.3 million
      in
      the three months ending September 30, 2007 and the fiscal year ending September
      30, 2008, respectively.


The
      table
      below sets forth the activity of the liability for the transitional costs for
      contract manufacturing (in thousands):







**Three
                Months Ended June 30, 2007**
            
            
            **Nine
                Months Ended June 30, 2007****Severance
                & Retention**
            
            
            **Other**
            
            
            **Total**
            
            
            **Severance
                & Retention**
            
            
            **Other**
            
            
            **Total**Beginning
                balance
            
            $
            940
            
            
            $
            11
            
            
            $
            951
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Costs
                incurred and charged to expense
            
            
            450
            
            
            
            763
            
            
            
            1,213
            
            
            
            1,390
            
            
            
            1,134
            
            
            
            2,524Costs
                paid
            
            
            (40
            )
            
            
            (774
            )
            
            
            (814
            )
            
            
            (40
            )
            
            
            (1,134
            )
            
            
            (1,174
            )Changes
                in estimate
            
            
            (116
            )
            
            
            
            
            
            
            (116
            )
            
            
            (116
            )
            
            
            —
            
            
            
            (116
            )Ending
                balance
            
            $
            1,234
            
            
            $
            —
            
            
            $
            1,234
            
            
            $
            1,234
            
            
            $
            —
            
            
            $
            1,234







**6.        STOCK-BASED
      COMPENSATION**




**Stock
      Options**





The
      Company’s 2000 Stock Incentive Plan authorizes 22,121,680 options (increased
      from 12,121,680 options at the 2007 Annual Meeting of Shareholders held on
      January 24, 2007) for grant and provides that options may have a contractual
      term up to ten years and become exercisable and vest in
      increments.  Options vest at a rate of 25% per year or 25% after the
      first year with the remainder vesting incrementally over the subsequent 36
      months.  Options under this plan are generally granted with the
      exercise price equal to the fair market value of the Company’s common stock on
      the date of grant.  The Company granted 40,000 and 38,000 stock
      options with an estimated total grant-date fair value of $36,000 and $83,000
      during the three months ended June 30, 2007 and 2006, respectively, and granted
      2,900,000 and 279,228 stock options with an estimated total grant-date fair
      value of $3,051,000 and $489,000 during the nine months ended June 30, 2007
      and
      2006, respectively. The Company recorded stock-based compensation related to
      stock options of $455,000 and $148,000 during the three months ended June 30,
      2007 and 2006, respectively, and $1,129,000 and $613,000 for the nine months
      ended June 30, 2007 and 2006, respectively.  The Company issues new
      shares upon the exercise of stock options.





Under
      the
      terms of the Merger Agreement, the Company’s outstanding stock options would
      convert into Oplink stock options at a conversion price equal to $1.65 divided
      by the average closing price of Oplink’s common stock for the five trading days
      ending two business days prior to the close of


14


the
      merger with Oplink.  In accordance with certain employment agreements
      with several employees, unvested stock options would become fully vested upon
      completion of the merger with Oplink.





**Restricted
      Stock Awards**





From
      time
      to time the Company may issue restricted stock awards and values the restricted
      stock at a price equal to the fair market value of the Company’s common stock on
      the date of grant.  The vesting is 25% per year or 1/48th per
      month.  During the year ended September 30, 2006, the Company issued
      300,000 shares of restricted stock with an estimated total grant-date fair
      value
      of $570,500.  Of the 300,000 shares issued, 50,000 shares were issued
      from the 2000 Stock Incentive Plan and 250,000 shares were issued outside of
      the
      plan.





There
      were no restricted stock awards granted for the three and nine months ended
      June
      30, 2007.  In June 2007, 62,500 restricted stock awards were cancelled
      in exchange for $103,125 to be paid the earlier of (i) January 2, 2008 or (ii)
      termination of services, as defined in the employment contract, of an executive
      officer of the Company, which was accrued during the three and nine months
      ended
      June 30, 2007.





Vesting
      of restricted stock awards during the nine months ended June 30, 2007 are as
      follows:





**Restricted**
              **Stock**
              **Awards**
            
            **Weighted**
              **Average
                Grant-**
              **Date
                Fair Value**
              **Per
                Award**Balance
                as of September 30, 2006
            
            297,916
            
            $1.90Restricted
                stock vested and issued
            
            (3,126
            )
            $1.91Balance
                as of December 31, 2006
            
            294,790
            
            $1.90Restricted
                stock vested and issued
            
            (3,126
            )
            $1.91Balance
                as of March 31, 2007
            
            291,664
            
            $1.90Restricted
                stock vested and issued
            
            (3,126
            )
            $1.91Restricted
                stock  cancelled
            
            (62,500
            )
            $1.90Balance
                as of June 30, 2007
            
            226,038
            
            $1.90





During
      the three and nine months ended June 30, 2007, the Company recorded stock-based
      compensation expense related to restricted stock awards of $106,000 and
      $153,000, respectively. There was no compensation expense related to restricted
      stock during the three and nine months ended June 30, 2006 as there were no
      restricted stock awards until the quarter ended September 30, 2006.





**Employee
      Stock Purchase Plan (ESPP)**





The
      Company has an Employee Stock Purchase Plan (ESPP) that allows employees to
      purchase a limited amount of the Company’s common stock at a 15% discount to a
      defined fair market value.  The stock-based compensation cost related
      to the ESPP was $8,000 and $14,000 for the three months ended June 30, 2007
      and
      2006, respectively, and was $29,000 and $37,000 and for the nine months ended
      June 30, 2007 and 2006, respectively.  The total stock-based
      compensation cost related to employee purchases of stock under the ESPP is
      amortized on a straight-line basis over a weighted-average period of
      approximately 1 year.





15


**Valuation
      Assumptions**





During
      the three and nine months ended June 30, 2007 and 2006, the Company valued
      employee options for compensation expense purposes at the measurement dates
      using the Black-Scholes pricing model with the following weighted average
      assumptions:




Three
                  months ended June 30,
              
              Nine
                  months ended June 30,2007
              
              2006
              
              2007
              
              2006Dividend
                  yield
              0%
              
              0%
              
              0%
              
              0%Average
                  expected volatility
              69.0%
              
              88.2%
              
              69.0%
              
              88.2%Average
                  risk-free rate of return
              4.78%
              
              5.10%
              
              4.66%
              
              4.70%Average
                  expected life (years)
              4.8
              
              8.0
              
              5.1
              
              8.0




*Expected
      Volatility*:  The volatility factor utilized in the Black-Scholes
      valuation model was based on the Company’s historical stock prices.





*Risk-free
      Rate of Return*:  The Company based the risk-free interest rate
      used in the Black-Scholes valuation model on the implied yield currently
      available on U.S. Treasury zero-coupon issues with an equivalent expected
      life.





*Expected
      Life*:  The Company’s expected life represents the period that the
      Company’s stock-based awards are expected to be outstanding and was determined
      based on historical experience of similar awards, based upon options granted
      with a contractual term of 10 years.  Commencing in December 2006, the
      Company began granting stock-based awards with a contractual term of seven
      years.  Since the Company has not had any historical experience
      associated with stock-based awards with a contractual term of seven years,
      the
      Company estimated the expected life of each stock option granted in the three
      months ended June 30, 2007 using the short-cut method permissible under SAB
      107,
      which utilizes the weighted average expected life of each tranche of the stock
      option, determined based on the sum of each tranche’s vesting period plus
      one-half of the period from the vesting date of each tranche to the stock
      option’s expiration. This method is available for options granted prior to
      December 31, 2007.





*Estimating
      Forfeitures*:  The Company uses historical forfeiture experience
      to derive an estimated rate of forfeiture.  Compensation expense for
      any period, as derived using the Black-Scholes valuation model, is adjusted
      based on this estimated rate of forfeiture.





**Non-Vested
      Options**





As
      of
      June 30, 2007, there was approximately $4.1 million of total unrecognized
      compensation cost related to non-vested share-based compensation arrangements
      that is expected to be substantially amortized by June 30, 2011.  The
      total cost is expected to be recognized over a weighted-average period of 3.3
      years.





16


**Stock
      Option Activity**





Stock
      option activity for the three and nine months ended June 30, 2007 and options
      available for future grant at June 30, 2007 are as follows:





**Options**
              **Available**
              **for
                Future**
              **Grant**
            
            **Number
                of**
              **Options**
            
            **Exercise
                Price**
              **per
                Option**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Balance
                as of September 30, 2006
            4,851,084
            
            8,496,512
            
            $0.19
                to $17.38
            
            $  8.01Options
                granted
            (1,180,000)
            
            1,180,000
            
            1.65
                to 2.12
            
            2.00Options
                exercised
            
            
            (39,670)
            
            0.97
                to 1.83
            
            0.98Options
                forfeited
            157,792
            
            (157,792)
            
            0.90
                to 3.10
            
            2.17Options
                canceled
            1,541,388
            
            (1,541,388)
            
            1.08
                to 17.38
            
            11.68Balance
                as of December 31, 2006
            5,370,264
            
            7,937,662
            
            0.19
                to 17.38
            
            6.56Options
                authorized
            10,000,000Options
                granted
            (1,680,000)
            
            1,680,000
            
            1.37
                to 1.60
            
            1.86Options
                exercised
            
            
            (182,250)
            
            0.19
                to 0.97
            
            0.44Options
                forfeited
            167,855
            
            (167,855)
            
            1.08
                to 11.00
            
            2.05Options
                canceled
            1,268,660
            
            (1,268,660)
            
            1.08
                to 17.38
            
            11.53Balance
                as of March 31, 2007
            15,126,779
            
            7,998,897
            
            0.19
                to 17.38
            
            5.02Options
                granted
            (40,000)
            
            40,000
            
            1.37
                to 1.57
            
            1.49Options
                exercised*
            
            
            (272,250)
            
            0.19
                to 1.20
            
            0.39Options
                forfeited
            150,705
            
            (150,705)
            
            1.83
                to 3.10
            
            1.72Options
                canceled
            51,485
            
            (51,485)
            
            1.81
                to 11.00
            
            3.73Balance
                as of June 30, 2007
            15,288,969
            
            7,564,457
            
            $0.19
                to $17.38
            
            $5.23





*The
      intrinsic value of options exercised during the three and nine months ended
      June
      30, 2007 was approximately $32,000 and $104,000, respectively, and was
      approximately $23,000 and $265,000, respectively, for the three and nine months
      ended June 30, 2006.





The
      following table summarizes information regarding options outstanding at June
      30,
      2007:





**Options
                    Outstanding**
                
                **Options
                    Exercisable****Range
                    of**
                  **Exercise
                    Prices**
                
                **Number**
                  **Outstanding**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Life**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Shares**
                  **Exercisable**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Life**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**$0.19
                    – $1.60*
                
                621,607
                
                4.6
                $
                1.03
                
                424,107
                
                3.6
                $
                0.82$1.62
                    – $3.47
                
                4,481,269
                
                7.0
                $
                2.04
                
                571,011
                
                4.7
                $
                2.33$3.64
                    – $9.72
                
                55,880
                
                4.6
                $
                7.16
                
                52,880
                
                4.5
                $
                7.36$11.00
                    – $11.12
                
                1,948,615
                
                1.2
                $
                11.00
                
                1,948,615
                
                1.2
                $
                11.00$17.38
                    – $17.38
                
                457,086
                
                0.6
                $
                17.38
                
                457,086
                
                0.6
                $
                17.367,564,457
                
                4.9
                $
                5.23
                
                3,453,699
                
                2.1
                $
                9.11





*
      The
      aggregate intrinsic value of options outstanding and exercisable was
      approximately $358,000 and $333,000 at June 30, 2007,
      respectively.  The aggregate intrinsic value of options outstanding
      and exercisable was approximately $1,409,000 and $1,261,000, respectively,
      at
      June 30, 2006.




17


The number of stock options that are vested or expected to vest at June 30,
      2007
      is 6,666,667 with a weighted average exercise price per share of $5.67 and
      a
      weighted averaged remaining contractual term of 2.7 years.  The
      aggregate intrinsic value of the stock options vested or expected to vest at
      June 30, 2007 is $353,000.





The
        weighted average estimated fair value of options granted in the three and
        nine
        months ended June 30, 2007 was $0.89 and $1.02,
        respectively.   The weighted average estimated fair value of
        options granted in the three and nine months ended June 30, 2006 was $2.19
        and
        $1.82, respectively.  The total numbers of shares exercisable were
        3,453,699 and 6,480,431 as of June 30, 2007 and 2006,
        respectively.





**ESPP
      Activity**





There were a total of 22,790 and 49,499 shares of the Company’s common stock
        issued at a weighted average purchase price of $1.27 and $1.36 pursuant to
        the
        employee stock purchase plan during the three and nine months ended June
        30,
        2007, respectively.  The weighted average fair value per share of the
        shares issued was $2.15 and $1.83 for the three and nine months ended June
        30,
        2007, respectively.  There were a total of 26,419 and 59,436 shares of
        the Company’s common stock issued at a weighted average purchase price of $1.42
        and $1.41 pursuant to the employee stock purchase plan during the three and
        nine
        months ended June 30, 2006, respectively.  The weighted average fair
        value of the shares issued were $2.43 and $2.17 for the respective periods
        ended
        June 30, 2006.  On May 3, 2007, the Company’s stockholders approved an
        increase in the number of shares available under the plan by 300,000
        shares.  There are a total of 322,818 shares available for future
        issuance under the plan at June 30, 2007.





**7.        INVENTORIES**




Inventories
      consist of the following (in thousands):


**June
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**Raw
                  materials
              
              
              $
              14,456
              
              
              $
              15,394Work-in-process
              
              
              
              5,028
              
              
              
              4,929Finished
                  goods
              
              
              
              2,811
              
              
              
              5,392Total
                  inventories
              
              
              $
              22,295
              
              
              $
              25,715





Inventory
      written down to net realizable value for the three months ended June 30, 2007
      and 2006 was $561,000 and $145,000, respectively, and $4,301,000 and $969,000
      for the nine months ended June 30, 2007 and 2006, respectively.





**8.        ASSETS
      HELD FOR SALE**




As
      the
      Company is transitioning a portion of its manufacturing to China (see note
      5),
      it will have excess space in its Woodland Hills, California facility, which
      is
      included in the OCP Woodland Hills reporting segment.  In addition,
      the Company has decided it is appropriate to sell the facility to generate
      additional cash.  Accordingly, on April 25, 2007, the Company’s board
      of directors approved resolutions to market and sell the Company’s land and
      building located in Woodland Hills, California and formed a real estate special
      committee of the board of directors to oversee the disposition of the land
      and
      building and to approve the final purchase offer and related
      agreements.




On
      May
      16, 2007, the Company entered into an exclusive sales listing agreement with
      a
      real estate advisory firm to market and sell its corporate
      property.  The carrying value of the land and building as of June 30,
      2007 is approximately $19.7 million.  The appraised value of the land
      and building exceeds




18


its
      carrying value.  The Company expects to sell the property for cash
      within the next twelve months and has classified the assets held for sale as
      a
      current asset.







**9.        PROPERTY,
      PLANT AND EQUIPMENT**




Property,
      plant and equipment consist of the following (in thousands):





**June
                  30,**
                **2007**
              
              
              **September
                  30,**
                **2006**
              
              
              **Useful**
                **Lives**Land
              $
              —
              
              
              $
              6,729Buildings
                  and improvements
              
              —
              
              
              
              15,311
              
              
              39
                  yearsMachinery
                  and equipment
              
              25,062
              
              
              
              23,151
              
              
              5
                  yearsComputer
                  hardware and software
              
              2,299
              
              
              
              1,591
              
              
              3
                  yearsFurniture
                  and fixtures
              
              478
              
              
              
              467
              
              
              5
                  yearsLeasehold
                  improvements
              
              197
              
              
              
              350
              
              
              9
                  yearsConstruction
                  in process
              
              1,105
              
              
              
              22229,141
              
              
              
              47,821Less
                  accumulated depreciation
              
              (18,482
              )
              
              
              (18,508
              )$
              10,659
              
              
              $
              29,313







Depreciation
      and amortization expense for property, plant and equipment for the three months
      ended June 30, 2007 and 2006 was $1,012,000 and $629,000, respectively, and
      $2,966,000 and $2,242,000 for the nine months ended June 30, 2007 and 2006,
      respectively.





**10.           INTANGIBLE
      ASSETS**





The
      following table sets forth intangible assets by major asset class (in
      thousands):




**Weighted
                  Average****June
                  30,  2007**
              
              **September
                  30,2006**
              **Amortization
                  Period****(Years
                  from inception)**Patents
              
              950
              
              950
              5.0Accumulated
                  amortization
              
              (887)
              
              (744)Acquired
                  and developed technology
              
              3,991
              
              2,572
              5.8Accumulated
                  amortization
              
              (1,461)
              
              (970)Customer
                  relationships
              
              775
              
              678
              3.0Accumulated
                  amortization
              
              (216)
              
              (19)Tradename
              
              -
              
              194Accumulated
                  amortization
              
              -
              
              (5)Total
                  intangible assets, net
              
              $           3,152
              
              $                2,656




Aggregate
      amortization expense related to intangible assets was $276,000
      and $108,000 for the three months ended June 30, 2007 and 2006, respectively,
      and $823,000 and $325,000 for the nine months ended June 30, 2007 and 2006,
      respectively.  Amortization expense for the three and
      nine


19


months
      ended June 30, 2007 includes $135,000 and $465,000, respectively, of
      amortization attributable to intangible assets acquired in the OCP Asia
      acquisition.





Following
      is a summary of future amortization expense in each of the next five fiscal
      years and thereafter (in thousands):




Remaining
                  three months fiscal 2007
              
              2962008
              
              7882009
              
              7522010
              
              4332011
              
              353Thereafter
              
              530$        3,152




**11.           OTHER
      ASSETS**




On
      April
      12, 2007, the Company purchased a minority interest in StrataLight
      Communications, Inc. (“StrataLight”) for $5.0
      million   StrataLight is engaged in the commercial deployment of
      ultra high capacity optical transmission sub-systems with line rates in excess
      of 40Gbps.  The minority interest is accounted for under the cost
      method in accordance with Accounting Principles Board Opinion No. 18 because
      the
      Company cannot exercise significant influence over the operations and management
      of StrataLight and is included in other assets on the condensed consolidated
      balance sheet as of June 30, 2007.  Subsequent to June 30, 2007, the
      Company and StrataLight entered into an option agreement whereby StrataLight
      may
      elect to repurchase all of the Company’s equity interest in StrataLight (see
      note 16).





**12.           (LOSS)
      EARNINGS PER SHARE**




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





**Three
                Months Ended June 30,**
            
            
            **Nine
                months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****(in
                thousands, except per share data)**BASIC
                EPS COMPUTATION:
              Net
                (loss) income applicable to common stock
            
            $
            (8,570
            )
            
            $
            (437
            )
            
            $
            (29,861
            )
            
            $
            2,792Weighted
                average common shares outstanding
            
            
            113,846
            
            
            
            113,347
            
            
            
            113,608
            
            
            
            113,187Basic
                (loss) earnings per share
            
            $
            (0.08
            )
            
            $
            (0.00
            )
            
            $
            (0.26
            )
            
            $
            0.02DILUTED
                EPS COMPUTATION:
              Net
                (loss) income applicable to common stock
            
            $
            (8,570
            )
            
            $
            (437
            )
            
            $
            (29,861
            )
            
            $
            2,792Weighted
                average common shares outstanding
            
            
            113,846
            
            
            
            113,347
            
            
            
            113,608
            
            
            
            113,187Effect
                of dilutive securities:
              Common
                stock options
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            853Diluted
                weighted average shares outstanding
            
            
            113,846
            
            
            
            113,347
            
            
            
            113,608
            
            
            
            114,040Diluted
                (loss) earnings per share
            
            $
            (0.08
            )
            
            $
            (0.00
            )
            
            $
            (0.26
            )
            
            $
            0.02





20


The basic (loss) earnings per share are computed using the weighted average
      number of common shares outstanding.  For purposes of computing basic
      (loss) earnings per share, shares of restricted stock which are subject to
      vesting provisions are not considered outstanding until they are
      vested.  As of June 30, 2007, 226,038 shares of non-vested restricted
      stock were outstanding.****Diluted loss per share is also
      computed without consideration to potentially dilutive instruments because
      the
      Company incurred losses during the three and nine months ended June 30, 2007
      and
      the three months ended June 30, 2006 which would make these instruments
      antidilutive.  The weighted average diluted common shares outstanding
      for the three and nine months ended June 30, 2007 excludes the antidilutive
      effect of 7,544,600 and 6,535,337 options, respectively.  The weighted
      average diluted common shares outstanding for the three and nine months ended
      June 30, 2006 excludes the dilutive effect of 6,239,877 and 6,233,849 options,
      respectively.  The options are excluded when the options have an
      exercise price in excess of the average market value of the Company’s common
      stock during the period or as a result of the Company’s net loss.





**13.**
            **COMMITMENTS
                AND CONTINGENCIES**




*Operating
      Leases* - The Company has operating leases for certain
      facilities.  Lease payments are made monthly.  The Company’s
      leases are renewable monthly, semiannually, annually or for five
      years.  Rent expense for these leases for the three months ended June
      30, 2007 and 2006 was $351,000 and $46,000, respectively, and for the nine
      months ended June 30, 2007 and 2006 was $1,071,000 and $259,000,
      respectively.  Rental expense for the three and nine months ended June
      30, 2007 includes $304,000 and $933,000 rental expense, respectively,
      attributable to the Company’s OCP Asia facility.





The
      following is a summary of future minimum payments due under operating leases
      that have initial or remaining noncancelable lease terms in excess of one year
      at June 30, 2007 (in thousands):





Three
                    months ending September 30, 2007
                $           3312008
                
                1,2082009
                
                1,0312010
                
                852011
                
                71Total
                    minimum lease payments
                
                $        2,726





*Retention
      Agreements*– In connection with the announcement by Oplink that it had
      entered into a stock purchase agreement with Furukawa to purchase Furukawa’s
      entire interest in the Company (see Note 1), the Company entered into agreements
      (“Retention Agreements”) with some of its employees to retain their services
      through January 2, 2008.  The amounts to be paid under the Retention
      Agreements are contingent upon (i) Oplink’s acquisition of Furukawa’s interest
      in the Company, which occurred on June 19, 2007, and (ii) Oplink’s acquisition
      of at least 90% of the Company’s outstanding common stock prior to January 2,
      2008.  In addition, such employees must remain an employee of the
      Company until January 2, 2008 unless terminated by the Company for reason other
      than for cause, as defined in the Retention Agreements.  As of June
      30, 2007, the Company had recorded an obligation of $307,000 and may incur
      a
      total obligation of $2,291,000 if all of the above conditions are
      met.




*Legal
      Proceedings* - In August 2006, the Company filed an action in the United
      States District Court for the District of Colorado for breach of contract and
      declaratory relief against Olympia Properties, LLC (“Olympia”), the former
      landlord of the Company’s former Colorado facility.  The action arose
      after Olympia retained the Company’s security deposit of $93,700 upon expiration
      of the lease, claiming that the Company contaminated the leased premises with
      arsenic, in violation of the lease.  The Company denied that the
      premises contained arsenic at levels exceeding either those permitted by the
      lease or any other applicable authority and, accordingly, the Company filed
      suit.




21




In
      its
      complaint, the Company requested that the court provide declaratory relief
      that
      the Company has not breached the lease through any act or omission, and also
      requested damages for breach of contract in connection with Olympia’s retention
      of the security deposit.  Further, the Company alleged additional
      breaches of the lease by Olympia.




Olympia
      denied the Company’s allegations and asserted counterclaims for breach of ten
      affirmative defenses.  Further, Olympia asserted counterclaims for
      breach of contract and equitable relief alleging damages of approximately $1.1
      million.  The Company denied Olympia’s counterclaims.  On
      May 10, 2007, the Company and Olympia reached an agreement to settle all claims
      under which the Company agreed to pay Olympia $420,000.  The amount
      was paid in June 2007.  The settlement has been included in general
      and administrative expenses in the condensed consolidated statements of
      operations for the three months ended March 31, 2007 and for the nine months
      ended June 30, 2007.





*Purchase
      Commitments*– As of June 30, 2007, the Company has entered into purchase
      commitments for materials, supplies, equipment and outside services in aggregate
      of approximately $8.2 million.





*Warranty
      Accruals*– The Company provides a standard warranty of its products from
      defects in materials and workmanship.  The standard warranty is
      limited to repair or replacement, at the Company’s option, of defective items
      authorized for return within one year from the date of the sale.  The
      table below sets forth the activity of the Company’s warranty reserve (in
      thousands), which is included in other accrued expenses in the accompanying
      consolidated balance sheets:


**Three
                  Months Ended June 30,**
              
              
              **Nine
                  months Ended****June
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Balance
                  at beginning of period
              
              $
              36
              
              
              $
              15
              
              
              $
              26
              
              
              $
              14Additions
                  (reductions) charged to expense
              
              
              (19
              )
              
              
              27
              
              
              
              (2
              )
              
              
              44Deductions
              
              
              (2
              )
              
              
              (9
              )
              
              
              (9
              )
              
              
              (25
              )Balance
                  at end of period
              
              $
              15
              
              
              $
              33
              
              
              $
              15
              
              
              $
              33




**14.**
            **RELATED
                  PARTY TRANSACTIONS**




The
      Company became a majority-owned subsidiary of Oplink as of June 5,
      2007.  Prior to June 5, 2007, the Company was a majority-owned
      subsidiary of Furukawa.  Two members of the Company’s current board of
      directors are Oplink executives and three other members of the Company’s current
      board of directors are directors of Oplink.  The Company’s related
      party transactions occur between itself and Furukawa-owned subsidiaries and
      affiliates through June 5, 2007 and with Oplink subsequent to June 5,
      2007.





The
      Company sells fiber optic components to Furukawa and Oplink and purchases raw
      materials from Furukawa in the regular course of business.  Sales of
      fiber optic modules to related parties amounted to $58,000 and $22,000 for
      the
      three months ended June 30, 2007 and 2006, respectively, and $65,000 and $52,000
      for the nine months ended June 30, 2007 and 2006,
      respectively.  Purchases of raw materials from Furukawa amounted to
      $2,897,000 and $8,747,000 for the three months ended June 30, 2007 and 2006,
      respectively, and $8,315,000 and $18,317,000 for the nine months ended June
      30,
      2007 and 2006, respectively.  Accounts receivable due from Oplink were
      $48,000 at June 30, 2007. There were no accounts receivable due from Furukawa
      at
      September 30, 2006.  There were no accounts payable to any related
      party at June 30, 2007.  Accounts payable to Furukawa was $2,142,000
      at September 30, 2006.  No management fees were paid in the three and
      nine months ended June 30, 2007 and 2006, respectively.


22


**15.**
            **SEGMENT
                    INFORMATION**




The
      Company’s CEO and CFO are its chief operating decision makers.  Prior
      to the quarter ended March 31, 2007, the Company operated as one reportable
      segment.  The Company’s CEO and CFO determined that due to changes in
      the economic characteristics of its OCP Woodland Hills and OCP Asia
      operations, primarily associated with negative gross margins for OCP Asia
      during the three and six months ended March 31, 2007 and those projected for
      the
      remainder of the current fiscal year, along with projected lower gross margins
      for OCP Asia as compared to OCP Woodland Hills for the next three years, that
      the Company operates in two reportable segments – the design and manufacture of
      fiber optic modules for use in MANs and LANs (the OCP Woodland Hills reportable
      segment) and FTTH networks (the OCP Asia reportable segment).





The
      following table sets forth
      statement of operations information by reportable segment (dollars in
      thousands):





**Three
                  Months Ended June 30,**
              
              
              **Nine
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**REVENUE:OCP
                  Woodland Hills
              
              $
              14,060
              
              
              $
              14,913
              
              
              $
              42,115
              
              
              $
              51,003OCP
                  Asia
              
              
              3,391
              
              
              
              —
              
              
              
              8,853
              
              
              
              —Less
                  inter-segment revenue
              
              
              (300
              )
              
              
              —
              
              
              
              (402
              )
              
              
              —Total
                  Revenue
              
              $
              17,151
              
              
              $
              14,913
              
              
              $
              50,566
              
              
              $
              51,003GROSS
                  PROFIT:OCP
                  Woodland Hills
              
              $
              2,783
              
              
              $
              3,356
              
              
              $
              7,199
              
              
              $
              16,038OCP
                  Asia
              
              
              (1,651
              )
              
              
              —
              
              
              
              (3,435
              )
              
              
              —Less
                  inter-segment gross profit
              
              
              —
              
              
              
              —
              
              
              
              (7
              )
              
              
              —Total
                  gross profit
              
              $
              1,132
              
              
              $
              3,356
              
              
              $
              3,757
              
              
              $
              16,038LOSS
                  FROM OPERATIONS:OCP
                  Woodland Hills
              
              $
              (6,483
              )
              
              $
              (1,980
              )
              
              $
              (26,740
              )
              
              $
              (1,498
              )OCP
                  Asia
              
              
              (3,264
              )
              
              
              —
              
              
              
              (7,335
              )
              
              
              —Total
                  loss from operations
              
              $
              (9,747
              )
              
              $
              (1,980
              )
              
              $
              (34,075
              )
              
              $
              (1,498
              )INVESTMENT
                  INCOME – OCP Woodland
                Hills
              
              
              1,312
              
              
              
              1,601
              
              
              
              4,296
              
              
              
              4,349OTHER
                  INCOME:OCP
                  Woodland Hills
              
              
              (4
              )
              
              
              101
              
              
              
              29
              
              
              
              239OCP
                  Asia
              
              
              9
              
              
              
              —
              
              
              
              72
              
              
              
              —Total
                  other income
              
              
              1,317
              
              
              
              1,702
              
              
              
              4,397
              
              
              
              4,588(LOSS)
                  INCOME BEFORE INCOME TAXES:OCP
                  Woodland Hills
              
              
              (5,175
              )
              
              
              (278
              )
              
              
              (22,415
              )
              
              
              3,090OCP
                  Asia
              
              
              (3,255
              )
              
              
              —
              
              
              
              (7,263
              )
              
              
              —Total
                  (loss) income before income taxes
              
              
              (8,430
              )
              
              
              (278
              )
              
              
              (29,678
              )
              
              
              3,090PROVISION
                  FOR INCOME TAXES – OCP Woodland Hills
              
              
              140
              
              
              
              159
              
              
              
              183
              
              
              
              298NET
                  (LOSS) INCOME:OCP
                  Woodland Hills
              
              
              (5,315
              )
              
              
              (437
              )
              
              
              (22,598
              )
              
              
              2,792OCP
                  Asia
              
              
              (3,255
              )
              
              
              —
              
              
              
              (7,263
              )
              
              
              —Total
                  net (loss) income
              
              $
              (8,570
              )
              
              $
              (437
              )
              
              $
              (29,861
              )
              
              $
              2,792


23


The
      following table represents depreciation and amortization by reportable segment
      (dollars in thousands):




**Three
                Months Ended June 30,**
            
            
            **Nine
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**DEPRECIATION
                AND AMORTIZATION:OCP
                Woodland Hills
            
            $
            640
            
            
            $
            737
            
            
            $
            1,906
            
            
            $
            2,567OCP
                Asia
            
            
            648
            
            
            
            —
            
            
            
            1,883
            
            
            
            —Total
                depreciation and amortization
            
            $
            1,288
            
            
            $
            737
            
            
            $
            3,789
            
            
            $
            2,567







Included
      in loss from operations for the nine months ended June 30, 2007 is $8,486,000
      of
      goodwill impairment charges associated with OCP Woodland Hills.




The
      following table represents total assets by reportable segment (dollars in
      thousands):




**June
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**OCP
                Woodland Hills
            
            
            $
            162,329
            
            
            $
            180,792OCP
                Asia
            
            
            
            15,960
            
            
            
            26,526$
            178,289
            
            
            $
            207,318





**16.**
            **SUBSEQUENT
                    EVENT**




On
      July
      13, 2007, the Company and StrataLight entered into an option agreement whereby
      StrataLight may elect to repurchase all of the Company’s equity interest in
      StrataLight for an aggregate purchase price of $5,000,000 plus the cumulative
      dividends through the date of the repurchase.  The option agreement
      requires that, if StrataLight exercises its option, the repurchase must be
      completed by August 31, 2007.





**ITEM
                2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**




The
      following discussion of our financial condition and results of operations should
      be read in conjunction with our condensed consolidated financial statements
      and
      the related notes to such condensed consolidated financial statements included
      elsewhere in this Report.  The following discussion contains
      forward-looking statements that involve risks and
      uncertainties.  Words such as “anticipates,” “expects,” “intends,”
“plans,” “believes,” “may” or similar expressions are intended to identify
      forward-looking statements.  The statements are based on current
      expectations and actual results could differ materially from those discussed
      herein.  Factors that could cause or contribute to the differences are
      discussed below in this Report under “Risk Factors” and elsewhere in this
      Report, and in our Annual Report on Form 10-K filed with the Securities and
      Exchange Commission (“SEC”) for the year ended September 30, 2006.





***Recent
      Accounting Pronouncements***





In
      June
      2006, the FASB issued FASB Interpretation No. (FIN) 48 — “Accounting for
      Uncertainty in Income Taxes — an interpretation of FASB Statement
      No. 109”. FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on accounting for derecognition, interest, penalties,
      accounting in interim periods, disclosure and classification of matters related
      to uncertainty in income taxes, and transitional requirements
      upon


24


adoption
      of FIN 48. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. Management is currently evaluating the effect that
      adoption of this interpretation will have on the Company’s consolidated
      financial position and results of operations.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements. SFAS No. 157
      applies under other accounting pronouncements that require or permit fair value
      measurements, the FASB having previously concluded in those accounting
      pronouncements that fair value is the relevant measurement attribute.
      Accordingly, SFAS No. 157 does not require any new fair value
      measurements. This statement is effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Management is currently evaluating the effect that the
      adoption of this pronouncement will have on the Company’s consolidated financial
      position or results of operations.




In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects
      of Prior Year Misstatements When Quantifying Misstatements in Current Year
      Financial Statement.” Due to diversity in practice among registrants,
      SAB 108 expresses SEC staff views regarding the process by which
      misstatements in financial statements are evaluated for purposes of determining
      whether financial statement restatement is necessary. SAB 108 is effective
      for fiscal years ending after November 15, 2006, and early application is
      encouraged.  The Company has adopted SAB 108 for the fiscal year ended
      September 30, 2007 and it did not have a significant impact on the Company’s
      consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Liabilities – Including an amendment of FASB Statement No. 115” (SFAS
      159), which permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. SFAS 159 is effective for the Company
      beginning October 1, 2008, and the provisions of SFAS 159 will be applied
      prospectively as of that date. Management is currently evaluating the effect
      that adoption of this statement will have on the Company’s consolidated
      financial position and results of operations when it becomes effective in
      2008.





**Critical
      Accounting Policies**





The
      preparation of condensed consolidated financial statements and related
      disclosures in conformity with accounting principles generally accepted in
      the
      United States requires management to make judgments, assumptions and estimates
      that affect the amounts reported in the condensed consolidated financial
      statements and accompanying notes.  Note 2 to the consolidated
      financial statements in the Annual Report on Form 10-K for the fiscal year
      ended
      September 30, 2006 describes the significant accounting policies and methods
      used in the preparation of the condensed consolidated financial statements.
      Estimates are used for, but not limited to, the accounting for the allowance
      for
      doubtful accounts and sales returns, valuation of inventory, long-lived assets,
      SFAS 123(R) fair value calculations for stock-based compensation, income taxes
      and loss contingencies. Actual results could differ from these estimates. The
      following critical accounting policies are impacted significantly by judgments,
      assumptions and estimates used in the preparation of our condensed consolidated
      financial statements.


25


**Allowance
      for Doubtful Accounts and Sales Returns**




Our
      accounts receivable balance, net of allowance for doubtful accounts and sales
      returns, was $10.7 million as of June 30, 2007 as compared to $11.2 million
      as of September 30, 2006.  The allowance for doubtful accounts
      and sales returns as of June 30, 2007 was $472,000 as compared to $550,000
      as of
      September 30, 2006.  The allowance is based on our assessment of
      the collectability of customer accounts and potential returns.  We
      regularly review the allowance by considering factors such as historical
      experience, credit quality, age of the accounts receivable balances, current
      economic conditions that may affect a customer’s ability to pay and historical
      customer returns.  If a major customer’s creditworthiness
      deteriorates, or if actual defaults are higher than our historical experience,
      or if actual future customer returns were to be higher from our expectations,
      our estimates of the recoverability of amounts due to us could be overstated,
      and additional allowances could be required, which could have an adverse impact
      on our operations.




**Inventory
      Write-Downs**




Our
      inventory balance was $22.3 million as of June 30, 2007 as compared to
      $25.7 million as of September 30, 2006.  We estimate the
      excess and obsolete inventory primarily through reference to historical usage
      and future demand forecasts.  We operate in a highly volatile industry
      with high and unpredictable rates of inventory obsolescence. At the point of
      write down to net realizable value, a new, lower-cost basis for that inventory
      is established, and subsequent changes in facts and circumstances do not result
      in the restoration or increase in that newly established cost
      basis.  If there were to be a sudden and significant decrease in
      demand for our products, or if there were a higher incidence of inventory
      obsolescence because of rapidly changing technology and customer requirements,
      we could be required to increase inventory write-downs, and our gross margin
      could be adversely affected.




**Long-Lived
      Assets**




SFAS
      144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” requires us to
      monitor and evaluate the recoverability of our long-lived assets whenever events
      or changes in circumstances indicate that the carrying value of an asset may
      no
      longer be recoverable.  If the carrying amount of a long-lived asset
      exceeds the expected future cash flows (undiscounted and without interest
      charges) from the use of the asset, the Company recognizes an impairment loss
      in
      the amount of the difference between the carrying amount and the fair value
      of
      the asset.  For purposes of estimating future cash flows from
      potentially impaired assets, the Company groups assets at the lowest level
      for
      which there are identifiable cash flows that are largely independent of the
      cash
      flows of other groups of assets.  The lowest level for which
      identifiable cash flows are determinable is at the reporting unit
      level.  Our long-lived assets subject to impairment are our property,
      plant and equipment and certain intangible assets that had net carrying values
      of $10.7 million****and $3.2 million, respectively, at June
      30, 2007.  Assumptions used in determining whether our long-lived
      assets are impaired include estimating if the undiscounted future cash flows
      will be sufficient to recover the value of our long-lived
      assets.  However, such estimates of future cash flows are subject to
      change because the underlying assumptions, such as revenues and expenses, are
      based on projections that may differ from actual future
      results.  Should our estimates of future undiscounted cash flows
      indicate that the carrying value of our long-lived assets may not be
      recoverable, the Company would be required to determine the fair value of those
      assets and record a loss for the difference, if any, between the carrying value
      and the fair value of those assets.  Based upon our impairment
      analysis performed during the quarter ended March 31, 2007 (see Note 4 to the
      condensed consolidated financial statements included in Item 1 of this
      document), the Company determined that the goodwill allocated to the OCP
      Woodland Hills reporting unit was fully impaired and recorded an impairment
      charge of $8.5 million as a non-cash charge to continuing
      operations.




26


**Stock-Based
      Compensation**




During
      the three and nine months ended June 30, 2007, the Company recorded stock-based
      compensation expense of $570,000 and $1,311,000, respectively, in accordance
      with SFAS 123(R), adopted on October 1, 2005.  The current period
      stock-based compensation recognized is based on the amortization of the fair
      value of stock options on their date of grant using a Black-Scholes option
      valuation model. The Black-Scholes option valuation model requires the input
      of
      highly subjective assumptions, including the expected life of the stock-based
      award and stock price volatility.  In addition, management has made an
      estimate of expected forfeitures and is recognizing compensation costs only
      for
      those equity awards expected to vest.  These assumptions represent
      management’s best estimates, but these estimates involve inherent uncertainties
      and the application of management judgment. As a result, if other assumptions
      had been used, our recorded stock-based compensation expense could have been
      materially different from that depicted above.




**Income
      Taxes**




The
      provisions of SFAS No. 109 “Accounting for Income Taxes,” require a
      valuation allowance when, based upon currently available information and other
      factors, it is more likely than not that all or a portion of the deferred income
      tax asset will not be realized.  During the fiscal year ended
      September 30, 2006, the Company released valuation allowance to the extent
      of
      our current period estimated federal income taxes payable as it was considered
      more likely than not that a portion of our deferred income tax assets
      attributable to federal credits and federal book-tax differences would be
      realized.  The Company expects that income taxes payable for fiscal
      2007 will be attributable only to foreign taxes payable and that there will
      be
      no liability and no release of valuation allowance related to Federal or state
      income taxes.  The Company expects to maintain the remaining valuation
      allowance until sufficient evidence exists, in the form of sustained
      profitability, to support reversal of the valuation allowance on all deferred
      tax assets.




**Loss
      Contingencies**




We
      are
      subject to the possibility of various loss contingencies arising in the ordinary
      course of business.  We consider the likelihood of loss or impairment
      of an asset or the incurrence of a liability, as well as our ability to
      reasonably estimate the amount of loss in determining loss
      contingencies.  An estimated loss is accrued when it is probable that
      an asset has been impaired or a liability has been incurred and the amount
      of
      loss can be reasonably estimated.  We regularly evaluate current
      information available to us to determine whether such accrual should be adjusted
      and whether new accruals are required.




**Overview**





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




Oplink
      beneficially owns 57.9% of our outstanding common stock as of June 30,
      2007.  Since our inception, we have purchased substantially all of our
      lasers and the majority of our other fiber optic components from Furukawa,
      which
      prior to June 5, 2007, beneficially owned all of our outstanding
      Class




27


B
      common
      stock.  We have relied on Furukawa’s research and development
      capabilities to provide us with technologically advanced lasers and fiber optic
      components that we purchase from Furukawa for inclusion in our
      products.  We currently purchase the majority of lasers from Furukawa
      under a Master Purchase Agreement which we entered into with Furukawa on
      October 1, 2003.  This Agreement automatically renews each year
      on October 1st
      unless it is terminated upon written notice by either Furukawa or us prior
      to
      renewal.




In
      the
      last three years, we have negotiated price reductions for the lasers we purchase
      from Furukawa.  However, the laser price reductions that we have been
      able to obtain from Furukawa have been less than the price reductions for the
      associated products that we have given our customers in response to market
      conditions.  As a result, our gross margins have been negatively
      impacted, and may be negatively impacted in the future.  While we
      continue to negotiate with Furukawa with respect to the pricing of the lasers
      we
      purchase from them, there can be no assurance that these efforts will be
      successful in addressing this negative impact on our gross
      margins.  While we believe that our acquisition of OCP Asia has begun
      to provide us with a second source for lasers used within certain of our
      products, reducing our dependence on Furukawa and improving lead times and
      current cost structures, there can be no assurance that we will be able to
      achieve these benefits in the near future or at all.




We
      operate in the following two reportable segments: (i) the design and manufacture
      of fiber optic components for use in MANs and LANs (the OCP Woodland Hills
      reportable segment) and (ii) the FTTH network (the OCP Asia reportable
      segment).  We sell our products to communication equipment
      manufacturers or CEMs, their contract manufacturers or CMs, who incorporate
      them
      into systems they assemble for CEMs and to distributors.  We
      define our customers as CEMs who have purchased our products directly or
      indirectly through CMs and distributors.  Revenue is generally
      recognized and earned when all of the following criteria are satisfied:
      (a) persuasive evidence of a sales arrangement exists; (b) price is
      determinable; (c) collectibility is reasonably assured; and
      (d) delivery has occurred. Delivery generally occurs when the title and the
      risks and rewards of ownership has substantially been transferred to the
      customer. The history of sales returns is analyzed in order to reasonably
      estimate and record an allowance for sales returns.  A small number of
      end customers have historically accounted for a significant portion of our
      total
      revenue.  Our 10 largest customers accounted for approximately 74.6%
      and 70.2% of our total revenue for the nine months ended June 30, 2007 and
      2006,
      respectively with Alcatel, Huawei Technologies, Cisco Systems and Tachibana
      (including sales to each of their contract manufacturers) accounting for
      approximately 16.7%, 16.1%, 13.4% and 11.4% of our total revenue, respectively,
      for the nine months ended June 30, 2007.  Alcatel, Cisco Systems and
      Huawei Technologies (including sales to each of their contract manufacturers)
      accounted for approximately 19.6%, 14.1% and 13.0% of our total revenue,
      respectively, for the nine months ended June 30, 2006.  No other
      customer accounted for more than 10.0% of our total revenue for the nine months
      ended June 30, 2007 and 2006. We expect that significant customer concentration
      will continue for the foreseeable future.  Our sales are made on a
      purchase order basis rather than by long-term purchase
      commitments.  Our customers may cancel or defer purchase orders
      without penalty on short notice.





In
      October 1999, Methode Electronics, Inc. filed a lawsuit against Infineon
      Technologies Corporation and us seeking unspecified damages, including monetary
      damages, injunctive relief, attorneys’ fees and costs arising from our alleged
      infringement of some of the claims contained in patents assigned to Methode,
      including patents relating to our 1x9 pin configuration
      products.  After Methode initiated the lawsuit, it assigned to Stratos
      Lightwave, Inc., a Methode spin-off, all of Methode’s rights, title and interest
      in the patent at issue.  The court subsequently added Stratos as a
      plaintiff to the lawsuit.  On April 12, 2002, we resolved our
      patent infringement litigation with Stratos.  The settlement resolved
      all claims in the lawsuit among us and Stratos.  As part of the
      settlement, we entered into a five-year license agreement with Stratos covering
      Stratos’ portfolio of optoelectronic transceiver patents.  In
      consideration of the license agreement, we were required to pay a total of
      $2 million over the license




28


term,
      which was fully paid in April 2007.  On April 12, 2007, we extended
      the license agreement such that it became coterminous with the expiration of
      the
      licensed patents for a total payment of $450,000, which we made in April
      2007.  Our optoelectronic products covered by this license include our
      1x9, GBIC, small form factor (SFF) and small form-factor pluggable (SFP) product
      families.




The
      Company acquired OCP Asia on August 24, 2006 (see Note 3 to the condensed
      consolidated financial statements contained in Part I of this document). OCP
      Asia was founded in 2000, has its headquarters and manufacturing facilities
      in
      the Hsinchu Science-Based Industrial Park in Taiwan, ROC, and has approximately
      290 employees. OCP Asia is currently a leading supplier of FTTH modules in
      Japan, which is presently the world’s largest FTTH market. OCP Asia’s results of
      operations are included in the Company’s condensed consolidated statements of
      operations for the three and nine months ended June 30, 2007.




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




The
      fastest-growing subsets of the market in which the Company participates, and
      those that currently have the highest margins, involve higher speed
      applications.  The Company, relative to its competitors, does not
      currently have a sufficiently broad product line to compete effectively with
      respect to these applications, especially products operating at 10 Gigabit
      speeds.  Company management is taking steps to improve its competitive
      position in this area, including releasing its first 10 Gigabit Ethernet
      industrial and extended temperature XFP components to its principal customer
      base.




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




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




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




General
      and administrative expenses consist primarily of salaries, stock-based
      compensation and related expenses for our administrative, finance and human
      resources personnel, professional fees and other corporate
      expenses.  Our professional fees include fees associated with the
      proposed merger with Oplink, litigation and accounting and consulting fees
      associated with several finance and accounting




29


projects,
      including our compliance with regulations associated with the Sarbanes-Oxley
      legislation.  As a result, our general and administrative expenses in
      fiscal 2007 will exceed those incurred in fiscal 2006.




Transitional
      costs for contract manufacturing consist primarily of accruals for severance
      and
      retention benefits related to planned workforce reductions, along with expenses
      incurred to relocate certain fixed assets and product qualification associated
      with the manufacturing of certain of our product lines in China which began
      in
      July 2007.




The
      Company recorded a goodwill
      impairment charge, associated with its OCP Woodland Hills segment, of $8.5
      million as a non-cash charge to continuing operations during the three months
      ended March 31, 2007.







**Results
      of Operations – Comparison of Three Months Ended June 30, 2007 and
      2006**




The
      following management discussion and analysis refers to and analyzes our results
      of operations into two segments as defined by our management.  These
      two segments are our OCP Woodland Hills and OCP Asia segments.





The
      following table sets forth statement of operations data and percentage of change
      for the three months ended June 30, 3007 and 2006 (dollars in thousands):





**Three
                  Months Ended June 30,**
              
              
              **Increase
                  / Decrease**
              
              **%****2007**
              
              
              **2006**
              
              
              
              **Change**REVENUE
              $
              17,151
              
              
              100.0
              %
              
              $
              14,913
              
              
              100.0
              %
              
              $
              2,238
              
              15.0
              %COST
                  OF REVENUE
              
              16,019
              
              
              93.4
              %
              
              
              11,557
              
              
              77.5
              %
              
              
              4,462
              
              38.6
              %GROSS
                  PROFIT
              
              1,132
              
              
              6.6
              %
              
              
              3,356
              
              
              22.5
              %
              
              
              (2,224
              )
              (66.3
              )%OPERATING
                  EXPENSES:Research
                  and development
              
              3,155
              
              
              18.4
              %
              
              
              2,521
              
              
              16.9
              %
              
              
              634
              
              25.2
              %Selling
                  and marketing
              
              1,506
              
              
              8.8
              %
              
              
              1,203
              
              
              8.1
              %
              
              
              303
              
              25.2
              %General
                  and administrative
              
              5,121
              
              
              29.8
              %
              
              
              1,612
              
              
              10.8
              %
              
              
              3,509
              
              217.7
              %Transitional
                  costs for contract manufacturing
              
              1,097
              
              
              6.4
              %
              
              
              —
              
              
              —
              
              
              
              1,097
              
              —Total
                  operating expenses
              
              10,879
              
              
              63.4
              %
              
              
              5,336
              
              
              35.8
              %
              
              
              5,543
              
              103.9
              %LOSS
                  FROM OPERATIONS
              
              (9,747
              )
              
              (56.8
              )%
              
              
              (1,980
              )
              
              (13.3
              )%
              
              
              (7,767
              )
              (392.3
              )%INVESTMENT
                  INCOME
              
              1,312
              
              
              7.7
              %
              
              
              1,601
              
              
              10.7
              %
              
              
              (289
              )
              (18.1
              )%OTHER
                  INCOME, NET
              
              5
              
              
              0.0
              %
              
              
              101
              
              
              0.7
              %
              
              
              (96
              )
              (95.1
              )%LOSS
                  BEFORE INCOME TAXES
              
              (8,430
              )
              
              (49.1
              )%
              
              
              (278
              )
              
              (1.9
              )%
              
              
              (8,152
              )
              (2,932.4
              )%PROVISION
                  FOR INCOME TAXES
              
              140
              
              
              (0.9
              )%
              
              
              159
              
              
              1.0
              %
              
              
              (19
              )
              (12.0
              )%NET
                  LOSS
              $
              (8,570
              )
              
              (50.0
              )%
              
              $
              (437
              )
              
              (2.9
              )%
              
              $
              (8,133
              )
              (1,861.1
              )%


30


**Revenues**


**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              14,060
              
              
              
              
              
              
              $
              14,913OCP
                  Asia
              
              
              3,391
              
              
              
              
              
              
              
              —17,451
              
              
              
              
              
              
              
              14,913Less
                  inter-segment revenues
              
              
              (300
              )
              
              
              
              
              
              
              —Total
                  Revenues
              
              $
              17,151
              
              
              
              
              
              
              $
              14,913Percentage
                  Increase
              
              
              
              
              
              
              15.0%





Revenues
      increased $2,238,000 or 15.0% during the comparable quarters.  OCP
      Woodland Hills revenues decreased by $853,000 or 5.7 % offset by the inclusion
      of $3,391,000 in revenues from OCP Asia during the three months ended June
      30,
      2007.  The decrease in revenues, excluding the revenues from OCP Asia,
      was primarily due to an approximate 8.7% reduction in unit sales offset by
      a
      3.3% increase in average sales prices.  The increase in the average
      sales prices is primarily attributable to changes in product mix associated
      with
      customers purchasing specific parts which have higher unit prices in the three
      months ended June 30, 2007 which differed from specific parts purchased in
      the
      three months ended June 30, 2006.  While average sales prices
      increased in the current quarter, future customer price reductions and changes
      in product mix may result in lower average sales prices.  The most
      significant product decrease in absolute dollars for OCP Woodland Hills was
      in
      Transceivers.




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




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              **2006**Transceivers
              
              
              88.7
              %
              
              
              88.3
              %Transmitters
              
              
              6.0
              %
              
              
              5.7
              %Receivers
              
              
              4.3
              %
              
              
              5.5
              %Other
              
              
              1.0
              %
              
              
              0.5
              %100.0
              %
              
              
              100.0
              %





**Gross
      Profit (Loss)**




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              **2006****(Dollars
                  in thousands)****Gross
                  Profit (Loss)**OCP
                  Woodland Hills
              
              $
              2,783
              
              
              $
              3,356OCP
                  Asia
              
              
              (1,651
              )
              
              
              —Total
                  Gross Profit (Loss)
              
              $
              1,132
              
              
              $
              3,356**Gross
                  Margin**OCP
                  Woodland Hills
              
              
              19.8
              %
              
              
              22.5
              %OCP
                  Asia
              
              
              (48.7
              )%
              
              
              —Total
                  Gross Margin
              
              
              6.6
              %
              
              
              22.5
              %


31


Cost
        of
        revenue increased 38.6% to $16,019,000 in the three months ended June 30,
        2007
        from $11,557,000 in the three months ended June 30, 2006. Cost of revenue
        attributable to OCP Woodland Hills and OCP Asia were $11,277,000 and $5,042,000,
        respectively, in the three months ended June 30, 2007.  The gross
        margins for OCP Woodland Hills and OCP Asia were 19.8% and (48.9)%,
        respectively, for the three months ended June 30, 2007. The gross margin
        for OCP
        Woodland Hills was 22.5% for the three months ended June 30,
        2006.  Gross profit and gross margins at OCP Woodland Hills decreased
        during the current quarter due to a 8.7% reduction in units shipped offset
        by a
        change in product mix, resulting in a 3.3% increase in average selling
        prices.  OCP Woodland Hills also wrote down inventory by $520,000
        during the three months ended June 30, 2007 primarily due to excess and obsolete
        inventory on hand due to lower projected usage and taking additional lower
        of
        cost-or-market reserves of $682,000 due to price reductions granted as a
        result
        of continuing pricing pressures in the market.  In addition, gross
        margins were positively impacted due to the usage of previously written down
        inventory of $590,000 during the three months ended June 30, 2007 compared
        to
        approximately $400,000 in the three months ended June 30, 2006.  The
        negative gross margins for OCP Asia is primarily attributable to competitive
        pricing pressures, $628,000 associated with excess manufacturing capacity
        and
        labor and $301,000 of retention bonus accruals.  Stock-based
        compensation expense charged to manufacturing overhead was $54,000 and $15,000
        for the three months ended June 30, 2007 and 2006, respectively.  The
        above items will continue to impact gross profit and margins in the
        future.


**Research
      and Development (R&D)**




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              2,462
              
              
              
              
              
              
              $
              2,521OCP
                  Asia
              
              
              693
              
              
              
              
              
              
              
              —Total
                  Research and Development
              
              $
              3,155
              
              
              
              
              
              
              $
              2,521Percentage
                  Increase
              
              
              
              
              
              
              25.2%


Research
      and development expense increased $634,000 to $3,154,000 in the three months
      ended June 30, 2007 from $2,521,000 in the three months ended June 30,
      2006.  Research and development expense attributable to OCP Asia for
      the three months ended June 30, 2007 was $693,000.  Research and
      development expense for OCP Woodland Hills did not materially change on a
      comparable quarterly basis.  Stock-based compensation expense charged
      to research and development expenses was $87,000 and $60,000 for the three
      months ended June 30, 2007 and 2006, respectively.  We believe that
      continued investment in research and development is critical to our future
      success and these expenses may increase in absolute dollars in the
      future.




**Sales
      and Marketing**




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              1,265
              
              
              
              
              
              
              $
              1,203OCP
                  Asia
              
              
              241
              
              
              
              
              
              
              
              —Total
                  Sales and Marketing
              
              $
              1,506
              
              
              
              
              
              
              $
              1,203Percentage
                  Increase
              
              
              
              
              
              
              25.2%


Sales
          and
          marketing expenses increased $303,000 in the three months ended June 30,
          2007
          from the three months ended June 30, 2006.  Sales and marketing
          expenses attributable to OCP Asia in the




32


three
          months ended June 30, 2007 were $241,000.  Sales and marketing expense
          for OCP Woodland Hills did not materially change on a comparable quarterly
          basis.  Stock-based compensation expense charged to sales and
          marketing expenses was $43,000 and $5,000 for the three months ended June
          30,
          2007 and 2006, respectively.  We believe that investment in sales and
          marketing is critical to our success and these expenses may increase in
          absolute
          dollars in the future.




**General
      and Administrative**




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              4,634
              
              
              
              
              
              
              $
              1,612OCP
                  Asia
              
              
              487
              
              
              
              
              
              
              
              —General
                  and administrative expense
              
              $
              5,121
              
              
              
              
              
              
              $
              1,612Percentage
                  Increase
              
              
              
              
              
              
              217.7%
  General
          and administrative expenses increased $3,509,000 in the three months ended
          June
          30, 2007 from the three months ended June 30, 2006. General and administrative
          expenses attributable to OCP Asia in the three months ended June 30, 2007
          were
          $487,000.  The $3,022,000 increase for OCP Woodland Hills includes an
          increase in professional services of $2,594,000, primarily due to $1,854,000
          in
          investment banking fees, legal, public relations and additional board of
          directors’ expenses associated with the proposed merger with Oplink, $344,000 of
          additional accounting fees relative to several finance and accounting projects,
          including our compliance with regulations associated with the Sarbanes-Oxley
          legislation and $329,000 of legal expenses, which includes expenses associated
          with the settlement of the Olympia litigation.  Other significant
          increases in general and administrative expenses include a $57,000 increase
          in
          travel related expenses and $56,000 of recruitment fees incurred during
          the
          quarter ended June 30, 2007.  In addition, $118,000 of costs, such as
          depreciation, taxes and utilities, associated with space previously occupied
          by
          a lessee in our Woodland Hills facility, are now classified as general
          and
          administrative expenses.  Previously, such expenses were offset by
          rental income and included in other income in the accompanying condensed
          consolidated financial statements. Stock-based compensation expense charged
          to
          general and administrative expenses was $386,000 and $82,000 for the three
          months ended June 30, 2007 and 2006, respectively.




The
      Company expects our general and administrative expenses to increase
      significantly in the quarter ending September 30, 2007 as a result of the
      activities related to the proposed merger with Oplink.




**Transitional
      Costs for Contract Manufacturing**




OCP
      Woodland Hills and OCP Asia have incurred transitional costs for contract
      manufacturing of $905,000 and $192,000 for the three months ended June 30,
      2007,
      respectively.  In connection with the transition to manufacture
      certain of our product lines in China with SAE, we expect to maintain our
      existing manufacturing facilities but will reduce our workforce once
      manufacturing at SAE begins.  The transitional charges are related
      primarily to estimated severance and retention
      payments,****along with expenses incurred to relocate certain
      fixed assets and product qualification associated with the manufacturing of
      certain of our product lines in China which began in July 2007. These
      transitional charges are estimated to be approximately $3.4 million for fiscal
      2007.




33


**Investment
      Income and Other Income, Net**




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**Investment
                  income
              
              $
              1,312
              
              
              
              
              
              
              $
              1,601Other
                  income (expenses), net
              
              
              5
              
              
              
              
              
              
              
              101Total
              
              $
              1,317
              
              
              
              
              
              
              $
              1,702Percentage
                  Decrease
              
              
              
              
              
              
              (22.6)%


******The
      total of investment income and other income, net decreased $385,000 in the
      three
      months ended June 30, 2007 from the three months ended June 30,
      2006.  This decrease was primarily due to less investment income as a
      result of a decrease in the combined amounts of cash equivalents and marketable
      securities since June 30, 2006. Other income attributable to OCP Asia and
      included in other income, net was $9,000 in the three months ended June 30,
      2007.  Rental income included in other income, net for the three
      months ended June 30, 2006 was $101,000.  There was no rental income
      from subleasing a portion of the facility for the three months ended June 30,
      2007.




**Provision
      for income taxes**




**Three
                  Months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**Income
                  tax provision
              
              $
              140
              
              
              
              
              
              
              $
              159


The
      income tax provision of $140,000 for the three months ended June 30, 2007
      represents a net Federal tax provision of $51,000, statutory state tax
      provisions of $62,000 and a foreign tax provision of $27,000 for the current
      period.  The income tax provision of $159,000 for the three months
      ended June 30, 2006 was comprised of foreign taxes in the amount of $149,000
      and
      state income taxes of $10,000.





34


**Results
      of Operations – Comparison of Nine months Ended June 30, 2007 and
      2006**




The
      following table sets forth statement of operations data and percentage of change
      for the nine months ended June 30, 3007 and 2006 (dollars in thousands):




**Nine
                      months Ended June 30,**
                  
                  
                  **Increase
                      / (Decrease)**
                  
                  
                  **%****2007**
                  
                  
                  **2006**
                  
                  
                  
                  
                  **Change**REVENUE
                  $
                  50,566
                  
                  
                  100.0
                  %
                  
                  $
                  51,003
                  
                  
                  100.0
                  %
                  
                  $
                  (437
                  )
                  
                  (0.9
                  )%COST
                      OF REVENUE
                  
                  46,809
                  
                  
                  92.6
                  %
                  
                  
                  34,965
                  
                  
                  68.5
                  %
                  
                  
                  11,844
                  
                  
                  33.9
                  %GROSS
                      PROFIT
                  
                  3,757
                  
                  
                  7.4
                  %
                  
                  
                  16,038
                  
                  
                  31.5
                  %
                  
                  
                  (12,281
                  )
                  
                  (76.6
                  )%OPERATING
                      EXPENSES:Research
                      and development
                  
                  9,044
                  
                  
                  17.9
                  %
                  
                  
                  8,280
                  
                  
                  16.2
                  %
                  
                  
                  764
                  
                  
                  9.2
                  %Selling
                      and marketing
                  
                  4,262
                  
                  
                  8.4
                  %
                  
                  
                  3,705
                  
                  
                  7.3
                  %
                  
                  
                  557
                  
                  
                  15.0
                  %General
                      and administrative
                  
                  13,632
                  
                  
                  27.0
                  %
                  
                  
                  5,551
                  
                  
                  10.9
                  %
                  
                  
                  8,081
                  
                  
                  145.6
                  %Transitional
                      cost for contract manufacturing
                  
                  2,408
                  
                  
                  4.8
                  %
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  2,408
                  
                  
                  —Impairment
                      of goodwill
                  
                  8,486
                  
                  
                  16.8
                  %
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  8,486
                  
                  
                  —Total
                      operating expenses
                  
                  37,832
                  
                  
                  74.8
                  %
                  
                  
                  17,536
                  
                  
                  34.4
                  %
                  
                  
                  20,296
                  
                  
                  115.7
                  %LOSS
                      FROM OPERATIONS
                  
                  (34,075
                  )
                  
                  (67.4
                  )%
                  
                  
                  (1,498
                  )
                  
                  (2.9
                  )%
                  
                  
                  (32,577
                  )
                  
                  (2,174.7
                  )%INVESTMENT
                      INCOME
                  
                  4,296
                  
                  
                  8.5
                  %
                  
                  
                  4,349
                  
                  
                  8.5
                  %
                  
                  
                  (53
                  )
                  
                  (1.2
                  )%OTHER
                      INCOME, NET
                  
                  101
                  
                  
                  0.2
                  %
                  
                  
                  239
                  
                  
                  0.5
                  %
                  
                  
                  (138
                  )
                  
                  (57.7
                  )%(LOSS)
                      INCOME BEFORE INCOME TAXES
                  
                  (29,678
                  )
                  
                  (58.7
                  )%
                  
                  
                  3,090
                  
                  
                  6.1
                  %
                  
                  
                  (32,768
                  )
                  
                  (1,060.5
                  )%PROVISION
                      FOR INCOME TAXES
                  
                  183
                  
                  
                  0.4
                  %
                  
                  
                  298
                  
                  
                  0.6
                  %
                  
                  
                  (115
                  )
                  
                  (38.6
                  )%NET
                      (LOSS) INCOME
                  $
                  (29,861
                  )
                  
                  (59.1
                  )%
                  
                  $
                  2,792
                  
                  
                  5.5
                  %
                  
                  $
                  (32,653
                  )
                  
                  (1,169.5
                  )%




**Revenues**




**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              42,115
              
              
              
              
              
              
              $
              51,003OCP
                  Asia
              
              
              8,853
              
              
              
              
              
              
              
              —50,968
              
              
              
              
              
              
              
              51,003Less
                  inter-segment revenues
              
              
              (402
              )
              
              
              
              
              
              
              —Total
                  Revenues
              
              $
              50,566
              
              
              
              
              
              
              $
              51,003Percentage
                  Decrease
              
              
              
              
              
              
              (0.9
              )%




Revenues
      decreased $437,000 or 0.9% during the comparable periods.  OCP
      Woodland Hills revenues decreased by $8,888,000 or 17.4 % and were partially
      offset by the inclusion of $8,853,000 in revenues from OCP Asia during the
      nine
      months ended June 30, 2007.  The decrease in revenues, excluding the
      revenues from OCP Asia, was primarily due to an approximate 7.6% reduction
      in
      unit sales and a 10.6% reduction in average sales prices. The decrease in the
      average sales prices is primarily attributable to changes in product mix
      associated with customers purchasing specific parts which have lower unit prices
      in the nine months ended June 30, 2007 which differed from specific parts
      purchased in the nine months ended June 30, 2006.  Future customer
      price reductions and changes in product mix may result in lower average sales
      prices.  The most significant product decrease in absolute dollars was
      in Transceivers.




35


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




**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              **2006**Transceivers
              
              
              87.4
              %
              
              
              88.3
              %Transmitters
              
              
              5.4
              %
              
              
              5.7
              %Receivers
              
              
              3.7
              %
              
              
              5.5
              %Other
              
              
              3.5
              %
              
              
              0.5
              %100.0
              %
              
              
              100.0
              %


**Gross
      Profit (Loss)**




**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              **2006****(Dollars
                  in thousands)****Gross
                  Profit (Loss)**OCP
                  Woodland Hills
              
              $
              7,200
              
              
              $
              16,038OCP
                  Asia
              
              
              (3,435
              )
              
              
              —3,765
              
              
              
              16,038Less
                  inter-segment gross profit (loss)
              
              
              (6
              )
              
              
              —Total
                  Gross Profit (Loss)
              
              $
              3,759
              
              
              $
              16,038**Gross
                  Margin**OCP
                  Woodland Hills
              
              
              17.1
              %
              
              
              31.5
              %OCP
                  Asia
              
              
              (38.8
              )%
              
              
              —Total
                  Gross Margin
              
              
              7.4
              %
              
              
              31.5
              %




Cost of revenue increased 33.9% to $46,809,000 in the nine months ended June
        30,
        2007 from $34,965,000 in the nine months ended June 30, 2006. Cost of revenue
        attributable to OCP Woodland Hills and OCP Asia were $34,917,000 and
        $12,288,000, respectively, in the nine months ended June 30,
        2007.  The gross margins for OCP Woodland Hills and OCP Asia were
        17.1% and (38.8)%, respectively, for the nine months ended June 30, 2007.
        The
        gross margin for OCP Woodland Hills was 31.5% for the nine months ended June
        30,
        2006.  Gross profit and gross margins at OCP Woodland Hills were
        negatively impacted during the current fiscal year due to competitive pricing
        pressures and changes in product mix, resulting in a 10.6% decrease in average
        selling prices and a 7.6% reduction in units shipped which was partially
        offset
        by a 6.8% reduction in standard raw material costs.  OCP Woodland
        Hills also wrote down inventory by $4,301,000 during the nine months ended
        June
        30, 2007 primarily due to excess and obsolete inventory on hand due to lower
        projected usage and taking a lower of cost-or-market reserve of $990,000
        due to
        price reductions granted as a result of continuing pricing pressures in the
        market.    In addition, the decrease in gross margin was
        also attributed to lower amounts of previously reserved inventory being
        utilized.  The usage of previously written down inventory was
        $1,479,000 during the nine months ended June 30, 2007 compared to approximately
        $1,800,000 in the three months ended June 30, 2006.  The negative
        gross margins for OCP Asia is primarily attributable to competitive pricing
        pressures, $1,078,000 associated with excess manufacturing and labor capacity
        and a $827,000 write down of inventory to net realizable value during the
        nine
        months ended June 30, 2007.  Stock-based compensation expense charged
        to manufacturing overhead was $125,000 and $55,000 for the nine months ended
        June 30, 2007 and 2006, respectively.  The above items will continue
        to impact gross profit and margins in the future.




36


**Research
      and Development (R&D)**





**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              7,439
              
              
              
              
              
              
              $
              8,280OCP
                  Asia
              
              
              1,611
              
              
              
              
              
              
              
              —9,050
              
              
              
              
              
              
              
              8,280Less
                  inter-segment research and development charges
              
              
              (6
              )
              
              
              
              
              
              
              —Total
                  Research and Development
              
              $
              9,044
              
              
              
              
              
              
              $
              8,280Percentage
                  Increase
              
              
              
              
              
              
              9.2%





Research
      and development expense increased $764,000 to $9,040,000 in the nine months
      ended June 30, 2007 compared to the comparable 2006 period.  Research
      and development expense attributable to OCP Asia for the nine months ended
      June
      30, 2007 was $1,611,000.  Research and development expense for OCP
      Woodland Hills decreased by $841,000 on a comparable quarterly basis, primarily
      due to the closure of the Colorado research and development facility (see Part
      IV, Item 15, Note 4 to the consolidated financial statements in our Annual
      Report on Form 10-K filed with the SEC) in the second quarter of fiscal 2006,
      which incurred expenses of $1,434,000 during the nine months ended June 30,
      2006.  Other research and development expenses, exclusive of the costs
      associated with the Colorado research and development facility, increased
      $593,000 on a comparable quarterly basis, primarily due to higher salaries
      and
      benefits ($239,000), professional and consulting fees ($221,000) and equipment
      expenses ($153,000).   Stock-based compensation expense charged
      to research and development expenses was $229,000 and $273,000 for the nine
      months ended June 30, 2007 and 2006, respectively.  We believe that
      continued investment in research and development is critical to our future
      success and these expenses may increase in absolute dollars in the
      future.




**Sales
      and Marketing**





**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              3,732
              
              
              
              
              
              
              $
              3,705OCP
                  Asia
              
              
              530
              
              
              
              
              
              
              
              —Total
                  Sales and Marketing
              
              $
              4,262
              
              
              
              
              
              
              $
              3,705Percentage
                  Increase
              
              
              
              
              
              
              15.0%





Sales
      and
      marketing expenses increased $557,000 in the nine months ended June 30, 2007
      from the nine months ended June 30, 2006.  Sales and marketing
      expenses attributable to OCP Asia in the nine months ended June 30, 2007 were
      $530,000.  Stock-based compensation expense charged to sales and
      marketing expenses was $115,000 and $26,000 for the nine months ended June
      30,
      2007 and 2006, respectively.  We believe that investment in sales and
      marketing is critical to our success and these expenses may increase in absolute
      dollars in the future.




37


**General
      and Administrative**





**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**OCP
                  Woodland Hills
              
              $
              12,387
              
              
              
              
              
              
              $
              5,551OCP
                  Asia
              
              
              1,245
              
              
              
              
              
              
              
              —General
                  and administrative expense
              
              $
              13,632
              
              
              
              
              
              
              $
              5,551Percentage
                  Increase
              
              
              
              
              
              
              143.8.%





General and administrative expenses increased $8,081,000 in the nine months
        ended June 30, 2007 from the nine months ended June 30, 2006. General and
        administrative expenses attributable to OCP Asia in the nine months ended
        June
        30, 2007 were $1,245,000.  The $6,836,000 increase for OCP Woodland
        Hills includes an increase in professional services of $3,839,000 which was
        primarily due to $1,891,000 in investment banking fees, legal, public relations
        and additional board of directors’ expenses associated with the proposed merger
        with Oplink, an internal investigation into how the Company accounted for
        stock
        option grants, legal expenses of $553,000 associated with the Olympia
        litigation, and additional accounting, legal and consulting expenses of
        $1,395,000 in connection with the Company’s purchase accounting analysis and the
        Form 8-K/A filing regarding the OCP Asia acquisition and several finance
        and
        accounting projects, including our compliance with regulations associated
        with
        the Sarbanes-Oxley legislation.  Other significant increases in
        general and administrative expenses include $420,000 for settlement of the
        Olympia litigation, $651,000 for executive severance costs and $335,000 in
        higher salary and benefits, primarily associated with the employment of the
        Company’s new executive officers in the quarter ended September 30, 2006, a
        $166,000 increase in travel related expenses and $186,000 of recruitment
        fees
        incurred during the nine months ended June 30, 2007.  In addition,
        $541,000 of costs, such as depreciation, taxes and utilities, associated
        with
        space previously occupied by a lessee in our Woodland Hills facility, are
        now
        classified as general and administrative expenses.  Previously, such
        expenses were offset by rental income and included in other income in the
        accompanying condensed consolidated financial statements. Stock-based
        compensation expense charged to general and administrative expenses was $842,000
        and $296,000 for the nine months ended June 30, 2007 and 2006,
        respectively.


The
      Company expects our general and administrative expenses to increase
      significantly in the quarter ending September 30, 2007 as a result of the
      activities related to the proposed merger with Oplink.




**Transitional
      Costs for Contract Manufacturing**




OCP
      Woodland Hills and OCP Asia have incurred transitional costs for contract
      manufacturing of $1,895,000 and $513,000 for the nine months ended June 30,
      2007, respectively.  In connection with the transition to manufacture
      certain of our product lines in China with SAE, we expect to maintain our
      existing manufacturing facilities but will reduce our workforce once
      manufacturing at SAE begins.  The transitional charges are related
      primarily to estimated severance and retention
      payments,****along with expenses incurred to relocate certain
      fixed assets and product qualification associated with the manufacturing of
      certain of our product lines in China which began in July 2007. These
      transitional charges are estimated to be approximately $3.4 million for fiscal
      2007.




**Impairment
      of Goodwill**





The
      Company recorded a goodwill impairment charge, associated with its OCP Woodland
      Hills segment, of $8,486,000 as a non-cash charge to continuing operations
      during the nine months ended June


38


30,
      2007
      due to the Company’s impairment analysis, as described in Note 4 to the
      condensed consolidated financial statements included in Item 1 of this
      document.





**Investment
      Income and Other Income, Net**





**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**Investment
                  income
              
              $
              4,296
              
              
              
              
              
              
              $
              4,349Other
                  income, net
              
              
              101
              
              
              
              
              
              
              
              239Total
              
              $
              4,397
              
              
              
              
              
              
              $
              4,588Percentage
                  Decrease
              
              
              
              
              
              
              (4.2)%





******The
      total of investment income and other income, net decreased $191,000 in the
      nine
      months ended June 30, 2007 from the nine months ended June 30,
      2006.  This decrease was primarily due to a decrease in the combined
      amounts of cash equivalents and marketable securities since June 30, 2006.
      Other
      income attributable to OCP Asia and included in other income, net was $72,000
      during the nine months ended June 30, 2007.  Other income, net for the
      nine months ended June 30, 2006, primarily represents rental income associated
      with a sublease of a portion of the Woodland Hills facility offset by related
      facility costs**.**  There was no rental
      income for the nine months ended June 30, 2007.




**Provision
      for Income Taxes**





**Nine
                  months Ended**
                **June
                  30,****2007**
              
              
              
              
              
              **2006****(Dollars
                  in thousands)**Income
                  tax provision
              
              $
              183
              
              
              
              
              
              
              $
              298





The
      income tax provision of $183,000 for the nine months ended June 30, 2007
      represents a net Federal tax provision of $51,000, statutory state tax
      provisions of $62,000 and a foreign tax provision of $70,000 for the current
      period.  The income tax provision of $298,000 for the nine months
      ended June 30, 2006 was comprised of foreign taxes in the amount of $270,000
      and
      state income taxes of $28,000.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2007, our primary source of liquidity was our cash and cash equivalents
      balance of $88.0 million and our marketable securities balance of $15.5 million,
      which consists of United States Treasury Notes and United States Federal
      government debt securities.  At September 30, 2006, we had $57.4
      million in cash and cash equivalents and $69.5 million in marketable
      securities.





*Current
      assets and current liabilities*





Since
      inception, we have financed our operations primarily with cash generated from
      operations, through term loans and our initial public offering of our Class
      A
      common stock, which we completed on November 3, 2000.  As of June 30,
      2007, our working capital (current assets net of current liabilities) was $134.1
      million with a current ratio of 10.2 compared to our working capital of $151.3
      million with a current ratio of 10.8 as of September 30, 2006.  Our
      net loss was the primary factor in the decrease in working capital during the
      nine months ended June 30, 2007.  We believe that additional cash
      could be borrowed if necessary; however, cash and cash equivalents, and
      marketable securities on hand are expected to be sufficient to fund operations
      for the next twelve months.  In addition, the Company
      expects


39


to
      sell
      its’ Woodland Hills facility within the next 12 months.  The Company
      has no liens or loans outstanding against the facility.





*Cash
      flows provided by / (used in)*





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





**Nine
                  months Ended**
                **June
                  30****2007**
              
              
              
              **2006**Operating
                  activities
              $
              (15,539
              )
              
              $
              (2,822
              )Investing
                  activities
              
              45,756
              
              
              
              855Financing
                  activities
              
              292
              
              
              
              435Effect
                  of exchange rate changes on cash
              
              95
              
              
              
              —Net
                  increase (decrease) in cash and cash equivalents
              $
              30,604
              
              
              $
              (1,532
              )





During
        the nine months ended June 30, 2007, net cash used in operating activities
        was
        primarily the result of the $29.8 million net loss for the period less non-cash
        adjustments of $18.2 million.  This is primarily attributable to
        continued price erosion on our product line due to competitive pressures
        and a
        decrease in unit volumes which have not been offset by reduced manufacturing
        expenses.  The Company anticipates significant manufacturing cost
        savings once it transitions a majority of its manufacturing to its contract
        manufacturer in China at the end of the current fiscal year.  In
        addition, operating expenses, primarily general and administrative expenses,
        have increased over the comparable period, primarily due to costs incurred
        in
        relationship to the pending merger with Oplink and higher legal, accounting
        and
        consulting fees pertaining to litigation and other matters. In addition,
        during
        the nine months ended June 30, 2007, there was a net decrease in operating
        assets and liabilities of $3.9 million, primarily due to an increase in buffer
        stock inventory associated with the transition to contract manaufacturing,
        a
        reduction in accounts payable due to less purchases of lasers and a reduction
        in
        accrued expenses due to the current payment of professional fees associated
        with
        the proposed Oplink merger..    During the nine months ended
        June 30, 2006, net cash used in operating activities was primarily the result
        of
        an increase in inventory, primarily due to higher revenues in the nine months
        ended June 30, 2006 compared to the comparable period in 2005, which more
        than
        offset net income, adjusted for depreciation and other non-cash items included
        in net income, and an increase in income tax
        receivables.


During
      the nine months ended June 30, 2007, cash provided by investing activities
      was
      primarily the result of the maturation of marketable securities greater than
      the
      conversion of cash and cash equivalents to marketable securities for a net
      of
      $54.6 million less $3.3 million of fixed assets acquisitions, particularly
      at
      OCP Asia, and $0.5 million paid for a license agreement.  During the
      nine months ended June 30, 2006, cash provided by investing activities included
      $1.0 million attributable to the sale of assets to Furukawa.  The
      maturation of marketable securities net of the conversion of cash and cash
      equivalents to marketable securities provided cash of $0.6
      million.  Purchases of property, plant and equipment were $0.8 million
      during the nine months ended June 30, 2006.





During
      the nine months ended June 30, 2007 and June 30, 2006, cash provided by
      financing activities was from the exercise of stock options.





We
      believe that our existing cash and cash equivalents and marketable securities
      on
      hand will be sufficient to meet our capital needs for at least the next twelve
      months. However, it is possible that we may need or elect to raise additional
      funds to fund our activities beyond the next year or to consummate acquisitions
      of other businesses, products or technologies. We could raise such funds through
      the proceeds anticipated to be realized from the sale of the Company’s Woodland
      Hills facility or by


40


borrowing
      money.  We cannot assure you that we will be able to complete the sale
      of the Woodland Hills facility or obtain additional funds on commercially
      favorable terms, or at all.





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





·
            the
                market acceptance of our products;


·
            the
                levels of promotion and advertising that will be required to launch
                our
                new products and achieve and maintain a competitive position in the
                marketplace;


·
            price
                discounts on our products to our
                customers;


·
            our
                business, product, capital expenditure and research and development
                plans
                and product and technology
                roadmaps;


·
            the
                levels of inventory and accounts receivable that we
                maintain;


·
            capital
                improvements to new and existing
                facilities;


·
            technological
                advances;


·
            our
                competitors’ response to our
                products;


·
            our
                pursuit of strategic alternatives, including future market opportunities;
                and


·
            our
                relationships with suppliers and
                customers.





In
      addition, we may require additional capital to accommodate growth, hiring,
      infrastructure and facility needs or to consummate acquisitions of other
      businesses, products or technologies.





**Inflation**





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





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements, as such term is defined in rules
      promulgated by the Securities and Exchange Commission, that have or are
      reasonably likely to have a current or future effect on our financial condition,
      changes in financial condition, revenues or expenses, results of operations,
      liquidity, capital expenditures or capital resources that are material to
      investors.





**Contractual
      Obligations**





The
      following is a summary of future minimum payments due under operating leases
      that have initial or remaining noncancelable lease terms in excess of one year
      at June 30, 2007 (in thousands):





Three
                  months ending September 30, 2007
              $           3312008
              
              1,2082009
              
              1,0312010
              
              852011
              
              71Total
                  minimum lease payments
              
              $        2,726


41


We
        also have purchase commitments for materials, supplies, equipment and outside
        services in aggregate of approximately $8.2 million.  Also, we have
        commitments under certain retention agreements up to a maximum of approximately
        $2.3 million. We believe that our cash and cash equivalents and marketable
        securities will be sufficient to meet all of the known
        requirements





**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




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





The
      primary objective of our investment activities is to preserve
      capital.  We have not used derivative financial instruments in our
      investment portfolio.  Our cash and cash equivalents are $88.0
      million, the majority of which is invested in money market and other interest
      bearing accounts.   In addition, we have $15.5 million invested
      in marketable securities, which represents investments in United States Treasury
      Notes and United States Federal government debt securities.





As
      of
      June 30, 2007, our investment in United States Treasury Notes had a time to
      maturity of 30 days. These securities are classified as held to maturity because
      we have the intention and ability to hold the securities to
      maturity.  Gross unrealized gains and losses on held-to-maturity
      marketable securities have historically not been material.  Maturities
      on the date purchased of held-to-maturity marketable debt securities can range
      from three to twelve months.





Our
      investments in United States Federal government debt securities have times
      to
      maturing of approximately 18 to 24 months.  These securities are
      classified as available for sale because we do not intend to hold them to
      maturity; accordingly they are carried on our books at market
      value.  While the Company began investing in such securities in June
      2007 and has not incurred any realized gain or losses, there could be gains
      and
      losses, both realized and unrealized, in the future.





If
      interest rates were to increase or decrease 1%, the result would be an annual
      increase or decrease of interest income of $1.0 million on our investment
      portfolio.   This analysis does not consider the effect of the
      change in the level of overall economic activity that could exist in such an
      environment.





**Foreign
      Currency Risk**




Prior
      to
      the acquisition of OCP Asia, sales to foreign customers were denominated in
      U.S.
      dollars and as such we had no foreign currency fluctuation risk related to
      accounts receivable.  We are exposed to foreign currency risk from the
      translation of our OCP Asia and United Kingdom operations into U.S. dollars.
      Based on the relative size and nature of our foreign operations, we do not
      believe that fluctuations in the exchange rate or foreign currency transactions
      between the New Taiwan Dollar or the British Pound and the U.S. dollar would
      have a material impact on our condensed consolidated financial
      statements.





**ITEM
                4T.**
            **CONTROLS
                AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**




In connection with the preparation of the Quarterly Report on Form 10-Q,
        as of
        June 30, 2007, an evaluation was performed under the supervision and with
        the
        participation of the Company’s management, including the CEO and CFO, of the
        effectiveness of the design and operation of the Company’s disclosure controls
        and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Our
        CEO
        and CFO concluded that, for the reasons set forth below, our disclosure controls
        and procedures were not adequate to ensure that all of the information required
        to be disclosed by us in reports we file or




42




submit
      under the Exchange Act is recorded, processed, summarized, and reported within
      the time periods specified in the rules and forms of the SEC.




As
        a result of its evaluation, management concluded that a control deficiency,
        originally identified in its disclosure controls and procedures as of March
        31,
        2007, constituted a “material weakness” within the meaning of the Public Company
        Accounting Oversight Board Auditing Standard No. 2. A material weakness is
        defined as a significant deficiency, or combination of significant deficiencies,
        that results in a more than remote likelihood that a material misstatement
        of
        the annual or interim financial statements will not be prevented or detected.
        Because management has identified a material weakness, management has concluded
        that the Company’s disclosure controls and procedures were not effective as of
        June 30, 2007.


The
        material weakness related to a deficiency in the design and operating
        effectiveness of controls surrounding the Company’s analysis of excess and
        obsolete inventory and lower of cost-or-market valuation.  Controls
        designed within the Company’s financial closing process to detect errors in the
        valuation of inventory were not designed effectively and did not operate
        effectively as they did not detect certain errors in the March 31, 2007 and
        June
        30, 2007 inventory valuation analysis. This deficiency in controls resulted
        in
        the Company recording adjustments to decrease the value of inventory by material
        amounts in the quarters ended March 31, 2007 and June 30, 2007.


As of June 30, 2007, the Company has taken and will continue to take steps
        to
        remediate the control deficiency identified. The Company continues to enhance
        controls related to the preparation and review of the quarterly analysis
        of
        excess and obsolete inventory and lower of cost or market inventory
        analysis.  Management has discussed these issues and remediation efforts in
        detail with our Audit Committee. Our CEO and our CFO believe that these
        remediation measures will address the identified material
        weakness.




**Changes
      in Internal Control**





Other
      than the changes noted above to remediate the material weakness related to
      inventory, there were no changes in our internal control over financial
      reporting identified in connection with the evaluation required by paragraph
      (d)
      of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our last
      fiscal quarter that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial
      reporting.


43


**PART
      II.**


**OTHER
      INFORMATION AND SIGNATURES**





**ITEM
                1.**
            **LEGAL
                PROCEEDINGS**




We
      are
      not currently involved in any material legal proceedings nor are we aware of
      any
      material legal proceedings threatened or pending against us. From time to time,
      however, we may become subject to additional legal proceedings, claims, and
      litigation arising in the ordinary course of business. In addition, in the
      past
      we have received, and we may continue to receive in the future, letters alleging
      infringement of patent or other intellectual property rights. Our management
      believes that these letters generally are without merit and intend to contest
      them vigorously.





*Olympia
      Properties*





In
      August
      2006, the Company filed an action in the United States District Court for the
      District of Colorado for breach of contract and declaratory relief against
      Olympia, our former landlord at our former Colorado facility.  The
      action arose after Olympia retained the Company’s security deposit of $93,700
      upon expiration of the lease, claiming that the Company contaminated the leased
      premises with arsenic, in violation of the lease.  The Company denied
      that the premises contained arsenic at levels exceeding either those permitted
      by the lease or any other applicable authority and, accordingly, the Company
      filed suit.




In
      its
      complaint, the Company requested that the court provide declaratory relief
      that
      the Company has not breached the lease through any act or omission, and also
      requested damages for breach of contract in connection with Olympia’s retention
      of the security deposit.  Further, the Company alleged additional
      breaches of the lease by Olympia.




Olympia
      denied the Company’s allegations and asserted counterclaims for breach of ten
      affirmative defenses.  Further, Olympia asserted counterclaims for
      breach of contract and equitable relief alleging damages of approximately $1.1
      million.  The Company denied Olympia’s counterclaims.  On
      May 10, 2007, the Company and Olympia reached an agreement to settle all claims
      under which the Company agreed to pay Olympia $420,000.  The amount
      was paid in June 2007.  The settlement has been included in general
      and administrative expenses in the condensed consolidated statements of
      operations for the three months ended March 31, 2007 and for the nine months
      ended June 30, 2007.





*Oplink
      Communications*





The
      Company issued a press release on April 25, 2007, and subsequently filed a
      Current Report on Form 8-K on April 27, 2007, announcing that our board of
      directors had received a letter from Oplink indicating that Oplink had entered
      into a stock purchase agreement with Furukawa to purchase Furukawa’s entire
      interest in the Company’s outstanding capital stock for $1.50 per share payable
      in cash and stock of Oplink.  Oplink also proposed to purchase the
      Company’s outstanding capital stock not owned by Oplink (or Furukawa) by means
      of a merger of the Company with a subsidiary of Oplink at a cash purchase price
      of $1.50 per share of the Company’s Class A common stock, subject to Oplink’s
      due diligence investigation and negotiation and approval of a definitive
      acquisition agreement.  A special committee of the Company’s board of
      directors comprised of its three independent directors, evaluated Oplink’s
      proposal.





On
      May 4,
      2007, the Company issued a press release and filed a Current Report on Form
      8-K
      announcing that a special committee of the board of directors adopted a 30-day
      shareholder rights plan on May 3, 2007. Under the plan, the Company declared
      a
      dividend distribution of one preferred share


44


purchase
      right for each outstanding share of the Company’s common stock held by
      shareholders of record as of May 14, 2007 (the “Purchase Rights”).





On
      May 7,
      2007, Oplink filed an action in the Delaware Court of Chancery seeking to
      invalidate certain aspects of the shareholder rights plan adopted by the special
      committee of the board of directors.  On May 9, 2007, the Company
      filed a motion with the Delaware Court of Chancery seeking the court to deny
      the
      motion filed by Oplink on May 7, 2007.  The Purchase Rights expired on
      June 2, 2007.  Oplink’s action was subsequently
      dismissed.





**ITEM
                1A.**
            **RISK
                FACTORS**





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


**Our
      continued success in generating revenue depends on growth in construction of
      fiber optic MAN, LAN and FTTH networks and our ability to compete in the markets
      for those networks.**




Our
      fiber
      optic modules are used primarily in MAN, LAN, and FTTH
      applications.  These markets are rapidly evolving, and it is difficult
      to predict their potential size or future growth rate.  In addition,
      we are uncertain as to the extent to which fiber optic technologies will be
      used
      in these markets.  Our success in generating revenue will depend on
      the growth of these markets and their adoption of fiber optic
      technologies.


As
      demand
      for bandwidth grows, service providers are likely to require increasingly
      sophisticated systems able to support and meet the requirements of MAN, LAN
      and
      FTTH applications and networks, such as cost-effectiveness and reliability
      in
      harsh environmental conditions.  The projected demand for such
      networking equipment has led to the expansion of production by existing optical
      component manufacturers, as well as the creation of new companies in Asia
      offering cost-effective fiber optic components.  This increased
      competition and resulting lower component cost structure has accelerated price
      and margin erosion in this market, resulting in reduced revenues and write-down
      of certain inventory to net realizable value.


The
      fiber
      optic communication industry continues to face challenging market
      conditions.  Capital spending by service providers on network
      infrastructure has remained substantially below pre-2001 levels.  As a
      result, equipment manufacturers have also dramatically reduced their quarterly
      purchases of components and modules from our competition and
      us.  While several service providers, including AT&T and Verizon,
      have announced current and planned investment in FTTH applications which we
      believe could increase traffic demand on the MANs into which such FTTH
      infrastructure would feed, it is too early to predict the outcome of these
      potential FTTH roll-outs.  Because visibility in the industry
      remains




45


limited,
      we cannot provide any assurance as to the timing or extent of any increased
      business that we may receive as a result of these or other industry
      developments.




Competition
      within the telecommunication industry for this growing FTTH segment is likely
      to
      intensify and certain of our competitors may be able to more quickly and
      effectively respond to newer technology or industry standards, devote more
      resources to development, production, promotion and sale of their products
      and
      deliver those products at lower prices.




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




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




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




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




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




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




The
      market for fiber optic modules is characterized by declining average selling
      prices for existing products due to increased competition, the introduction
      of
      new products, product obsolescence and increased unit volumes as manufacturers
      deploy new network equipment.  We have in the past experienced, and in
      the future may experience, period-to-period fluctuations in operating results
      due to declines in our overall average selling prices.  We anticipate
      that the selling prices for our existing products will decrease in the future
      in
      response to product introductions by competitors or us, or other factors,
      including pressure from significant customers for price
      reductions.  Therefore, we must continue to develop and introduce new
      products that can be sold at higher prices on a timely basis to maintain our
      overall average selling prices.  Failure to do so could cause our
      revenue and gross margins to decline.




46


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




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




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




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




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




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




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




47


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




The
      market for our products is characterized by rapid technological change, new
      and
      improved product introductions, changes in customer requirements and evolving
      industry standards.  Our future success will depend to a substantial
      extent on our ability to develop, introduce and support cost-effective new
      products and technology on a timely basis.  The development of new,
      technologically advanced products is a complex and uncertain process requiring
      high levels of innovation and highly skilled engineering and development
      personnel, as well as the accurate anticipation of technological and market
      trends.  Because the costs for research and development of new
      products and technology are expensed as incurred, such costs will have a
      negative impact on our reported net operating results until such time, if ever,
      that we generate revenue from products or technology resulting from such
      research and development.  If we fail to develop and deploy new
      cost-effective products and technologies or enhancements of existing products
      on
      a timely basis, or if we experience delays in the development, introduction
      or
      enhancement of our products and technologies, our products may no longer be
      competitive, our revenue will decline and we may have inventory that may become
      obsolete or in excess of future customer demand.




Furthermore,
      we cannot assure you that our new products will gain market acceptance or that
      we will be able to respond effectively to product announcements by competitors,
      technological changes or emerging industry standards.  Our failure to
      respond to product announcements, technological changes or industry changes
      in
      standards would likely prevent our products from gaining market acceptance
      and
      harm our competitive position.




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




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




·
            increased
                costs associated with the replacement of defective products, redesign
                of
                products to meet customer design specifications and/or refund of
                the
                purchase price;


·
            diversion
                of development resources; and


·
            increased
                service and warranty costs.




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




Our
      products are subject to various regulations of U.S. and foreign governmental
      authorities, principally in the areas of radio frequency emission standards
      and
      eye safety.  Radio frequency emission




48


standards
      govern allowable radio interference with other services.  Eye safety
      standards govern the labeling and certification of laser products to ensure
      that
      they are used in a way that does not create a hazard to the human
      eye.  Our products and the systems into which they are incorporated
      must also comply with international standards and governmental standards of
      the
      foreign countries where our products are used.  In addition, under
      applicable European Union regulations, we along with other electronic component
      manufacturers are prohibited from using lead and certain other hazardous
      materials in our products.  Our inability, or the inability of our
      customers, to comply with existing or evolving standards established by
      regulatory authorities, or to obtain timely domestic or foreign regulatory
      approvals or certificates will restrict our ability to sell our
      products.




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




Historically,
      we have relied primarily on a limited direct sales force, supported by third
      party manufacturers’ representatives and distributors, to sell our
      products.  Our sales strategy focuses primarily on developing and
      expanding our direct sales force, manufacturers’ representatives and
      distributors.  We have incurred and may continue to incur significant
      costs related to the expansion of our sales operations.  If the
      expansion of our sales operations does not generate adequate additional revenue,
      our operating margins may decline.  To the extent we are unsuccessful
      in developing our direct sales force, we will likely be unable to compete
      successfully against the significantly larger and well-funded sales and
      marketing operations of many of our current or potential
      competitors.  In addition, if we fail to develop relationships with
      significant manufacturers’ representatives or distributors, or if these
      representatives or distributors are not successful in their sales or marketing
      efforts, sales of our products may decrease and our competitive position would
      be harmed.  Our representatives or distributors may not market our
      products effectively or may not continue to devote the resources necessary
      to
      provide us with effective sales, marketing and technical support.  Our
      inability to effectively manage our domestic and foreign sales and support
      staff
      or maintain existing or establish new relationships with manufacturer
      representatives and distributors would harm our revenue and result in declining
      margins.




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




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




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




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




49


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




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




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




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




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




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




50


In
      the
      last three years, we have negotiated price reductions for the lasers we purchase
      from Furukawa.  However, the laser price reductions that we have been
      able to obtain from Furukawa have been less than the price reductions for the
      associated products that we have given our customers in response to market
      conditions.  As a result, our gross margins have been negatively
      impacted, and may be negatively impacted in the future.  While we
      continue to negotiate with Furukawa with respect to the pricing of the lasers
      we
      purchase from them, we cannot assure you that these efforts will be successful
      in addressing this negative impact on our gross margins.  While we
      believe that our acquisition of OCP Asia may provide us with a second source
      for
      lasers used within certain of our products, potentially reducing our dependence
      on Furukawa and improving lead times and current cost structures, there can
      be
      no assurance that we will be able to achieve these benefits in the near future
      or at all.




On
      June
      5, 2007, Furukawa sold all of its majority interest in the Company’s outstanding
      capital stock to Oplink.  We are unable to predict the impact of the
      consummation of Oplink’s purchase of Furukawa’s interest in the Company on our
      supply relationship with Furukawa.  We cannot assure you that Furukawa
      will renew the Master Purchase Agreement upon its expiration on September 30,
      2007 or that it will continue to provide services and components to us, and
      if
      not, whether or on what terms we could find adequate alternative sources for
      these services and components.




**We
      are moving certain manufacturing operations to a sub-contractor in China, which
      exposes us to risks inherent in doing business in China.**




We
      have
      entered into an agreement with SAE to manufacture certain product lines in
      China, which began in July 2007.  This agreement will allow the
      Company to move into high-volume production in China to augment our capabilities
      in short-run, specialized applications.  If our customers do not
      qualify the manufacturing lines of SAE for volume shipments, our operating
      results and customer relationships may suffer.




We
      may
      experience delays, disruption or quality problems in the manufacturing
      operations of SAE, especially during the initial startup of manufacturing with
      them.  As a result, we could incur additional costs that would
      adversely affect gross margins, and product shipments to our customers could
      be
      delayed beyond requested shipment schedules, which could adversely affect our
      revenues, competitive position and reputation.




**Disruption
      to our operations at either our California or Taiwan manufacturing facilities
      could require us to lease alternative manufacturing facilities or limit our
      manufacturing operations.**




Currently,
      our manufacturing operations are conducted in our California and Taiwan
      facilities.  Due to this geographic concentration, a disruption of our
      manufacturing operations, resulting from sustained process abnormalities, human
      error, government intervention or natural disasters, such as earthquakes,
      typhoons, fires or floods, or other causes, could require us to cease or limit
      our manufacturing operations.




**Uncertainties
      arising out of terrorist activities, resulting military actions and other
      factors could adversely affect our business and operating
      results.**




The
      September 11, 2001 terrorist attacks in the United States and recent
      terrorist attacks in other parts of the world, as well as continued threats
      of
      global terrorism, current and future military response to them, the United
      States military action in Iraq, and the potential outbreak of Avian Flu have
      created many economic and political uncertainties that make it extremely
      difficult for us, our customers and our suppliers to accurately forecast and
      plan future business activities.  The potential outbreak of Avian Flu,
      especially in China, where we have significant customer and supply
      relationships, could also disrupt our




51


operations,
      sales, and supply chain or those of our customers, which has made it more
      difficult to predict and plan for future business activities.  This
      reduced predictability challenges our ability to operate profitably or to grow
      our business.  In particular, it is difficult to develop and implement
      strategies, sustainable business models and efficient operations, and
      effectively manage contract manufacturing and supply chain
      relationships.  In addition, the continued threats of terrorism, the
      heightened security measures in response to such threats, and the potential
      outbreak of Avian Flu have caused and may continue to cause significant
      disruption to commerce throughout the world.  Disruption in air
      transportation in response to these threats or future attacks, or Avian Flu,
      may
      result in transportation and supply-chain disruptions, increase our costs for
      both receipt of inventory and shipment of products to our customers, and cause
      customers to defer their purchasing decisions.  Disruptions in
      commerce could also cause consumer confidence and spending to decrease or result
      in increased volatility in the U.S. and worldwide financial markets and
      economy.  We may also become subject to the risk that future
      restrictions of immigration controls may adversely affect the residence status
      of non-U.S.-citizen engineers and other key technical employees in our
      California facility or our ability to hire new non-U.S.-citizen employees in
      our
      California facility.




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




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




·
            stop
                selling, incorporating or using our products that use the infringed
                intellectual property;


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


·
            redesign
                the products to not use the infringed intellectual property, which
                may not
                be technically or commercially
                feasible.




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




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




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




Our
      success and ability to compete is dependent in part on our proprietary
      technology.  We rely primarily on patent, copyright, trademark and
      trade secret laws, as well as confidentiality agreements and other methods,
      to
      establish and protect our proprietary rights.  Existing patent,
      copyright, trademark and trade secret laws afford only limited
      protection.  While we are pursuing foreign patent protections, the




52
 
 laws of some foreign countries do not protect us against
        the
        unauthorized use of our proprietary technology and processes to the same
        extent
        as do the laws of the United States, and policing the unauthorized use of
        our
        products is difficult.  Many U.S. companies have encountered
        substantial infringement problems in some foreign countries.  Because
        we sell some of our products overseas, we have exposure to foreign intellectual
        property risks.  Any infringement of our proprietary rights could
        result in costly litigation, and any failure to adequately protect our
        proprietary rights could result in our competitors offering similar products,
        potentially resulting in the loss of some of our competitive advantage and
        a
        decrease in our revenue.


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




Our
      properties and business operations are subject to a wide variety of federal,
      state and local environmental, health and safety laws and other legal
      requirements, including those relating to the storage, use, discharge and
      disposal of toxic, volatile or otherwise hazardous substances.  We may
      be required to incur substantial costs to comply with current or future legal
      requirements.  In addition, if we fail to obtain required permits or
      otherwise fail to operate within these or future legal requirements, we may
      be
      required to pay substantial penalties, suspend our operations or make costly
      changes to our manufacturing processes or facilities.  While we
      believe our properties and business operations are in compliance with applicable
      environmental laws and we do not anticipate any material capital expenditures
      for environmental control facilities for the 2007 fiscal year, there can be
      no
      assurance that we will not incur substantial expenditures in this regard in
      the
      future.




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




Although
      a significant portion of our sales has historically been in North America,
      a
      growing percentage of our revenue is generated from sales outside North
      America.  Sales of our products outside North America accounted for
      approximately 65.2% and 49.8% of our revenue for the nine months ended June
      30,
      2007 and 2006, respectively.  We expect that our sales outside of
      North America will continue to contribute materially to our
      revenue.  Prior to the acquisition of OCP Asia, the Company had no
      foreign denominated sales. Fluctuations in the exchange rate between the New
      Taiwan dollars and the United States dollars may significantly impact the
      financial results of the Company.  We have limited experience in
      marketing and distributing our products internationally.  One of our
      objectives is to expand our international operations in the
      future.  Significant management attention and financial resources are
      needed to develop our international sales, support and distribution channels
      and
      manufacturing.  We may not be able to establish or maintain
      international market demand for our products.




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




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


·
            difficulties
                and costs of staffing and managing foreign operations with personnel
                who
                have expertise in fiber optic
                technology;


·
            unexpected
                changes in regulatory or certification requirements for optical networks;
                and


·
            political
                or economic instability.




**Our
      future operating results may be subject to volatility as a result of exposure
      to
      fluctuation in foreign currency exchange risks.**




As
      a
      result of the OCP Asia acquisition and our intention to move certain production
      to a contract manufacturer in China, a larger portion of our revenue and
      expenses are likely to be denominated in




53
 
 foreign currencies in the future. The impact in the current
        period was not significant. Accordingly, we may be subject to the risks of
        fluctuating currencies between the U.S. dollar, the New Taiwan dollar, the
        Chinese Yuan and the British Pound varying more significantly than it has
        to
        date.  The Company may engage in currency hedging activities in an
        effort to cover any exposure to such fluctuations.  These factors
        could impact our international sales or increase our costs of doing business
        abroad or impair our ability to expand into international markets, and therefore
        harm our business.  Under certain circumstances, these transactions
        can have an adverse effect on our operating results.


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




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




·
            problems
                assimilating the purchased operations, technologies or
                products;


·
            unanticipated
                costs associated with the
                acquisition;


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


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


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


·
            potential
                loss of key employees of purchased
                organizations.




**Our
      recent acquisition could be difficult to integrate, disrupt our business, dilute
      stockholder value and harm our operating results.**




On
      August
      24, 2006, we purchased 96.88% of the stock of GigaComm Corporation, now known
      as
      OCP Asia., a Taiwan-based supplier of passive optical network (PON) and
      fiber-to-the-home (FTTH) components.  Prior to the acquisition, OCP
      Asia suffered recurring losses from operations that raised substantial doubt
      as
      to its ability to continue as a going concern.  If we are unable to
      successfully integrate and manage our larger and geographically more diverse
      organization, reverse the recurring losses incurred by OCP Asia, or if we
      encounter significant delay in achieving a successful integration, the impact
      could have a material adverse effect on us and, as a result, on the market
      price
      of our common stock.




**Charges
      to earnings resulting from the application of the purchase method of accounting
      may adversely affect the market value of our common stock.**




We
      accounted for our acquisition of OCP Asia using the purchase method of
      accounting.  In accordance with GAAP, we allocated the total purchase
      price to the acquired company’s net tangible assets and intangible assets based
      upon estimates of their fair values as of the date of completion of the
      transaction (August 24, 2006) and recorded the excess of the purchase price
      over
      the fair values as goodwill.  The goodwill was allocated solely to OCP
      Woodland Hills due to expected synergies associated with OCP Asia manufacturing
      lasers that were previously only available from Furukawa.  The Company
      recorded a goodwill impairment charge, associated with its OCP Woodland Hills
      segment of $8,486,000, as a non-cash charge to continuing operations during
      the
      three and nine months ended March




54
 
 31, 2007 and June 30, 2007, respectively.  We will
        incur an increase in the amount of amortization expense over the estimated
        useful lives of certain of the intangibles assets acquired in connection
        with
        the acquisition on an annual basis.  We cannot assure you that we will
        not incur charges in the future as a result of any impairment of intangible
        assets, which charges may have an adverse effect on our earnings.


**We
      may incur additional charges beyond that originally anticipated in the
      transition of certain manufacturing operations from California and Taiwan to
      SAE
      in China.**




In
      connection with the transition of certain manufacturing to SAE during fiscal
      2007, we announced a proposed reduction in workforce in both the U.S. and Taiwan
      with anticipated charges to the statement of operations of approximately $3.4
      million during fiscal 2007.  These transitional charges are primarily
      estimated severance and retention payments. These workforce reductions were
      initiated during the three months ended June 30, 2007 and are expected to
      continue through fiscal 2008.  Should we lose a significant portion of
      the workforce to attrition prior to the move, our operations may be
      significantly impacted beyond the anticipated transitional charges
      estimated.  There is a risk that, during this period of manufacturing
      transition, management will not sufficiently coordinate the role of its
      workforce to ensure that all areas of our operations receive appropriate
      attention. If we are unable to manage our workforce, manufacturing capacity
      and
      scope of operations effectively, the cost and quality of our products may
      suffer.




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




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




·
            fluctuations
                in demand for, and sales of, our products, which is dependent on
                the
                implementation of fiber optic
                networks;


·
            the
                timing of customer orders, particularly from our largest
                customers;


·
            competitive
                factors, including introductions of new products, product enhancements
                and
                the introduction of new technologies by our competitors, the entry
                of new
                competitors into the fiber optic  modules market and pricing
                pressures;


·
            our
                ability to control expenses;


·
            the
                mix of our products sold; and


·
            economic
                conditions specific to the communications and related
                industries.




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




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




55




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




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




**Sales
      of substantial amounts of our shares by selling stockholders could cause the
      market price of our shares to decline.**




Our
      three
      founders recently left employment with the Company.  In the aggregate,
      they beneficially own approximately 22.6 million shares of common stock,
      including stock options for approximately 2.0 million shares.  During
      fiscal 2006 and the first quarter of fiscal 2007, the three co-founders sold
      an
      aggregate of approximately 6.5 million shares of our common
      stock.  One founder, Muoi Van Tran, beneficially owns approximately
      12.9 million shares of common stock, including stock options for approximately
      2.0 million shares.  The other two founders, who beneficially own
      approximately 9.7 million shares of common stock, are free to sell additional
      shares of their common stock without being subject to volume limitation rules
      imposed by federal securities laws.  The average daily trading volume
      of our common stock during fiscal 2006 was slightly over 200,000
      shares.  Sales by our founders in the public or private market could
      adversely affect the market price of our common stock by increasing the supply
      of shares available for sale compared to the demand in the public and private
      markets.




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




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




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




Our
      success depends on the continued contributions of our senior management and
      other key research and development, sales and marketing and operations
      personnel, including Philip F. Otto, our President and Chief Executive Officer,
      Frederic T. Boyer, our Senior Vice President and Chief Financial Officer, Dr.
      Liew-Chuang Chiu, our Vice President of Operations and Jacob Tarn, General
      Manager of OCP Asia.  Competition for employees in our industry is
      intense.  We do not have life insurance policies covering any of our
      executives.  There can be no assurance that we will be successful in
      retaining such




56
 
 key personnel, or that we will be successful in hiring
        replacements or additional key personnel.  Our loss of any key
        employee, the failure of any key employee to perform in his or her current
        position, or the inability of our officers and key employees to expand, train
        and manage our employee base may prevent us from executing our growth
        strategy.


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




We
      rely
      upon the ability to use stock options as a key component in our executive and
      employee compensation structure.  In the past, stock options have been
      significant in our ability to retain important personnel and offer competitive
      compensation packages.  Without this component, we would be required
      to significantly increase cash compensation levels in order to retain our key
      employees.  SFAS 123(R) updated the accounting treatment for
      share-based payments and requires the expensing of equity compensation in the
      statement of operations and may cause us to reduce, modify or even eliminate
      all
      or portions of the equity compensation program.




Although
      the Company has retention agreements with its key employees, the purchase by
      Oplink of Furukawa’s majority interest in the Company’s outstanding capital
      stock may result in the loss of some of our key personnel who may experience
      uncertainty about their future role with the Company and we may have difficulty
      attracting and retaining key management, sales, marketing and technical support
      personnel, which could further affect our operating results.




**The
      sale of Furukawa’s majority interest to Oplink may affect  our
      relationship with Furukawa.**




We
      have
      historically relied on Furukawa’s research and development capabilities to
      provide us with technologically advanced lasers and fiber optic components
      that
      we purchase from Furukawa for inclusion in our products, and we expect to
      continue to rely on Furukawa in the future.  We currently purchase the
      majority of lasers from Furukawa under a Master Purchase
      Agreement.  We cannot predict how the sale of Furukawa’s interest in
      the Company to Oplink will impact our supply relationship.  We cannot
      assure you that Furukawa will renew the Agreement upon its expiration on
      September 30, 2007 or whether it will continue to provide services and
      components to us, and if not, whether or on what terms we could find adequate
      alternative sources for these services and components.




In
      the
      last three years, we have negotiated price reductions for the lasers we purchase
      from Furukawa.  However, the laser price reductions that we have been
      able to obtain from Furukawa have been less than the price reductions for the
      associated products that we have given our customers in response to market
      conditions.  As a result, our gross margins have been negatively
      impacted, and may be negatively impacted in the future.  While we
      continue to negotiate with Furukawa with respect to the pricing of the lasers
      we
      purchase from them, we cannot assure you that these efforts will be successful
      in addressing this negative impact on our gross margins.  While we
      believe that our acquisition of OCP Asia may provide us with a second source
      for
      lasers used within certain of our products, potentially reducing our dependence
      on Furukawa and improving lead times and current cost structures, there can
      be
      no assurance that we will be able to achieve these benefits in the near future
      or at all.




Potential
      conflicts of interest exist between Furukawa and us in a number of areas,
      including the nature and quality of services rendered by Furukawa to us and
      potential competitive business activities.  For example, we may decide
      to enter into or acquire a line of business competitive with Furukawa, or
      Furukawa may decide to enter into or acquire a line of business competitive
      with
      us.  Any of these events




57
 
 may alter or eliminate our ability to rely on Furukawa
        to
        supply key components to us in the future, increase our costs of producing
        our
        products and result in increased competition in our markets.  We
        cannot assure you that we will be able to resolve any conflicts we may have
        with
        Furukawa or, if we are able to do so, that the resolution will be favorable
        to
        us.


We
      cannot
      predict how the sale of Furukawa’s interest in the Company will impact these
      conflicts, or whether comparable conflicts will exist between us and
      Oplink.




**Oplink
      will control the outcome of stockholder voting and election of
      directors.**




Oplink
      beneficially owns 57.9% of our outstanding shares of common stock.  As
      long as Oplink has a controlling interest, it will continue to be able to elect
      our entire board of directors and generally be able to determine the outcome
      of
      all corporate actions requiring stockholder approval.  As a result,
      Oplink will be in a position to continue to control all matters affecting us,
      including:




·
            a
                change of control, including a
                merger;


·
            our
                acquisition or disposition of
                assets;


·
            our
                future issuances of common stock or other
                securities;


·
            our
                incurrence of debt; and


·
            our
                payment of dividends on our common
                stock.




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




**Failure
      to complete the pending sale of our Company to Oplink could materially adversely
      impact the market price of our common stock.**




Consummation
      of the merger between the Company and Oplink is subject to our and Oplink’s
      performance under the merger agreement and a number of closing conditions.
      In
      particular, under Delaware law, the merger must be approved by two-thirds of
      the
      outstanding shares of the Company’s Class A common stock not owned by Oplink. If
      the merger is not completed for any reason, the price of our common stock will
      likely decline (and such decline may be substantial) to the extent that the
      market price of our common stock reflects market assumptions that the merger
      will be completed and the premium implied by the Merger consideration will
      be
      realized.




**Our
      internal controls over financial reporting may not be adequate, which could
      have
      a significant and adverse effect on our business and
      reputation.**




We
      are
      evaluating our internal controls over financial reporting in order to allow
      management to report on our internal controls over financial reporting, as
      required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and
      regulations of the SEC thereunder, which we refer to as
      Section 404.  Section 404 requires a reporting company such
      as ours to, among other things, annually review and report on its internal
      controls over financial reporting, and evaluate and disclose changes in its
      internal controls over financial reporting quarterly.  We will be
      required to comply with Section 404 as of September 30,
      2008.  We are currently performing the system and process evaluation
      and testing required (and any necessary remediation) in an effort to comply
      with
      management certification requirements of Section 404.




In
      the
      course of our ongoing evaluation, we have identified areas of our internal
      controls requiring improvement, and plan to design enhanced processes and
      controls to address these and any


58


other issues that might be identified through this
      review.  As a result, we expect to incur additional expenses and
      diversion of management’s time.  We cannot be certain as to the timing
      of completion of our evaluation, testing and remediation actions or the impact
      of the same on our operations and may not be able to ensure that the process
      is
      effective or that the internal controls are or will be effective in a timely
      manner.  If we are not able to implement the requirements of
      Section 404 in a timely manner or with adequate compliance, our independent
      auditors may not be able to certify as to the effectiveness of our internal
      control over financial reporting and we may be subject to sanctions or
      investigation by regulatory authorities, including the SEC.  As a
      result, there could be an adverse reaction in the financial markets due to
      a
      loss of confidence in the reliability of our consolidated financial
      statements.  In addition, we may be required to incur costs in
      improving our internal control system and the hiring of additional
      personnel.  Any such action could have a material effect on our
      business, results of operations and financial condition.









59


**ITEM
      6.                      EXHIBITS**





Exhibit
      Number               Description





31.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





60





**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.









**OPTICAL
                COMMUNICATION PRODUCTS, INC.,****a
                Delaware corporation**Date:
              August
                  20, 2007
              
              By:
              /s/
                  Philip F. OttoName:
              Philip
                  F. OttoTitle:
              Chief
                  Executive Officer and President(principal
                  executive officer)




Date:
              August
                  20, 2007
              
              By:
              /s/
                  Frederic T. BoyerName:
              Frederic
                  T. BoyerTitle:
              Chief
                  Financial Officer (principalfinancial
                  and accounting officer)








61


EXHIBIT
      INDEX





Exhibit
                Number
            Description31.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.