===============================================================================

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

                                    FORM 10-Q

                        [X] QUARTERLY REPORT PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 2005

                                       or

                        [ ] TRANSITION REPORT PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   For the transition period from ____________________ to ____________________


                        Commission file number 000-31861


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



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

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

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


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

         Indicate by check mark 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).

Large Accelerated Filer |_|   Accelerated Filer |_|   Non-Accelerated Filer  |X|

         The registrant has two classes of common stock authorized, Class A
Common Stock and Class B Common Stock. The rights, preferences and privileges of
each class of common stock are identical except for voting rights. The holders
of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled to ten votes per share on matters to be voted
on by stockholders. As of January 31, 2006, there were approximately 47,120,608
shares of Class A common stock outstanding and 66,000,000 shares of Class B
Common Stock outstanding.

===============================================================================


<PAGE>


                      OPTICAL COMMUNICATION PRODUCTS, INC.

                           INDEX TO FORM 10-Q FOR THE
                    QUARTERLY PERIOD ENDED DECEMBER 31, 2005


                                                                           PAGE
                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

         Balance Sheets as of December 31, 2005 and
         September 30, 2005 ...................................................1

         Statements of Operations for the Three Months Ended
         December 31, 2005 and 2004............................................2

         Statements of Cash Flows for the Three Months Ended
         December 31, 2005 and 2004............................................3

         Notes to Financial Statements.........................................4

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations................................................12

Item 3.  Quantitative and Qualitative Disclosure about Market Risk............32

Item 4.  Controls and Procedures..............................................33

                        PART II. OTHER INFORMATION AND SIGNATURES

Item 1.  Legal Proceedings....................................................34

Item 5.  Other Information....................................................34

Item 6.  Exhibits and Reports on Form 8-K.....................................34

Signature.....................................................................35


<PAGE>


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

OPTICAL COMMUNICATION PRODUCTS, INC.

BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>

                                                                                December 31,     September 30,
                                                                                     2005             2005
---------------------------------------------------------------------------------------------------------------------

ASSETS

CURRENT ASSETS:

  <S>                                                                              <C>               <C>
  Cash and cash equivalents                                                     $   76,977         $  83,975
  Marketable securities                                                             69,597            64,645
  Accounts receivable less allowance for doubtful accounts and sales
    returns of $408 at December 31, 2005 and $426 at September 30, 2005             10,751             9,481
  Inventories                                                                       17,931            15,318
  Deferred income taxes                                                                385                 -
  Prepaid expenses and other current assets                                            899             1,017
                                                                                ----------        ----------

           Total current assets                                                    176,540           174,436


Property, plant and equipment, net                                                  24,117            24,914
Intangible assets, net                                                                 794               902
                                                                                ----------         ---------

TOTAL ASSETS                                                                    $  201,451         $ 200,252
                                                                                ==========         =========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                  $2,719             3,169
  Accounts payable to related party                                                  3,962             4,095
  Accrued payroll & benefits                                                         1,536             1,112
  Accrued bonus                                                                      1,308             1,916
  Other accrued expenses                                                             1,521             1,322
  Income taxes payable                                                                 454               130
                                                                                ----------         ---------

           Total current liabilities                                                11,500            11,744
                                                                                ----------         ---------
OTHER LONG-TERM LIABILITIES                                                            200               200
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Class A common stock, $0.001 par  value; 200,000,000 shares authorized,
    47,077,448 and 46,903,871 shares outstanding at December 31, 2005
    and September 30, 2005, respectively.                                               47                47
  Class B common stock $0.001 par value; 66,000,000 shares
    authorized, 66,000,000 shares issued and outstanding at
    December 31, 2005 and September 30, 2005                                            66                66
  Additional paid-in-capital                                                       133,375           133,024
  Retained earnings                                                                 56,263            55,171
                                                                                ----------        ----------
           Total stockholders' equity                                              189,751           188,308
                                                                                ----------         ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $  201,451        $  200,252
                                                                                ==========         =========
</TABLE>

                       See Notes to Financials Statements.

                                       1


<PAGE>


OPTICAL COMMUNICATION PRODUCTS, INC.

STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

                                                Three Months Ended December 31,
                                              ---------------------------------

                                                        2005             2004
--------------------------------------------------------------------------------

REVENUE                                            $   17,749        $   14,023

COST OF REVENUE                                        11,440             8,558
                                                   ----------         ---------

GROSS PROFIT                                            6,309             5,465
                                                   ----------        ----------

EXPENSES:
  Research and development                              3,262             3,727
  Selling and marketing                                 1,190             1,201
  General and administrative                            2,112             1,194
                                                   ----------        ----------
           Total expenses                               6,564             6,122
                                                   ----------        ----------
LOSS FROM OPERATIONS                                    (255)              (657)

OTHER INCOME, Net                                       1,382               626
                                                   ----------        ----------

INCOME (LOSS) BEFORE INCOME TAXES                       1,127               (31)

INCOME TAX PROVISION                                        35                 0
                                                   -----------        ---------
NET INCOME (LOSS)                                  $     1,092        $     (31)
                                                   ===========        =========
BASIC EARNINGS (LOSS) PER SHARE                    $      0.01        $   (0.00)
                                                   ===========        =========
DILUTED EARNINGS (LOSS) PER SHARE                  $      0.01        $   (0.00)
                                                   ===========        =========
BASIC SHARES OUTSTANDING                               113,027          112,818
                                                   ===========        =========
DILUTED SHARES OUTSTANDING                             113,326          112,818
                                                   ===========        =========


                              See notes to financial statements.

                                       2


<PAGE>


OPTICAL COMMUNICATION PRODUCTS, INC

STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>

                                                                       Three Months Ended December 31,
                                                                      ----------------------------------
                                                                        2005              2004
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>
Operating Activities:
  Net income (loss)                                                  $   1,092         $     (31)

  Adjustments  to  reconcile  net  income (loss) to net
    cash used in  operating activities:
    Depreciation and amortization of property,
     plant and equipment                                                  912              1,271
    Amortization of intangibles                                           108                225
    Amortization of (discount) premium on marketable
     securities                                                          (185)               103
    Stock-based compensation expense                                      240                  -
    Deferred income taxes                                                (385)                 -
    Changes in operating assets and liabilities:
      Accounts receivable, net                                         (1,270)               (63)
      Inventories                                                      (2,613)            (1,488)
      Prepaid expense and other assets                                    118                291
      Accounts payable                                                   (450)               469
      Accounts payable to related parties                                (133)               503
      Accrued payroll and benefits                                        424
      Accrued bonuses                                                    (608)            (2,166)
      Other accrued expenses and income taxes payable                     523               (772)
                                                                    -----------        -----------
Net cash used in operating activities                                  (2,227)            (1,658)
                                                                    -----------        -----------
Investing Activities:
Purchase of marketable securities                                     (14,767)            (4,967)
Maturities of marketable securities                                    10,000             15,000
Purchase of property, plant and equipment                                (115)               (76)
                                                                    -----------        -----------

Net cash (used in) provided by investing activities                    (4,882)             9,957
                                                                    -----------        -----------
Financing Activities:
Issuance of common stock                                                  111                 71
                                                                    -----------        -----------
(Decrease) increase in cash and cash equivalents                       (6,998)             8,370

Cash and cash equivalents, beginning of period                         83,975             75,423
                                                                    -----------        -----------

Cash and cash equivalents end of period                                76,977             83,793
                                                                    ===========        ===========
Supplemental disclosures of cash flow information:
  Cash paid during period for:
      Interest                                                      $       -          $       -
      Income taxes                                                  $       -          $       -

</TABLE>

                       See notes to financial statements.


                                        3


<PAGE>


NOTES TO FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION

      The  accompanying   unaudited  interim  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 financial statements
      contain  all  adjustments,  consisting  of normal  recurring  adjustments,
      necessary  to present  fairly the  Company's  financial  statements  as of
      December 31, 2005 and for all interim  periods  presented.  The  financial
      statements  should  be read in  conjunction  with  the  audited  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, 2005. The results of operations for the period ended December 31, 2005
      are not necessarily indicative of the results that may be expected for the
      fiscal year ending  September  30,  2006.  The  Company's  operations  are
      primarily  located  in  Woodland  Hills,  California.  The  Company  is  a
      majority-owned  subsidiary of The Furukawa Electric Company, Ltd. of Japan
      ("Furukawa").  Furukawa  beneficially  owned 58.4% of the Company's common
      stock at December  31,  2005,  which  accounts  for 93.4% of the  combined
      voting power of all of the Company's outstanding stock.

      Recent Accounting Pronouncements

      In November 2004, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards ("SFAS") 151, Inventory Costs.
      SFAS 151 requires  that  allocation of fixed  production  overheads to the
      costs of  conversion  be based on the normal  capacity  of the  production
      facilities and  unallocated  overheads are recognized as an expense in the
      period in which  they arc  incurred.  In  addition,  other  items  such as
      abnormal  freight,  handling costs and amounts of wasted materials require
      treatment as current period charges rather than a portion of the inventory
      cost.  SFAS 151 is effective for inventory  costs incurred  during periods
      beginning after June 15, 2005. The Company implemented SFAS 151 during the
      quarter ended  December 31, 2005 and the adoption of SFAS 151 did not have
      a material impact.

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

2.    STOCK-BASED COMPENSATION

      On December 16, 2004,  the FASB issued  Statement 123 (revised  2004) that
      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.   Statement  123(R)  replaces  FASB  Statement  No.  123,
      Accounting for  Stock-Based  Compensation,  and supersedes APB Opinion No.


                                        4

<PAGE>


      25, Accounting for Stock Issued to Employees.  SFAS 123(R) is effective as
      of the first interim or annual reporting period that begins after June 15,
      2005.  The Company  implemented  SFAS 123(R) in the current  quarter ended
      December 31, 2005.

      The Company adopted SFAS 123(R) using the  modified-prospective-transition
      method. Under this transition method,  compensation cost recognized in the
      quarter ended December 31, 2005  includes:  a)  compensation  cost for all
      share-based  payments  granted  prior to, but not yet vested  based on the
      grant-date fair value estimated in accordance with the original provisions
      of Statement 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 FAS 123R. The results
      for the prior periods have not been restated.

      Periods prior to the adoption of SFAS 123(R)

      Prior to the adoption of SFAS 123(R),  the Company provided the disclosure
      required under SFAS No. 123, "Accounting for Stock-Based Compensation," as
      amended  by SFAS No.  148,  "Accounting  for  Stock-Based  Compensation  -
      Transition  and  Disclosures."  The Company  generally  did not  recognize
      stock-based  compensation  expense in its  statements  of  operations  for
      periods  prior to the  adoption of SFAS  123(R) as options  are  generally
      granted at an exercise  price equal to the market value of the  underlying
      stock on the date of grant.



      The following  table  illustrates  the effect on net loss and net loss per
      share as if the Company had applied the fair value recognition  provisions
      of  SFAS  123(R)  to  options  granted  under  the  company's  stock-based
      compensation  plans prior to the adoption  date.  For purposes of this pro
      forma disclosure, the value of options was estimated using a Black-Scholes
      option  pricing  formula and amortized on a  straight-line  basis over the
      respective vesting periods of the awards. Disclosures for the three months
      ended December 31, 2005 are not presented because stock-based compensation
      was  accounted  for under SFAS  123(R)'s  fair-value  method  during  this
      current period.


<TABLE>
<CAPTION>

                                                Three Months Ended December 31,
                                                             2004
                                               --------------------------------
                                                         (in thousands,
                                                         except per share
                                                           amounts)
      <S>                                               <C>           <C>

      Net Loss
        As reported:                                    $            (31)

        Deduct total stock-based employee
        compensation expense determined
        under fair value based method for
        all awards, net of related tax
        effects:                                                    (997)
                                                        ------------------
        Proforma                                        $         (1,028)
                                                        ------------------
                                                        ------------------

      Basic loss per share
        As reported                                     $          (0.00)
        Pro forma                                       $          (0.01)

      Diluted loss per share
        As reported                                     $          (0.00)
        Pro forma                                       $          (0.01)

</TABLE>


                                        5


<PAGE>



      Adoption of SFAS 123(R)

      During  the  quarter  ended  December  31,  2005,  the  company   recorded
      stock-based  compensation expense 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  fair  value  model  amortized  on a
      straight-line  basis over the vesting period of the options.  The adoption
      period  coincides  with the  beginning  of the current  quarter.  No prior
      periods  have  been   restated.   The  effect  of  recording   stock-based
      compensation  for the three month  period  ended  December 31, 2005 was as
      follows:

<TABLE>
<CAPTION>


                                                 Three months ended December 31,
                                                                 2005
                                                                 ----
                                                      (in thousands, except per
                                                            share amounts)

      <S>                                                 <C>             <C>
      Stock-based compensation expense by type of award
        Employee stock options                             $            232
        Employee stock purchase plan                                      8
                                                         -------------------
      Total stock-based compensation expense               $            240
      Tax effect on stock-based compensation expense                      0
                                                         -------------------
      Net effect on net income                             $            240

      Effect on earnings per share
        Basic earnings per share                           $           0.00
        Diluted earnings per share                         $           0.00


</TABLE>



      As required by SFAS  123(R),  management  has made an estimate of expected
      forfeitures  and is recognizing  compensation  costs only for those equity
      awards expected to vest based on a 25% estimated forfeiture rate.

      During the quarter  ended  December  31,  2005,  the  Company  accelerated
      certain  unvested  stock options and recognized  approximately  $52,000 of
      stock-based compensation expense related to this modification of terms.

      Stock Options

      The Company's 2000 Stock Incentive Plan authorizes  12,121,680 options for
      grant and provides that options may have a maximum  contractual term of 10
      years, and become  exercisable and vest in increments.  The normal vesting
      is 25% per year.  However,  the vesting period can vary. All options under
      this plan are  granted  with the  exercise  price equal to the fair market
      value of the Company's common stock on the date of grant. During the three
      months ended December 31, 2005, the Company  granted 195,228 stock options
      with an estimated  total  grant-date  fair market  value of  approximately
      $313,000.  Of this  amount,  the Company  estimated  that the  stock-based
      compensation for the awards not expected to vest will be approximately 25%
      of the grant  date fair  market  value.  During  the  three  months  ended
      December 31, 2005, the Company recorded  stock-based  compensation related
      to stock options of $232,000 for all unvested options granted prior to and
      all options granted after the adoption of SFAS 123(R).


                                        6


<PAGE>


      Employee Stock Purchase Plan (ESPP)

      The Company has an Employee Stock  Purchase Plan 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 plan for the three months ended December 31, 2005 was $8,000.  This
      cost is amortized on a straight-line basis over a weighted-average  period
      of approximately 1 year.

      Valuation assumptions



<TABLE>
                                           Three month ended December 31,

      <S>                                       <C>            <C>

                                               2005            2004
                                               ----            ----

      Dividend yield                             0%               0%
      Expected volatility                       89%              96%
      Risk-free rate of return                4.52%            4.04%
      Expected life (years)                    8.0              8.7

</TABLE>

      Expected Volatility: The fair value of stock-based awards made through the
      quarter  ended  December  31,  2005 were  valued  using the  Black-Scholes
      valuation  method  with  a  volatility   factor  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 method 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.

      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 method, is adjusted
      based on this estimated rate of forfeiture.

      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.  The assumptions  listed above 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 and pro forma  stock-based
      compensation  expense  could  have  been  materially  different  from that
      depicted  above.  In  addition,  we are  required to estimate the expected
      forfeiture  rate and only recognize  expense for those shares  expected to
      vest.  If our actual  forfeiture  rate is  materially  different  from our
      estimate,  the  share-based   compensation  expense  could  be  materially
      different.

      Stock Option Activity

      There were 5,791,638 shares available for future grant under the Company's
      2000 Stock Incentive Plan at December 31, 2005. The following is a summary
      of stock option activity during the three months ended December 31, 2005:


                                        7


<PAGE>



<TABLE>
<CAPTION>

<S>                                                            <C>                 <C>                    <C>

                                                                             Exercise Price per     Weighted Average
                                                        Number of Options          Option            Exercise Price

Options outstanding- September 30, 2005                       7,991,882       $0.100 to $17.38          $   8.49
Options granted                                                 195,228         1.87 to 2.41                1.94
Options exercised                                               (63,024)        0.39 to 1.71                1.02
Options canceled                                               (227,295)        0.68 to 17.38               4.69
                                                            -------------    ------------------        ----------
Options outstanding - December 31, 2005                       7,896,791       $0.100 to $17.38          $   8.49
                                                         ================    ==================        ==========
</TABLE>

          The following table summarizes  information  regarding options
      outstanding at December 31, 2005:

<TABLE>
<CAPTION>


                                         Options Outstanding                             Options Exercisable
                       --------------------------------------------------------- -------------------------------------

                                              Weighted Average
Range of Exercise               Number             Remaining         Weight Average        Shares         Weight Average
  Prices                      Outstanding        Contractual Life     Exercise Price      Exercisable      Exercise Price
                          ------------------ ------------------ ------------------- ---------------- --------------------
<S>                                <C>             <C>                 <C>               <C>               <C>


$0.00 - $1.69**                1,190,322          4.9             $     0.6325         1,029,158       $     0.5689
$1.81 - $3.31**                1,577,484          8.3             $     2.2266           453,270       $     2.3290
$3.56 - $4.55                     34,250          7.0             $     3.9331            28,000       $     3.9867
$8.05 - $9.72                     51,480          5.6             $     8.3095            51,480       $     8.3095
$11.00 - $17.38                5,043,255          5.0             $    12.3410         5,043,255       $    12.3410
                               ---------          ---             ------------         ---------       ------------
                               7,896,791          5.5             $     8.4929         6,605,163       $     9.7529
                              ==========          ===             ============         =========       ============

</TABLE>

      ** The aggregate  intrinsic value for options  outstanding and exercisable
      options  outstanding at December 31, 2005 was  $2,367,107 and  $1,873,349,
      respectively.

      The weighted average  estimated grant date fair value per share of options
      granted  during the three  months ended  December 31, 2005 was $1.60.  The
      total intrinsic value of options  exercised  during the three months ended
      December 31, 2005 was $80,000.


      ESPP Activity

      There were a total of 33,017 shares of the  Company's  common stock issued
      at a weighted  average  purchase  price of $1.41  pursuant to the employee
      stock purchase plan during the three months ended December 31, 2005. There
      are a total of 76,449 shares  available for future issuance under the plan
      at December 31, 2005.

      Non-vested Options

      As of December 31,  2005,  there was  approximately  $1.7 million of total
      unrecognized   compensation   cost  related  to   non-vested   share-based
      compensation  arrangements that is expected to be substantially  amortized
      in full by September 30, 2009. The total unrecognized compensation expense
      was approximately $1.9 million at September 30, 2005.

                                        8


<PAGE>


3.    INVENTORIES

      Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>


                                                      December 31,             September 30,
                                                          2005                      2005

      ---------------------------------------------------------------------------------------------
<S>                                                   <C>                         <C>
      Raw materials                                   $    9,882               $      8,393
      Work-in-process                                      6,328                      5,094
      Finished goods                                       1,721                      1,831
                                                      ----------               ------------
      Total inventories                               $   17,931               $     15,318
                                                      ==========                ===========
</TABLE>


4.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                     December 31,             September 30,
                                                         2005                      2005
                                                                                                           Useful Lives
      --------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                      <C>                            <C>

      Land                                            $    6,729               $      6,729
      Buildings and improvements                          14,949                     14,949                   39 years
      Machinery and equipment                             20,529                     20,419                    5 years
      Computer hardware and software                       1,686                      1,681                    3 years
      Furniture and fixtures                                 382                        382                    5 years
      Leasehold improvements                                 181                        181                    9 years
                                                      ----------               -------------
                                                          44,456                     44,341
      Less accumulated depreciation                       20,339                     19,427
                                                      ----------               -------------
                                                      $   24,117               $     24,914
                                                      ==========               ============

</TABLE>

5.    INTANGIBLE ASSETS

      The Company's intangible assets by major asset class are as follows:


<TABLE>
<CAPTION>



                                                                    Weighted
                                                As of                Average
                                     December 31,    September 30, Amortization
                                         2005            2005        Period
                                     -------------------------------------------
                                                                     (Years from
                                           (in thousands)             inception)
<S>                                     <C>        <C>                   <C>
      Patents
        Accumulated Amortization           950         950               5.0
                                           601        (554)
      Acquired Technology                1,216       1,216               5.0
        Accumulated Amortization          (771)       (710)
                                        -------------------
      Total intangible assets, net      $  794     $   902
                                        ========   ========
</TABLE>


      Aggregate   amortization   expense   related  to  intangible   assets  was
      approximately  $108,000 and  $225,000 for the three months ended  December
      31, 2005 and 2004, respectively.


                                        9


<PAGE>




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

                                                       (in thousands)

      Remaining nine months fiscal 2006                  $      325
      Fiscal 2007                                               433
      Fiscal 2008                                                36
                                                         -----------
                                                         $      794
                                                         ===========

6.    EARNINGS (LOSS) PER SHARE

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


<TABLE>
<CAPTION>
                                                  Three Months Ended December 31,
                                               -------------------------------------
                                                      2005              2004
                                               (in thousands, except per share data)

------------------------------------------------------------------------------------
<S>                                                 <C>                 <C>
BASIC EPS COMPUTATION:
Net income (loss) applicable to common stock       $   1,092         $     (31)
                                                   ---------         ---------
Weighted average common shares outstanding           113,027           112,818
                                                   ---------         ---------
Basic earnings (loss) per share                    $    0.01         $   (0.00)
                                                   =========        ==========


DILUTED EPS COMPUTATION:
Net income (loss) applicable to common stock        $  1,092               (31)
                                                   ---------        ----------
Diluted weighted average shares outstanding          113,326           112,818
                                                   ---------        ----------
Diluted earnings (loss) per share                   $   0.01         $   (0.00)
                                                   =========        ==========
</TABLE>


      The weighted  average  diluted  common  shares  outstanding  for the three
      months ended December 31, 2005 and December 31, 2004 excludes the dilutive
      effect of approximately 5,513,668 and 5,782,295 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 due to a net operating loss for the period.

7.    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  December  31, 2005 and 2004 was $139,000 and
      $135,000, respectively.

                                        10


<PAGE>


      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 December 31, 2005:

      (in thousands)

      ---------------------------------------------------------
      nine months ending September 30, 2006           $   172
      2007                                                 57
      2008                                                 42
      2009                                                 42
      2010                                                 42
      Thereafter                                           36
     ----------------------------------------------------------
      Total minimum lease payments                    $   391
     ----------------------------------------------------------

      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.


<TABLE>
<CAPTION>
                                Balance at       Additions                      Balance at
                                beginning        charged to                       end of
      Warranty Reserve           period           expense       (Deductions)      period
      Three months ended:
<S>                             <C>              <C>             <C>            <C>
      December 31, 2004         $ 31,000       $    3,000        $  (8,000)       $ 26,000
      December 31, 2005         $ 14,000       $   36,000        $ (10,000)       $ 40,000

</TABLE>


8.    SUBSEQUENT EVENT

      Colorado Facility

      The Company permanently ceased the operations of its Broomfield,  Colorado
      facility,  a  research  and design  facility  where the  Company  had been
      focused  on  creating  VCSEL  technology  for  fiber  optic  communication
      networks,  on January 31, 2006. The Company decided to cease the operation
      of its Colorado  facility because the cost of Fabry-Perot  lasers has been
      decreasing,   making  1300  nm  VCSEL  technology  less  attractive  as  a
      cost-effective replacement, and because of the delay in development of the
      market  for the next  generation  of  optical  modules.  As a result,  the
      Company will cease the immediate  development of products based on 1300 nm
      VCSEL  technology.  In the  short-term,  the  closure  will result in cost
      savings  for the  Company in the range of  approximately  $500,000 to $1.0
      million per quarter.  The Company has derived immaterial revenues from its
      operations at the Colorado facility.

      On February 10,  2006,  the Company  entered  into an  agreement  with The
      Furukawa Electric Co., Ltd., the Company's majority  stockholder,  to sell
      certain  assets  located  at  the  Colorado   facility  related  to  VCSEL
      technology.   The  Company   also   granted   Furukawa  a   non-exclusive,
      royalty-bearing  license to use and exploit intellectual  property related
      to the VCSEL  technology.  Under the terms of the license,  Furukawa would
      pay the  Company a royalty  on sales of  certain  products  utilizing  the
      1300nm VCSEL chip technology.  Total cash consideration was $1 million, in
      addition to the potential royalty payments.

                                       11


<PAGE>


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 financial  statements and the
related notes to such 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,"  "will" 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, 2005.

Critical Accounting Policies

      The  preparation  of  financial  statements  and  related  disclosures  in
conformity with accounting  principles  generally  accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Financial  Statements and accompanying  notes. Note 2 to
the  Financial  Statements in the Annual Report on Form 10-K for the fiscal year
ended  September 30, 2005  describes  the  significant  accounting  policies and
methods used in the preparation of the Financial Statements.  Estimates are used
for, but not limited to, the accounting for the allowance for doubtful  accounts
and  sales  returns,  valuation  of  excess  and  obsolete  inventory,  warranty
accruals,  long-lived  assets,  SFAS 123(R) fair market value  calculations  for
stock-based  compensation  and income  taxes.  Actual  results could differ from
these  estimates.  The  following  critical  accounting  policies  are  impacted
significantly by judgments, assumptions and estimates used in the preparation of
our Financial Statements.

Allowance for Doubtful Accounts and Sales Returns

      Our accounts  receivable  balance,  net of allowance for doubtful accounts
and sales  returns,  was $10.8  million and $9.5 million as of December 31, 2005
and September 30, 2005,  respectively.  The allowance for doubtful  accounts and
sales returns as of December 31, 2005 was $408,000, compared with $426,000 as of
September  30,  2005.   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 deviate from our expectations, our estimates of the recoverability of amounts
due to us could be  overstated,  and  additional  allowances  could be required,
which could have an adverse impact on our operations.

Inventory Write-downs

      Our inventory balance was $17.9 million as of December 31, 2005,  compared
with $15.3  million as of September 30, 2005. At December 31, 2005 and September
30, 2005,  inventory  with a historical  cost of $8.5 million and $9.0  million,
respectively, was written down as excess and obsolete inventory. We estimate our
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, 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.  We do not  necessarily  discard  written  down
inventory and have, periodically, discovered that written down inventory was not
obsolete or excess, as previously  estimated.  In those

                                        12


<PAGE>


situations, the written down inventory is sold and reflected in cost of sales at
the new  written  down  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.

Warranty Accruals

      The   liability  for  product   warranties,   included  in  other  accrued
liabilities,  was $40,000 as of December 31, 2005,  compared  with $14,000 as of
September 30, 2005.  Our products  sold are generally  covered by a warranty for
periods  ranging from one to five years. We accrue for warranty costs as part of
our cost of sales  based on  associated  material  costs,  and labor  costs on a
historical  basis. If we experience an increase in warranty claims compared with
our  historical  experience,  or if the cost of  servicing  warranty  claims  is
greater  than the  expectations  on which the accrual has been based,  our gross
margin could be adversely affected.

Long-Lived Assets

      We monitor  and  evaluate  the  recoverability  of our  long-lived  assets
whenever events or changes in circumstances  indicate that the carrying value of
an asset may no longer be  recoverable.  If the carrying  amount of a long-lived
asset exceeds the expected future cash flows  (undiscounted and without interest
charges)  from the use of the asset,  we  recognize  an  impairment  loss in the
amount of the difference  between the carrying  amount and the fair value of the
asset. Our long-lived  assets subject to impairment are our property,  plant and
equipment  and our  intangible  assets  which had net  carrying  values of $24.1
million and $794,000,  respectively,  at December 31, 2005. At our September 30,
2005  year-end,  we  estimated  that  undiscounted  future  cash flows  would be
sufficient  to  recover  the  value of our  long-lived  assets.  However,  these
estimates of future cash flows are subject to change.  Should these estimates of
future  undiscounted  cash  flows  indicate  that  the  carrying  value  of  our
long-lived assets may not be recoverable,  we would be required to determine the
fair value of those assets and record a loss for the difference, if any, between
the carrying value and the fair value of those assets.

Stock-based Compensation

      During  the  quarter  ended  December  31,  2005,  the  company   recorded
stock-based  compensation  expense of $240,000 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 based on a 25% estimated  forfeiture  rate.  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 and pro forma  stock-based  compensation
expense  could have been  materially  different  from that  depicted  above.  In
addition,  we are  required to estimate the  expected  forfeiture  rate and only
recognize  expense for those shares  expected to vest. If our actual  forfeiture
rate is materially  different from our estimate,  the  share-based  compensation
expense could be materially different.

Income Taxes

      At December 31, 2005, the unadjusted net book value of our deferred income
tax assets totaled  approximately $4.9 million,  which was principally comprised
of  federal  and  state  net  operating   loss   carry-forwards   and/or  credit
carry-forwards   and  differences   between  the  book  and  tax  bases  of  our
inventories.  The  provisions  of SFAS No. 109  "Accounting  for Income  Taxes,"
require a valuation allowance when,

                                        13


<PAGE>


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 quarter  ended  December 31, 2005,  we released  valuation
allowance  to the extent of our  quarterly  federal tax  expense,  as it is more
likely than not that a portion of our deferred income tax assets attributable to
federal credits and federal book-tax differences will be realized.  We expect to
continue  releasing the valuation  allowance  attributable to federal  tax-based
deferred  tax  assets on a  quarterly  basis to the  extent of our  federal  tax
expense and maintain the remaining valuation allowance until sufficient evidence
exists to support full reversal of the  valuation  allowance on all deferred tax
assets.

Overview

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

      Furukawa  beneficially  owns all of our outstanding  Class B common stock,
representing  58.4% of our  outstanding  shares of common stock and 93.3% of the
combined  voting power of all of our  outstanding  common stock as of the fiscal
quarter  ended  December  31,  2005.  Since  our  inception,  we have  purchased
substantially  all of our  lasers  and the  majority  of our other  fiber  optic
components from Furukawa.  We have relied on Furukawa's research and development
capabilities to provide us with technologically  advanced lasers and fiber optic
components  that we purchase from  Furukawa for  inclusion in our  products.  We
currently  purchase the majority of lasers from Furukawa under a one-year Master
Purchase Agreement, which we entered into with Furukawa on October 1, 2003. This
Agreement renews automatically on October 1 of each year unless it is terminated
upon written  notice by either  Furukawa or us prior to renewal.  This agreement
was automatically renewed on October 1, 2005.

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


      We operate in one industry  segment,  the design and  manufacture of fiber
optic subsystems and modules.  We sell our products to  communication  equipment
manufacturers,  or CEMs, their contract  manufacturers,  or CMs, who incorporate
them into systems they  assemble for CEMs,  and to  distributors.  We define our
customers as CEMs who have purchased our products directly or indirectly through
CMs and  distributors.  We recognize  revenue upon product  shipment,  and sales
returns and allowances have been insignificant. Historically, a relatively small
number of customers have accounted for a significant  percentage of our revenue.
Our 10 largest  customers  accounted  for  approximately  71.7% and 70.7% of our
total revenue for the quarters ended  December 31, 2005 and 2004,  respectively.
Huawei  Technologies  and  Alcatel  (including  sales  to  each of  their  CMs),
accounted for approximately 16.3% and 16.2%, respectively,  of our total revenue
for the quarter ended  December 31, 2005.  Cisco Systems and Alcatel  (including
sales to each of their  CMs),  accounted  for  approximately  18.1%  and  12.1%,
respectively,  of our total revenue for the quarter ended  December 31, 2004. No
other end-user  customer  accounted for more than 10.0% of our total revenue for
the quarters ended December 31, 2005 or 2004. Although our

                                        14


<PAGE>


revenue from sales to our other customers continues to increase,  we expect that
significant customer concentration will continue for the foreseeable future.

      We also ship directly to CMs who place  purchase  orders with us directly.
No such direct  customer  accounted for more than 10.0% of our total revenue for
the quarters  ended  December 31, 2005 or 2004. 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 and on short notice.

      The  unfavorable  economic  conditions  in the United States that began in
2001 detrimentally affected the U.S. manufacturing industry,  particularly sales
of fiber  optics  equipment to service  providers  and  communication  equipment
companies.  Announcements  by fiber  optics  equipment  manufacturers  and their
customers at the time indicated that there was a reduction in spending for fiber
optic  equipment  as a result of the  economic  slowdown  and  efforts to reduce
then-existing  inventories.  Based  on  these  and  other  factors,  some of our
customers  reduced,  modified,  cancelled or rescheduled orders for our products
and  expressed   uncertainty  as  to  their  future  requirements.   Despite  an
improvement in general economic conditions in the United States since that time,
capital spending by service providers in the fiber optic communications industry
on network  infrastructure  has remained  substantially  below pre-2001  levels.
During the first quarter of fiscal 2006, we have seen a higher level of activity
from our  customers  which  resulted  in an  increase  in new orders  compare to
previous quarters. We cannot provide any assurance that the increase in customer
activity will  continue or that our business will not be negatively  impacted in
the future as a result of our customers' declining business activities.

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

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

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

      Sales and  marketing  expenses  consist  primarily of salaries and related
expenses for sales and marketing personnel,  commissions paid to sales personnel
and independent manufacturers'  representatives,  marketing and promotion costs.
We may  expand  our sales  and  marketing  operations  and  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 future periods.

      General and administrative  expenses consist primarily of salaries,  stock
compensation and related expenses for our administrative,  finance,  information
systems and human  resources  personnel,  professional  fees and other corporate
expenses. Our legal and consulting fees may increase as a result of our analysis
of strategic  alternatives,  including future market  opportunities  that may be
pursued by our

                                        15


<PAGE>


management and board of directors.  As a result,  our general and administrative
expenses in absolute dollars may continue to increase in future periods.

Results of Operations - Comparison  of Three Months Ended  December 31, 2005 and
2004

      The following table sets forth statement of operations data and percentage
of change for the periods indicated (in thousands):

<TABLE>





                                                    Three Months Ended December 31,                                %
                                           --------------------------------------------------
                                                    2005                   2004                    Change        Change
                                           ---------------------------------------------------   ------------  -----------
<S>                                        <C>            <C>        <C>              <C>            <C>            <C>
REVENUE                                    $     17,749   100.0%     $    14,023      100.0%         3,726          26.6%
COST OF REVENUE                                  11,440    64.5%           8,558       61.0%         2,882          33.7%
                                           ------------              -----------

GROSS PROFIT                                      6,309    35.5%           5,465       39.0%           844          15.4%
                                           ------------              -----------

EXPENSES:
      Research and development                    3,262    18.4%           3,727       26.6%          (465)        -12.5%
      Selling and marketing                       1,190     6.7%           1,201        8.6%           (11)         -0.9%
                                           ------------              -----------
      General and administrative                  2,112    11.9%           1,194        8.5%           918          76.9%
                                           ------------              ----------
Total expenses                                    6,564    37.0%           6,122       43.7%           442           7.2%
                                           ------------              -----------

LOSS FROM OPERATIONS                              (255)    -1.4%           (657)       -4.7%           402         -61.2%

OTHER INCOME, Net                                 1,382     7.8%             626        4.5%           756         120.8%
                                           ------------              -----------
INCOME (LOSS) BEFORE INCOME TAXES                 1,127     6.3%            (31)       -0.2%         1,158       -3,735.5%

INCOME TAXES                                         35     0.2%               -        0.0%            35           N/A
                                           ------------              -----------
INCOME (LOSS)                              $      1,092     6.2%            (31)       -0.2%         1,123       -3,622.6%

</TABLE>


         Revenue - Revenue increased 26.6% to $17.7 million in the quarter ended
December  31, 2005 from $14.0  million in the quarter  ended  December 31, 2004.
This increase was due  predominantly  to an increase in demand from our existing
customers.  Revenue attributable to our top ten customers was approximately $2.7
million more in the quarter  ended  December 31, 2005 as compared to the quarter
ended  December  31,  2004.  The  most  significant   product  increase  was  in
Transceivers.  We continue to experience  pressure from  customers to make price
reductions.  We cannot  assure you that our increase in revenue will continue in
future periods, as the average selling prices for existing products may continue
to decline in response to product  introductions  by competitors or us, or other
factors, including the reduction of customer demand for our products or pressure
from customers for price reductions.

                                        16


<PAGE>


      The following table sets forth revenue attributable to each of our product
groups for the periods presented (in thousands).

<TABLE>
<CAPTION>

                                          Three months ended December 31,
                                 -----------------------------------------------
                                           2005                     2004
                                 ----------------------   ----------------------
<S>                                  <C>          <C>          <C>         <C>
         Transceivers                15,354       86.5%        11,666      83.2%
         Transmitters                 1,370        7.7%         1,244       8.9%
         Receivers                      933        5.3%         1,033       7.4%
         Other                           92        0.5%            80       0.6%
                                 -----------------------------------------------
                                     17,749      100.0%        14,023     100.0%

</TABLE>

         Cost of Revenue - Cost of revenue  increased  33.7% to $11.4 million in
the  quarter  ended  December  31, 2005 from $8.6  million in the quarter  ended
December  31,  2004.  Gross  margin  decreased  to 35.5% from 39.0%  during this
period.  The  decrease  in gross  margin was  primarily  due to an  increase  in
material  costs as a percent of  revenue  to 42.6%  from 39.0% for the  quarters
ended  December  31,  2005 and 2004,  respectively.  Changes in product  mix and
increased raw material costs are the primary  factors  contributing to increases
in material  cost as a  percentage  of revenue and such  factors may continue to
impact gross margin in the future. In addition,  direct labor as a percentage of
revenue increased to 4.9% from 4.1% for the quarters ended December 31, 2005 and
2004,  respectively.  These  increases  were  partially  offset by a decrease in
overhead  costs as a percent of revenue to 17.0% from 17.9% and an  increase  in
usage of previously  written down inventory of $829,000 from  $563,000,  for the
quarters ended December 31, 2005 and 2004, respectively.

         Research and Development - Research and development  expenses decreased
12.5% to $3.3 million in the quarter  ended  December 31, 2005 from $3.7 million
in the quarter  ended  December 31, 2004.  This  decrease was primarily due to a
decrease in the number of engineering staff members to 63 members in the quarter
ended  December 31, 2005 from 76 members in the quarter ended  December 31, 2004
and  an  approximate   $200,000  decrease  in  depreciation  expense  for  fully
depreciated  engineering  equipment  at  our  Colorado  facility.  Research  and
development  expenses in the current  quarter  ended  December  31, 2005 include
approximately  $122,000 of non-cash stock-based  compensation expense. We ceased
operations  at our  Colorado  facility on January 31, 2006 and the closure  will
result in cost savings for the Company in the range of approximately $500,000 to
$1.0 million per quarter. Although we do not expect any of these factors to have
a material impact on our research and development efforts in the near future, we
cannot be absolutely certain of its potential impact in the longer term basis.

         Sales and Marketing - Sales and marketing  expenses remained  unchanged
at $1.2  million for the  quarters  ended  December  31, 2005 and 2004.  A small
decrease in salaries  was offset by a revenue  related  increase in  commissions
paid to outside sales  representatives.  We believe that investment in sales and
marketing  is  critical  to our success  and  believe  that these  expenses  may
increase in absolute dollars in the future.

         General  and  Administrative  -  General  and  administrative  expenses
increased 76.9% to $2.1 million in the quarter ended December 31, 2005 from $1.2
million in the quarter ended December 31, 2004. The increase of $918,000 was due
a $620,000  increase in  professional  services  as a result of the  analysis of
strategic  alternatives being conducted by our management and board of directors
and an increase of $93,000 non-cash stock-based compensation expense as a result
of  implementation  of SFAR 123(R) during the quarter ended December 31, 2005 as
compared to the quarter ended December 31, 2004.


                                        17


<PAGE>


         Other Income,  net - Other income, net increased 120.8% to $1.4 million
in the  quarter  ended  December  31, 2005 from  $626,000  in the quarter  ended
December 31, 2004.  This increase was primarily due to an increase in investment
income as a result of rising interest rates.

         Income  Taxes - Income tax expense  was  $35,000 for the quarter  ended
December 31, 2005 and was  comprised  of foreign  taxes in the amount of $28,000
and state income taxes of $7,000. There was no income tax provision recorded for
the quarter  ended  December  31, 2004 due to the loss  position  and  valuation
allowance  recorded  against net  deferred  tax assets.  There is no federal tax
expense  recorded  during the  quarter  ended  December  31, 2005 as we released
valuation allowance to the extent of our quarterly federal tax expense, as it is
more  likely  than  not  that  a  portion  of our  deferred  income  tax  assets
attributable  to  federal  credits  and  federal  book-tax  differences  will be
realized.

Liquidity and Capital Resources

         As of December 31, 2005,  our primary  source of liquidity was our cash
and cash  equivalents  balance of $77.0  million and our  marketable  securities
balance of $69.6  million,  which consists  primarily of United States  Treasury
notes and bonds.  At September  30, 2005,  we had $84.0 million in cash and cash
equivalents and $64.6 million in current marketable securities.

         Current assets and current liabilities

         Since  inception,  we have financed our operations  primarily with cash
generated from operations. Additional financing has been generated through lines
of credit and term loans, and through our initial public offering of our Class A
common  stock,  which we completed on November 3, 2000. As of December 31, 2005,
our working  capital was $165.0 million with a current ratio of 15:1 compared to
our working capital of $163 million with a current ratio of 15:1 as of September
30, 2005. Our net income  contributed to the increase in working  capital during
the three months ended  December 31, 2005. In addition,  our revenues,  accounts
receivable  and inventory  increased as a result of higher level of activity and
new orders from our  customers  during this period.  We believe that  additional
cash could be borrowed if necessary;  however,  cash flow from operations,  cash
and equivalents, and marketable securities are expected to be sufficient to fund
operations for the next twelve months.

         Cash flows provided by/ (used in)

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


                                                        Three Months Ended
                                                            December 31
                                                   -----------------------------
                                                     2005                2004
                                                     ----                ----
      Operating Activities                          $(2,227)            $(1,658)
      Investing Activities                           (4,882)              9,957
      Financing Activities                              111                  71
                                                   ----------           --------
      Net increase in cash and cash equivalents     $(6,998)            $ 8,370

         During the three months ended December 31, 2005, cash used in operating
activities  was  primarily  the result of increases in accounts  receivable  and
inventory  which more than  offset net  income.  During the three  months  ended
December  31,  2004,  cash used by  operations  was the result of an increase in
inventories,  decreases in accrued bonus and other accrued expenses, and the net
loss after adding back the adjustments for depreciation and amortization.  These
were partially  offset by increases in accounts  payable and accounts payable to
related parties.

                                        18


<PAGE>


         During the three months ended December 31, 2005, cash used in investing
activities was primarily the result of the purchase of marketable securities net
of the  maturation for a net of $4.8 million.  Purchases of property,  plant and
equipment were $115,000.  During the three months ended December 31, 2004,  cash
provided by investing  activities  was primarily the result of the maturation of
marketable securities, net of the purchase of marketable securities for a net of
$10.0 million.

         During the three months ended  December 31, 2005 and December 31, 2004,
cash provided by financing activities was from the exercise of stock options.

         We believe that our existing  cash,  cash  equivalents  and  marketable
securities  on hand,  together  with cash that we  expect to  generate  from our
operations,  will be  sufficient to meet our capital needs for at least the next
twelve  months.  However,  it is  possible  that we may  need or  elect to raise
additional  funds to fund our  activities  beyond the next year or to consummate
acquisitions of other businesses,  products or technologies. We could raise such
funds by  selling  more  stock to the  public or to  selected  investors,  or by
borrowing money. We cannot assure you that we will be able to obtain  additional
funds on commercially  favorable  terms, or at all. If we raise additional funds
by issuing  additional  equity or  convertible  debt  securities,  the ownership
percentages of existing  stockholders would be reduced. In addition,  the equity
or debt  securities  that we issue may have rights,  preferences  or  privileges
senior to those of the holders of our common stock.

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

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

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

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.

                                        19


<PAGE>


Contractual Obligations

         There have been no material  changes to the contractual  obligations as
of September 30, 2005  disclosed in our Form 10-K filed with the SEC on December
29, 2005.

Recent Accounting Pronouncements

         See  Note  1,  "Recent  Accounting  Pronouncements,"  in the  notes  to
Financial Statements herein.

RISK FACTORS

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

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

         Our fiber optic  subsystems and modules are used primarily in MAN, LAN,
and SAN applications. These markets are rapidly evolving, and it is difficult to
predict  their  potential  size or  future  growth  rate.  In  addition,  we are
uncertain  as to the extent to which  fiber optic  technologies  will be used in
these  markets.  Our success in generating  revenue will depend on the growth of
these  markets and their  adoption of fiber optic  technologies.  A  substantial
portion of our  revenue is derived  from sales of our product in the MAN market.
Sales of our products for the MAN market represented  approximately 89%, and 88%
of our  revenue  for the  three  months  ended  December  31,  2005,  and  2004,
respectively.

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

        o        lower near term revenue visibility; and
        o        general market and economic uncertainty.

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


                                        20


<PAGE>


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

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

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

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

We are  dependent  on a  limited  number  of  suppliers  for  most  of  our  key
components. If these suppliers are unable or unwilling to meet our manufacturing
requirements,  if they raise prices of their  products,  or if they  discontinue
certain 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. We do not have any control over these  limits,  and
our  suppliers  may  choose  to  allocate  more  of  their   production  to  our
competitors.

         A  disruption  in, or  termination  of,  our supply  relationship  with
Furukawa  or any of our  other  key  suppliers,  or  our  inability  to  develop
relationships  with new suppliers would interrupt and delay the manufacturing of
our products,  which could result in delays in our revenue,  or the cancellation
of orders


                                        21


<PAGE>


for our  products.  We may not be able to  identify  and  integrate  alternative
suppliers  in a  timely  fashion,  or at  all.  Any  transition  to  alternative
suppliers would likely result in delays in shipment,  quality control issues and
increased expenses,  any of which would limit our ability to deliver products to
our customers.  Furthermore,  if we are unable to identify an alternative source
of supply,  we may have to  redesign or modify our  products,  which would cause
delays in shipments,  increase design and manufacturing  costs and require us to
increase the prices of our products.

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

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

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

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

         o    The timing of customer orders,  particularly  from our significant
              customers;

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

         o    Our ability to control expenses;

         o    The mix of our products sold; and

         o    Economic  conditions  specific to the  communications  and related
              industries.

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

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

General economic factors could negatively impact our growth plan.

         The unfavorable  economic conditions in the United States that began in
2001 detrimentally affected the U.S. manufacturing industry,  particularly sales
of fiber  optics  equipment to service  providers  and  communication  equipment
companies. Announcements by fiber optics equipment manufacturers and


                                       22
<PAGE>


their customers at the time indicated that there was a reduction in spending for
fiber optic equipment as a result of the economic slowdown and efforts to reduce
then-existing  inventories.  Based  on  these  and  other  factors,  some of our
customers  reduced,  modified,  cancelled or rescheduled orders for our products
and  expressed   uncertainty  as  to  their  future  requirements.   Despite  an
improvement in general economic conditions in the United States since that time,
capital spending by service providers in the fiber optic communications industry
on network infrastructure has remained substantially below pre-2001 levels.

Our business,  operating results and financial condition are likely to suffer if
the global  economy,  or economic  conditions in the United States,  experiences
another downturn.

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

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

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

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

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

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

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

         The market for fiber optic subsystems and modules is highly competitive
and we expect  competition to intensify in the future.  Our primary  competitors
include  Avago  Technologies,  ExceLight  Communications,   Finisar,  JDSU,  MRV
Communications,  OpNext, Picolight, and Stratos Lightwave. We also face indirect
competition from public and private  companies  providing  products that address
the

                                        23


<PAGE>


same fiber optic network problems that our products address. The development
of  alternative   solutions  to  fiber  optic   transmission   problems  by  our
competitors,  particularly systems companies that also manufacture modules, such
as  Fujitsu  and  JDSU,  could  significantly  limit  our  growth  and  harm our
competitive position.

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

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

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

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

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

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

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


                                        24


<PAGE>


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

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

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

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

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

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

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

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

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

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

         Historically, we have relied primarily on a limited direct sales force,
supported by third party  manufacturers'  representatives  and distributors,  to
sell our  products.  Our sales  strategy  focuses  primarily on  developing  and
expanding   our  direct  sales   force,   manufacturers'   representatives   and
distributors.  We have  incurred and will  continue to incur  significant  costs
related to the expansion of our sales operations.  If the expansion of our sales
operations

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<PAGE>


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.

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

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

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

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

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

                                        26


<PAGE>


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

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

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

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

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

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

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

         o    diversion of development resources; and

         o    increased service and warranty costs.


                                        27


<PAGE>


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

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

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

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

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

         Although a significant  portion of our sales has  historically  been in
North  America,  a growing  percentage  of our revenue is  generated  from sales
outside North America. Sales of our products outside North America accounted for
approximately  47.6%,  and  42.4% of our  revenue  for the  three  months  ended
December 31, 2005, and 2004,  respectively.  We expect that our sales outside of
North  America will continue to  contribute  materially to our revenue.  We have
limited  experience in marketing and distributing our products  internationally.
One of our objectives is to expand our  international  operations in the future.
Significant  management  attention and financial resources are needed to develop
our international sales, support and distribution channels and manufacturing. We
may not be able to establish  or maintain  international  market  demand for our
products.

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

         o    greater  difficulty in accounts  reeivable  collection  and longer
              collection periods;

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

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

         o    political or economic instability.

         A portion of our international  revenue and expenses may be denominated
in foreign currencies in the future.  Accordingly, we could experience the risks
of  fluctuating  currencies  and  may  choose  to  engage  in  currency  hedging
activities.  These factors could  adversely  impact our  international  sales or
increase our costs of doing business abroad or impair our ability to expand into
international markets, and therefore could significantly harm our business.

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<PAGE>


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

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

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

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

         o    problems  assimilating the purchased  operations,  technologies or
              products;

         o    unanticipated costs associated with the acquisition;

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

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

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

         o    potential loss of key employees of purchased organizations.


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

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

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

         The Nasdaq Stock Market has quantitative  maintenance  criteria for the
continued  listing of  securities  on the Nasdaq  National  Market.  The current
requirements  affecting us include  maintaining a minimum bid price per share of
$1. Our bid price has been below $1 in the past. If the bid price of our Class A
common stock drops below $1 per share and remains at that level for more than 30
consecutive trading days, we will be in violation of Nasdaq's listing standards.
If within 90 days  thereafter,  our Class A common stock does not have a minimum
bid price of $1 per share for 10 consecutive  trading days,


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<PAGE>


Nasdaq will  commence  proceedings  to delist our Class A common  stock from the
Nasdaq National Market.  If we fail to maintain  continued listing on the Nasdaq
National Market and must move to a market with less  liquidity,  our stock price
would  likely  decline.  If we are  delisted,  it could have a material  adverse
effect on the market price of, and the liquidity of the trading  market for, our
Class A common stock.

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

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

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

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

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

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

         Furukawa  beneficially  owns all of our  outstanding  shares of Class B
common stock, which as of January 31, 2006 represented 93.4% voting control over
all  stockholder  issues.  The  holders of our Class A common  stock and Class B
common  stock have  identical  rights  except that holders of our Class A common
stock are  entitled  to one vote per share  while  holders of our Class B common
stock  are  entitled  to ten  votes  per  share  on  matters  to be  voted on by
stockholders. The differential in the voting rights of


                                        30


<PAGE>


our Class A common  stock and Class B common  stock could  adversely  affect the
price of our Class A common stock to the extent that  investors or any potential
future purchaser of our shares of Class A common stock give greater value to the
superior  voting rights of our Class B common  stock.  Each share of our Class B
common stock will  automatically  convert into one share of Class A common stock
if it is transferred to any entity, other than an entity controlling, controlled
by or under common control with Furukawa. In addition,  our Class B common stock
will automatically  convert into shares of our Class A common stock if the total
number of  outstanding  shares of Class B common  stock falls below 20% of total
number of  outstanding  shares of our common  stock.  As long as Furukawa  has a
controlling  interest,  it will continue to be able to elect our entire board of
directors  and  generally  be able to  determine  the  outcome of all  corporate
actions  requiring  stockholder  approval.  As a result,  Furukawa  will be in a
position to continue to control all matters affecting us, including:

         o    a change of control, including a merger;

         o    our acquisition or disposition of assets;

         o    our future issuances of common stock or other securities;

         o    our incurrence of debt; and

         o    our payment of dividends on our common stock.

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

Our exploration of strategic alternatives may not be successful.

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

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

         o    the exploration of strategic  alternatives may disrupt  operations
              and  distract  management,  which  could have a  material  adverse
              effect on our operating results;

         o    the process of exploring  strategic  alternatives may be more time
              consuming and expensive than we currently anticipate;

         o    we may not be able to  successfully  achieve  the  benefits of the
              strategic alternative undertaken by us; and

         o    perceived  uncertainties as to the future direction of the Company
              may result in the loss of employees or business partners.

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

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


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<PAGE>


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

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



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We are  currently  exposed  to  interest  rate  risk on our  investment
portfolio. We do not have any term loan debt as of December 31, 2005.

         The  primary  objective  of our  investment  activities  is to preserve
capital.  We have not used  derivative  financial  instruments in our investment
portfolio. Our cash and cash equivalents includes $77.0 million, the majority of
which is  invested  in money  market and other  interest  bearing  accounts.  In
addition,  we have  $69.6  million  invested  in  marketable  securities,  which
represents investments in United States treasury notes and treasury bonds.

         As of December 31, 2005, our investment in marketable  securities had a
weighted-average   time  to  maturity  of  approximately  164  days.  Marketable
securities  represent  United  States  treasury  notes and  treasury  bonds with
maturity on the date  purchased of greater than three months.  These  securities
are classified as held to maturity  because we have the intention and ability to
hold  the  securities  to  maturity.   Gross  unrealized  gains  and  losses  on
held-to-maturity  marketable  securities  have  historically  not been material.
Maturities on the date purchased of held-to-maturity  marketable debt securities
can range from three months to two years.

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


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<PAGE>


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

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control

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

                                        33


<PAGE>


                                    PART II.
                        OTHER INFORMATION AND SIGNATURES

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 5.  OTHER INFORMATION

         The  Company  permanently  ceased  the  operations  of its  Broomfield,
Colorado  facility,  a research and design  facility  where the Company had been
focused on creating VCSEL technology for fiber optic communication  networks, on
January 31,  2006.  The Company  decided to cease the  operation of its Colorado
facility because the cost of Fabry-Perot lasers has been decreasing, making 1300
nm VCSEL technology less attractive as a cost-effective replacement, and because
of the delay in  development  of the market for the next  generation  of optical
modules.  As a result,  the  Company  will cease the  immediate  development  of
products based on 1300 nm VCSEL technology. In the short-term,  the closure will
result in cost savings for the Company in the range of approximately $500,000 to
$1.0 million per quarter.  The Company has derived immaterial  revenues from its
operations at the Colorado facility.

         On February 10, 2006,  the Company  entered into an agreement  with The
Furukawa Electric Co., Ltd., the Company's majority stockholder, to sell certain
assets located at the Colorado facility related to VCSEL technology. The Company
also  granted  Furukawa  a  non-exclusive,  royalty-bearing  license  to use and
exploit intellectual  property related to the VCSEL technology.  Under the terms
of the  license,  Furukawa  would pay the  Company a royalty on sales of certain
products  utilizing the 1300nm VCSEL chip technology.  Total cash  consideration
was $1 million, in addition to the potential royalty payments.

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.
99.1                  Press Release of the Company dated February 13, 2006


                                        34


<PAGE>


                                   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:     February 14, 2006                By:      /s/ Muoi Van Tran
         ------------------                         -----------------
                                           Name:    Muoi Van Tran
                                           Title:   Chairman of the Board,
                                           Chief Executive Officer and President


Date:     February 14, 2006                BY:      /s/ Susie Nemeti
         ------------------                         -----------------
                                           Name:    Susie Nemeti
                                           Title:   Chief Financial Officer
                                                    (Principal Financial and
                                                    Accounting Officer)

                                        35


<PAGE>


                                  EXHIBIT INDEX


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.
99.1                      Press Release of the Company dated February 13, 2006