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

                                    FORM 10-Q

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

                  For the quarterly period ended March 31, 2007
                                       or

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

          For the transition period from ________________ to ________________
                        Commission file number 000-31861

                      OPTICAL COMMUNICATION PRODUCTS, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

Large accelerated filer |_|   Accelerated filer |_|   Non-accelerated filer |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
                                 Yes |_| No |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 May 11, 2007, there were 47,859,877 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 MARCH 31, 2007

                                TABLE OF CONTENTS

<TABLE>

                                                                                                             PAGE
                                                PART I. FINANCIAL INFORMATION                                ----

<S>          <C>                                                                                              <C>
Item 1.      Condensed Consolidated Financial Statements (Unaudited)........................................   1

             Condensed Consolidated Balance Sheets at March 31, 2007 and September 30, 2006.................   1

             Condensed Consolidated Statements of Operations for the Three and Six Months Ended March
             31, 2007 and 2006 and Condensed Consolidated Statements of Comprehensive Income (Loss) for
             the Three and Six Months Ended March 31, 2007 and 2006.........................................   2

             Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and
             2006...........................................................................................   3

             Notes to Condensed Consolidated Financial Statements...........................................   4

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations..........  21

Item 3.      Quantitative and Qualitative Disclosures about Market Risk.....................................  37

Item 4.      Controls and Procedures........................................................................  38

                                         PART II. OTHER INFORMATION AND SIGNATURES

Item 1.      Legal Proceedings..............................................................................  39

Item 1A.     Risk Factors...................................................................................  40

Item 6.      Exhibits.......................................................................................  55

Signatures..................................................................................................  58
</TABLE>


<PAGE>


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

OPTICAL COMMUNICATION PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
                                                                                                March 31,       September 30,
                                                                                                  2007              2006
                                                                                             ----------------  ----------------

ASSETS
 CURRENT ASSETS:
<S>                                                                                           <C>               <C>
    Cash and cash equivalents                                                                 $     82,017      $     57,413
    Marketable securities                                                                           34,891            69,523
    Accounts receivable, less allowance for doubtful accounts and sales returns
     of $456 at March 31, 2007 and $550 at September 30, 2006                                        9,474            11,185
    Inventories                                                                                     24,857            25,715
    Income taxes receivable                                                                            466             1,284
    Deferred income taxes                                                                              330               330
    Prepaid expenses and other current assets                                                        1,146             1,333
                                                                                                -----------       -----------
      Total current assets                                                                         153,181           166,783
    Property, plant and equipment, net                                                              30,413            29,313
    Goodwill                                                                                           -               8,330
    Intangible assets, net                                                                           2,980             2,656
    Deferred income taxes                                                                              207               207
    Other assets                                                                                       145                29
                                                                                                -----------       -----------
 TOTAL ASSETS                                                                                 $    186,926      $    207,318
                                                                                                ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
    Accounts payable                                                                          $      4,035       $     7,239
    Accounts payable to related parties                                                              2,767             2,142
    Accrued payroll related expenses                                                                 2,197             1,599
    Accrued bonus                                                                                    1,570             1,688
    Accrued transitional costs for contract manufacturing                                              951                -
    Other accrued expenses                                                                           3,761             2,595
    Income taxes payable                                                                               223               180
                                                                                                -----------       -----------
      Total current liabilities                                                                     15,504            15,443
                                                                                                -----------       -----------
 OTHER LONG-TERM LIABILITIES                                                                           158               159
 COMMITMENTS AND CONTINGENCIES                                                                         -                  -
 STOCKHOLDERS' EQUITY:
    Class A common stock, $0.001 par value; 200,000,000 shares authorized, 47,680,587 and
     47,424,178 shares outstanding at March 31, 2007 and September 30, 2006, respectively               48                47
    Class B common stock $0.001 par value; 66,000,000 shares authorized, 66,000,000 shares
     issued and outstanding at March 31, 2007 and September 30, 2006                                    66                66
    Additional paid-in capital                                                                     136,023           135,123
    Accumulated other comprehensive loss                                                              (148)              (86)
    Retained earnings                                                                               35,275            56,566
                                                                                                -----------       -----------
    Total stockholders' equity                                                                     171,264           191,716
                                                                                                -----------       -----------
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                   $    186,926      $    207,318
                                                                                                ===========       ===========
</TABLE>
                                       1


<PAGE>


SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OPTICAL COMMUNICATION PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>


                                                               Three Months Ended March 31,        Six Months Ended March 31,
                                                             ------------------------------------------------------------------
                                                                   2007           2006                2007          2006
                                                               ------------------------------    ------------------------------
<S>                                                          <C>                <C>              <C>              <C>
 REVENUE                                                     $       16,391     $     18,342     $     33,415     $     36,090
 COST OF REVENUE                                                     16,966           11,969           30,790           23,408
                                                               -------------      -----------      -----------      -----------
  GROSS PROFIT (LOSS)                                                   (575)           6,373            2,625           12,682
                                                               -------------      -----------      -----------      -----------
 OPERATING EXPENSES:
    Research and development                                          3,047            2,497            5,889            5,759
    Selling and marketing                                             1,474            1,313            2,756            2,502
    General and administrative                                        4,107            1,826            8,511            3,939
    Transitional costs for contract manufacturing                       851               -             1,311               -
    Impairment of goodwill                                            8,486               -             8,486               -
                                                               -------------      -----------      -----------      -----------
      Total operating expenses                                       17,965            5,636           26,953           12,200
                                                               -------------      -----------      -----------      -----------
 INCOME (LOSS) FROM OPERATIONS                                      (18,540)             737          (24,328)             482
 INVESTMENT INCOME                                                    1,411            1,451            2,984            2,748
 OTHER INCOME, NET                                                       25               53               96              139
                                                               -------------      -----------      -----------      -----------
 INCOME (LOSS) BEFORE INCOME TAXES                                  (17,104)           2,241          (21,248)           3,369
 PROVISION FOR INCOME TAXES                                              -               105               43              140
                                                               -------------      -----------      -----------      -----------
 NET INCOME (LOSS)                                           $      (17,104)    $      2,136     $    (21,291)    $      3,229
                                                               =============      ===========      ===========      ===========
 BASIC EARNINGS (LOSS) PER SHARE                             $        (0.15)    $       0.02     $      (0.19)    $       0.03
                                                               =============      ===========      ===========      ===========
 DILUTED EARNINGS (LOSS) PER SHARE                           $        (0.15)    $       0.02     $      (0.19)    $       0.03
                                                               =============      ===========      ===========      ===========
 BASIC SHARES OUTSTANDING                                           113,540          113,193          113,490          113,107
                                                               =============      ===========      ===========      ===========
 DILUTED SHARES OUTSTANDING                                         113,540          114,144          113,490          113,995
                                                               =============      ===========      ===========      ===========

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

                                                                Three Months Ended March 31,      Six Months Ended March 31,
                                                               ---------------------------------------------------------------
                                                                   2007           2006               2007           2006
                                                               ------------------------------   ------------------------------
 NET INCOME (LOSS)                                           $      (17,104)    $      2,136     $   (21,291)     $     3,229
 OTHER COMPREHENSIVE INCOME (LOSS)
    Foreign currency translation adjustment                            (189)              -              (62)              -
                                                               -------------      -----------      ----------       ----------
 COMPREHENSIVE INCOME (LOSS)                                 $      (17,293)    $      2,136     $   (21,353)     $     3,229
                                                               =============      ===========      ==========       ==========
</TABLE>

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                       2


<PAGE>


OPTICAL COMMUNICATION PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>

                                                                                   Six Months Ended March 31,
                                                                                ---------------------------------
                                                                                      2007              2006
                                                                                ---------------    --------------
 OPERATING ACTIVITIES:
<S>                                                                              <C>                <C>
    Net income (loss)                                                             $    (21,291)     $      3,229
    Adjustments to reconcile net income (loss) to net cash used in operating
     activities:
      Depreciation and amortization                                                      2,502             1,823
      Impairment of goodwill                                                             8,486                --
      Inventory write-down                                                               4,525               824
      Amortization of discount on marketable securities                                   (455)             (410)
      Stock-based compensation expense                                                     742               488
    Changes in operating assets and liabilities:
      Accounts receivable                                                                1,707            (1,987)
      Income taxes receivable                                                              818                --
      Inventories                                                                       (4,789)           (5,457)
      Prepaid expense and other current assets                                             160               443
      Accounts payable                                                                  (3,366)             (245)
      Accounts payable to related parties                                                  624               932
      Accrued payroll related expenses                                                     601                27
      Accrued bonuses                                                                     (119)             (597)
      Accrued transitional costs for contract manufacturing                                953                --
      Other accrued expenses                                                               584              (304)
      Income taxes payable                                                                  43              (712)
                                                                                    ------------      ------------
        Net cash used in operating activities                                           (8,274)           (1,946)
                                                                                   ------------      ------------
 INVESTING ACTIVITIES:
    Purchase of marketable securities                                                  (47,548)          (29,560)
    Maturities of marketable securities                                                 82,635            30,000
    Sale of assets to related party                                                          --            1,000
    Purchase of property, plant and equipment                                           (2,472)             (139)
                                                                                   ------------      ------------
        Net cash provided by investing activities                                       32,615             1,301
                                                                                   ------------      ------------
 FINANCING ACTIVITIES:
    Proceeds from the exercise of stock options and employee stock purchase plan           158               383
                                                                                   ------------      ------------
        Net cash provided by financing activities                                          158               383
                                                                                   ------------      ------------
 EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                   105                --
                                                                                   ------------      ------------
 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   24,604              (262)
 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           57,413            83,975
                                                                                   ------------      ------------
 CASH AND CASH EQUIVALENTS, END OF YEAR                                           $     82,017      $     83,713
                                                                                   ============      ============
 SUPPLEMENTAL CASH FLOW INFORMATION:
    Cash paid during the year for interest                                        $        135      $         --
    Cash paid (received) during the year for income taxes, net                    $       (925)     $        806
 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
    Purchase of property, plant and equipment through accounts payable            $        492      $        114

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
</TABLE>

                                       3


<PAGE>


1.   GENERAL INFORMATION

         The accompanying  unaudited  interim condensed  consolidated  financial
statements of Optical Communication Products,  Inc., a Delaware corporation (the
"Company"),   have  been  prepared  in  accordance  with  accounting  principles
generally  accepted  in the  United  States of  America  and  Article  10 of the
Securities and Exchange Commission's  Regulation S-X.  Accordingly,  they do not
include all of the information and footnotes  required by accounting  principles
generally  accepted  in the United  States of  America  for  complete  financial
statements.  In  management's  opinion,  the  unaudited  condensed  consolidated
financial  statements  contain all  adjustments,  consisting of normal recurring
adjustments,  necessary to present fairly the Company's  condensed  consolidated
financial statements as of March 31, 2007 and for all interim periods presented.
The condensed  consolidated  financial  statements should be read in conjunction
with the audited consolidated financial statements included in the Annual Report
of the Company filed on Form 10-K with the  Securities  and Exchange  Commission
for the year ended  September 30, 2006. The results of operations for the period
ended March 31, 2007 are not  necessarily  indicative of the results that may be
expected for the fiscal year ending September 30, 2007. The Company's operations
are primarily located in Woodland Hills, California and Hsinchu, Taiwan (through
the acquisition of GigaComm  Corporation (now known as OCP Asia, Inc.) in August
2006), referred to as OCP Asia throughout the rest of this document.

         The Company is a  majority-owned  subsidiary  of The Furukawa  Electric
Co.,  Ltd.  of  Japan  ("Furukawa").  Furukawa  beneficially  owns  58.1% of the
Company's  common  stock at March  31,  2007,  which  accounts  for 93.3% of the
combined  voting power of all of the Company's  outstanding  stock.

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

         On May 4, 2007, the Company issued a press released and filed a Current
Report  on Form 8-K  announcing  that the  Special  Committee  adopted  a 30-day
shareholder  rights plan on May 3, 2007.  Under the plan, the Special  Committee
has declared a dividend  distribution  of one preferred share purchase right for
each  outstanding  share of the Company's  common stock held by  shareholders of
record as of May 14,  2007.  These  rights,  which  will  expire on June 2, 2007
unless previously  redeemed,  exchanged or terminated,  will become  exercisable
only under  three  specific  conditions:  the  closing of  Oplink's  purchase of
Furukawa's 58.1% ownership interest in the Company, the acquisition of more than
15%  of  the  Company's  outstanding  common  stock  by a  third  party,  or the
acquisition  of any  additional  shares by Furukawa  or Oplink.

         On May 7,  2007,  Oplink  announced  that it has filed an action in the
Delaware  Court  of  Chancery  seeking  to  invalidate  certain  aspects  of the
shareholder  rights plan adopted by the Special  Committee.  The action filed by
Oplink  seeks (i) a  declaration  that the  shareholder  rights  plan is invalid
insofar as it attempts to prevent the sale of Furukawa's shares to Oplink,  (ii)
an  injunction  preventing  the  Company or the  Special  Committee  from taking
further  actions  to  implement  the  shareholder  rights  plan  (including  the
announced  distribution of rights to the Company's  shareholders of record as of
May 14, 2007), (iii) a declaration affirming the right of Oplink and Furukawa to
proceed  with their  announced  transaction,  and (iv) other  relief,  including
unspecified monetary damages. The Company believes the action is without merit.

                                       4


<PAGE>


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

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

2.    SIGNIFICANT ACCOUNTING POLICIES

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


         Cash  and  Cash  Equivalents  --  Cash  and  cash  equivalents  include
unrestricted  deposits  and money  market  funds with a maturity  at the date of
purchase of three months or less.

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

         Investments in marketable  securities were as follows at March 31, 2007
and September 30, 2006 (in thousands):

<TABLE>
                                                                                          Unrealized           Unrealized
Type of  Security                                Book/Cost           Fair Value              Gain               (Losses)
-------------------------------------         -----------------   ------------------   -----------------    -----------------
United States Treasury Notes
<S>                                         <C>                  <C>                  <C>                  <C>             <C>
   March 31, 2007                           $           34,891   $           34,891   $               --   $                --
   September 30, 2006                       $           69,523   $           69,517   $               --   $               (6)
</TABLE>

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

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

                                       5


<PAGE>


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

         In addition,  SFAS No. 142,  "Goodwill  and Other  Intangible  Assets,"
requires that we review and test goodwill and indefinite lived intangible assets
for impairment on at least an annual basis, rather than amortize them. We may be
required to review and test for impairment  more frequently if events or changes
in  circumstances  indicate  that the assets may be  impaired.  In testing for a
potential  impairment  of  goodwill,  SFAS No. 142  requires us to: (1) allocate
goodwill to our various business units to which the acquired  goodwill  relates;
(2) estimate the fair value of those businesses to which goodwill  relates;  and
(3) determine the carrying value of the businesses.  If the estimated fair value
is less than the carrying  value for a  particular  business  unit,  then we are
required to estimate the fair value of all  identifiable  assets and liabilities
of the business unit, in a manner similar to a purchase price  allocation for an
acquired  business  unit.  This requires the  identification  of any  previously
unrecognized  intangible assets.  When this process is completed,  the amount of
goodwill impairment is determined.

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

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

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

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

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

                                       6


<PAGE>


         Fair  Value  of  Financial   Instruments  --  The  recorded  values  of
marketable  securities,   accounts  receivable,  accounts  payable  and  accrued
expenses  approximate  their fair values based on their short-term  nature.  The
Company has no long-term debt at March 31, 2007.

         Concentration of Credit Risk -- Financial  instruments that potentially
subject the Company to  concentrations  of credit risk consist primarily of cash
and cash equivalents, placed with high credit quality institutions, and accounts
receivable. The Company sells products and extends credit to customers, monitors
its exposure to credit losses, and maintains  allowances for anticipated losses.
Accounts  receivable from the Company's  customers with amounts greater than 10%
of gross  accounts  receivable  amounted to  $1,869,000  (18.8%) and  $1,146,000
(11.5%) at March 31, 2007 and $1,648,000  (14.0%) at September 30, 2006. Revenue
from  individual  customers  with  amounts  greater  than 10% of total  revenues
amounted  to 18.3%,  16.5%,  14.5% and 10.8% for the six months  ended March 31,
2007 and 17.9%,  13.3% and 11.7% for the six months  ended  March 31,  2006.  No
other individual customer represented more than 10% of total revenues.

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

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

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

         The  Company   adopted  SFAS  123(R)  using  the   modified-prospective
transition method. Under this transition method,  compensation cost includes: a)
compensation cost for all share-based payments granted prior to October 1, 2005,
but not yet vested,  based on the grant-date  fair value estimated in accordance
with the  original  provisions  of SFAS 123,  and b)  compensation  cost for all
share-based  payments  granted  subsequent to September  30, 2005,  based on the
grant-date  fair value  estimated  in  accordance  with the  provisions  of SFAS
123(R). The results for the prior periods have not been restated.

         The  Company  adopted the  transition  method  described  in FASB Staff
Position No. FAS 123(R)-3,  "Transition  Election  related to Accounting for the
Tax Effect of Share-Based  Payment  Awards," in the quarter ended  September 30,
2006.  The  adoption of FAS 123(R)-3  did not have a  significant  impact on the
Company's condensed consolidated financial statements.



                                       7


<PAGE>

Recent Accounting Pronouncements

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

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

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

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

3.   ACQUISITION OF OCP ASIA

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

                                       8


<PAGE>


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

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

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

         Of the $19,406,000  acquisition  price,  approximately  $1.3 million is
held in escrow as of March 31,  2007.  Such amount is to be  distributed  to the
Selling  Stockholders at the end of a contingency  period of  approximately  one
year from the date of the agreement  pending  resolution of any matters that may
arise  relating  to  Selling  Stockholders'  indemnification  provisions  in the
Primary Stock Purchase Agreement.

         The purchase price  allocation below is based on the estimated value of
the  inventory,  fixed  assets and  intangible  assets  acquired and the related
income tax impact of the purchase accounting  adjustments.  During the three and
six months ended March 31, 2007, the purchase  price  allocation was adjusted to
reduce the fair value of inventory by $641,000 and $1,128,000, respectively, and
increase the fair value of intangible  assets by $872,000.  The Company adjusted
the purchase price  allocation at the end of the Company's second fiscal quarter
ended March 31,  2007,  including  the  allocation  to  identifiable  intangible
assets. We do not expect that goodwill will be deductible for tax purposes.

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

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

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

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

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

                                        9


<PAGE>


         The table below sets forth the changes in  goodwill,  which is entirely
allocated to the OCP Woodland  Hills  segment,  from September 30, 2006 to March
31, 2007 (in thousands):

                    Balance as of September 30, 2006         $   8,330
                    Purchase price adjustments:
                     Inventories                                 1,128
                     Intangible assets                            (872)
                     Other                                        (100)
                                                             ----------
                                                                 8,486
                    Impairment of goodwill                      (8,486)
                                                             ----------
                    Balance as of March 31, 2007             $       0
                                                             ==========

4.   IMPAIRMENT OF LONG-LIVED ASSETS

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

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

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

                                       10


<PAGE>


5.   TRANSITION TO CONTRACT MANUFACTURING

         On November 1, 2006, the Company announced that it reached an agreement
with SAE  Magnetics  (H.K.)  Limited  (SAE),  a  wholly-owned  subsidiary of TDK
Corporation, which will enable the Company to manufacture certain of its product
lines in China commencing in the summer of 2007. The Company expects to maintain
its  existing  manufacturing   facilities  but  will  reduce  its  manufacturing
workforce in Woodland Hills,  California and at OCP Asia once  manufacturing  at
SAE begins. In connection with this workforce reduction,  the Company expects to
incur transition  charges of  approximately  $3.2 million during the fiscal year
ending September 30, 2007, which includes approximately $2.4 million for the OCP
Woodland  Hills  reporting  segment and $0.8 million for the OCP Asia  reporting
segment.  These transition charges,  which are primarily estimated severance and
retention  payments,  along with  expenses  incurred to relocate  certain  fixed
assets and product qualification associated with the manufacturing of certain of
our product lines in China  commencing in the summer of 2007, are being recorded
in  accordance  with SFAS 146,  "Accounting  for Costs  Associated  with Exit or
Disposal  Activities," and SFAS 112,  "Employees'  Accounting for Postemployment
Benefits."  During the three and six months  ended March 31,  2007,  the Company
charged  $851,000  and  $1,311,000,  respectively,  to  transitional  costs  for
contract  manufacturing,  of which  $712,000  and  $990,000  was  charged by OCP
Woodland  Hills and  $139,000  and  $321,000  was charged by OCP Asia during the
respective  periods. No employees have been terminated as of March 31, 2007. The
Company anticipates that the transition will be completed by September 30, 2007.

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

<TABLE>

                              Three Months Ended March 31, 2007                     Six Months Ended March 31, 2007
                      --------------------------------------------------   --------------------------------------------------
                       Severance &                                          Severance &
                        Retention           Other             Total          Retention           Other             Total
                     ----------------  ---------------  ----------------  ----------------  ---------------  ----------------
<S>                  <C>               <C>              <C>               <C>               <C>              <C>
Beginning balance    $           487   $           --   $           487   $            --   $           --   $            --
Costs incurred and
  charged to expense             453              398               851               940              371             1,311
Costs paid                        --             (387)             (387)               --             (360)             (360)
                     ----------------  ---------------  ----------------  ----------------  ---------------  ----------------
Ending balance       $           940   $           11   $           951   $           940   $           11   $           951
                     ================  ===============  ================  ================  ===============  ================
</TABLE>

6.   STOCK-BASED COMPENSATION

Stock Options

         The Company's 2000 Stock Incentive Plan authorizes  22,121,680  options
(increased  from  12,121,680  options at the 2007 Annual Meeting of Shareholders
held on  January  24,  2007) for  grant and  provides  that  options  may have a
contractual term up to ten years and become  exercisable and vest in increments.
Options  vest at a rate of 25% per year or 25%  after  the  first  year with the
remainder  vesting  incrementally  over the subsequent 36 months.  Options under
this plan are generally granted with the exercise price equal to the fair market
value of the Company's  common stock on the date of grant.  The Company  granted
1,680,000 and 46,000 stock options with an estimated total grant-date fair value
of $1,454,000 and $94,000 during the three months ended March 31, 2007 and 2006,
respectively,  and granted 2,860,000 and 241,228 stock options with an estimated
total  grant-date  fair value of $3,015,000  and $312,000  during the six months
ended March 31, 2007 and 2006,  respectively.  The Company recorded  stock-based
compensation  related to stock options of $411,000 and $233,000 during the three
months  ended March 31, 2007 and 2006,  respectively,  and $665,000 and $465,000
for the six months  ended  March 31,  2007 and 2006,  respectively.  The Company
issues new shares upon the exercise of stock options.

                                       11


<PAGE>


Restricted Stock Awards

         From time to time the  Company  may issue  restricted  stock at a price
equal to the fair  market  value of the  Company's  common  stock on the date of
grant.  The  vesting is 25% per year or 1/48th per month.  During the year ended
September 30, 2006, the Company  issued 300,000 shares of restricted  stock with
an estimated  total  grant-date  fair value of $570,500.  Of the 300,000  shares
issued, 50,000 shares were issued from the 2000 Stock Incentive Plan and 250,000
shares were issued outside of the plan. 3,126 and 6,252 of the 300,000 shares of
restricted  stock that were  issued in the year ended  September  30,  2006 have
vested during the three and six months ended March 31, 2007,  respectively,  and
all non-vested shares are contingently  returnable. A total of 8,333 shares have
vested as of March 31,  2007.  During the three and six months  ended  March 31,
2007,  the  Company  recorded   stock-based   compensation  expense  related  to
restricted stock of $28,000 and $56,000, respectively. There was no compensation
expense related to restricted  stock during the three and six months ended March
31,  2006 as there were no  restricted  stock  grants  until the  quarter  ended
September 30, 2006.

Employee Stock Purchase Plan (ESPP)

         The  Company  has an Employee  Stock  Purchase  Plan (ESPP) that allows
employees to purchase a limited  amount of the  Company's  common stock at a 15%
discount to a defined  fair market  value.  The  stock-based  compensation  cost
related to the ESPP was $21,000 and $15,000 for the three months ended March 31,
2007 and 2006, respectively,  and was $21,000 and $23,000 and for the six months
ended March 31, 2007 and 2006, respectively.  The total stock-based compensation
cost  related to employee  purchases  of stock under the ESPP is  amortized on a
straight-line basis over a weighted-average period of approximately 1 year.

Valuation Assumptions

         During  the three and six months  ended  March 31,  2007 and 2006,  the
Company  valued  employee  options  for  compensation  expense  purposes  at the
measurement  dates  using the  Black-Scholes  pricing  model with the  following
weighted average assumptions:

<TABLE>
                                           Three months ended March 31,        Six months ended March 31
                                         --------------------------------    --------------------------------
                                               2007            2006                2007             2006
                                         ---------------  ---------------    ---------------  ---------------
        <S>                                   <C>             <C>                 <C>              <C>
        Dividend yield                          0%              0%                  0%               0%
        Average expected volatility           69.0%           88.0%               69.0%            88.0%
        Average risk-free rate of return      4.67%           4.50%               4.62%            4.50%
        Average expected life (years)          4.8             8.0                 5.5              8.0
</TABLE>

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

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

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

                                       12


<PAGE>


tranche's  vesting  period plus  one-half of the period from the vesting date of
each tranche to the stock  option's  expiration.  This method is  available  for
options granted prior to December 31, 2007.

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

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

Non-Vested Options

         As of March 31,  2007,  there was  approximately  $4.5 million of total
unrecognized  compensation cost related to non-vested  share-based  compensation
arrangements  that is expected to be substantially  amortized by March 31, 2011.
The total cost is expected to be recognized  over a  weighted-average  period of
3.5 years.

Stock Option Activity

         Stock option activity for the three and six months ended March 31, 2007
and options available for future grant at March 31, 2007 are as follows:

<TABLE>

                                                Options                                                      Weighted
                                               Available                                                      Average
                                              for Future           Number of         Exercise Price          Exercise
                                                 Grant              Options            per Option              Price
                                           ------------------------------------------------------------------------------
<S>                                            <C>                 <C>                <C>                         <C>
Balance as of September 30, 2006                4,851,184           8,496,512         $0.19 to $17.38              $8.01
Options granted                                (1,180,000)          1,180,000            1.65 to 2.12               2.00
Options exercised*                                                    (39,670)           0.97 to 1.83               0.98
Options forfeited                                 157,792            (157,792)           0.90 to 3.10               2.17
Options canceled                                1,541,388          (1,541,388)          1.08 to 17.38              11.68
                                           ----------------    ----------------     ------------------     --------------
Balance as of December 31, 2006                 5,370,364           7,937,662           0.19 to 17.38               6.56
Options authorized                             10,000,000
Options granted                                (1,680,000)          1,680,000            1.37 to 1.60               1.86
Options exercised*                                                   (182,250)           0.19 to 0.97               0.44
Options forfeited                                 167,855            (167,855)          1.08 to 11.00               2.05
Options canceled                                1,268,660          (1,268,660)          1.08 to 17.38              11.53
                                           ----------------    ----------------     ------------------     --------------
Balance as of March 31, 2007                   15,126,879           7,998,897         $0.19 to $17.38              $8.55
                                           ================    ================     ==================     ==============
</TABLE>


*The intrinsic value of options  exercised during the three and six months ended
March 31, 2007 was approximately  $172,000 and $199,000,  respectively,  and was
approximately $167,000 and $247,000,  respectively, for the three and six months
ended March 31, 2006.

                                       13


<PAGE>


         The  following   table   summarizes   information   regarding   options
outstanding at March 31, 2007:
<TABLE>

                                     Options Outstanding                             Options Exercisable
                     ------------------------------------------------------------------------------------------------
                                             Weighted                                     Weighted
                                             Average            Weighted                  Average       Weighted
                                            Remaining           Average                   Remaining     Average
    Range of             Number            Contractual          Exercise       Shares    Contractual    Exercise
 Exercise Prices      Outstanding              Life              Price       Exercisable     Life        Price
                     ------------------------------------------------------------------------------------------------

<S>                           <C>               <C>          <C>              <C>            <C>      <C>
$0.19 - $1.28*                 672,857          3.0          $       0.63       671,107      3.0      $       0.62
$1.37 - $3.47                4,853,459          7.4          $       2.03       552,200      5.6      $       2.30
$3.64 - $9.72                   61,880          4.4          $       7.25        58,880      4.3      $       7.43
$11.00 - $11.12              1,953,615          3.5          $      11.00     1,953,615      3.5      $      11.00
$17.38 - $17.38                457,086          3.8          $      17.38       457,086      3.8      $      17.38
                     ------------------ --------------------- ------------ ------------- ------------- ------------
                             7,998,897          5.8          $       5.02     3,692,888      3.8      $       8.55
                     ================== ===================== ============ ============= ============= ============
</TABLE>

* The aggregate  intrinsic  value of options  outstanding  and  exercisable  was
approximately  $482,000 at March 31,  2007.  The  aggregate  intrinsic  value of
options outstanding and exercisable was approximately $3,666,000 and $2,581,000,
respectively, at March 31, 2006.

         The weighted  average  estimated  fair value of options  granted in the
three and six months ended March 31, 2007 was $0.87 and $1.05, respectively. The
weighted  average  estimated fair value of options  granted in the three and six
months ended March 31, 2006 was $2.62 and $1.76,  respectively The total numbers
of shares  exercisable  were  3,692,888  and  6,475,186 as of March 31, 2007 and
2006, respectively.

ESPP Activity

         There were a total of 1,148 and 26,709 shares of the  Company's  common
stock issued at a weighted average purchase price of $1.45 and $1.44 pursuant to
the employee stock purchase plan during the three and six months ended March 31,
2007,  respectively.  The  weighted  average  fair value per share of the shares
issued was $0.95 for the respective  periods ended March 31, 2007.  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 and six months ended March 31, 2006. The weighted  average fair
value of the shares issued were $0.96 for the respective periods ended March 31,
2006. There are a total of 22,818 shares available for future issuance under the
plan at March 31, 2007. On May 3, 2007, the Company's  stockholders' approved an
increase in the number of shares available under the plan by 300,000 shares.

7.   INVENTORIES

    Inventories consist of the following (in thousands):

                                  March 31,               September 30,
                                    2007                      2006
                            --------------------      ---------------------
    Raw materials             $          15,614         $           15,394
    Work-in-process                       4,540                      4,929
    Finished goods                        4,703                      5,392
                               -----------------         ------------------
    Total inventories         $          24,857         $           25,715
                               =================         ==================

                                       14


<PAGE>


8.   PROPERTY, PLANT AND EQUIPMENT

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

                                                   March 31,           September 30,         Useful
                                                     2007                   2006             Lives
                                              --------------------   -------------------    ---------

        <S>                                    <C>                     <C>                  <C>
        Land                                   $            6,729      $          6,729
        Buildings and improvements                         15,311                15,311     39 years
        Machinery and equipment                            24,193                23,151      5 years
        Computer hardware and software                      2,213                 1,591      3 years
        Furniture and fixtures                                478                   467      5 years
        Leasehold improvements                                370                   350      9 years
        Construction in process                             1,143                   222
                                                ------------------      ----------------
                                                           50,437                47,821
        Less accumulated depreciation                     (20,024)              (18,508)
                                                ------------------      ----------------
                                               $           30,413      $         29,313
                                                ==================      ================
</TABLE>

         Depreciation  and  amortization  expense for fixed assets for the three
months ended March 31, 2007 and 2006 was $988,000 and $73,000, respectively, and
$1,954,000  and  $212,000  for the six  months  ended  March 31,  2007 and 2006,
respectively.

9.   INTANGIBLE ASSETS

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

                                                                                                Weighted
                                                                                                Average
                                                         March 31,        September 30,      Amortization
                                                           2007               2006               Period
                                                        --------------  -----------------------------------
                                                                                             (Years from
                                                                                              inception)

        <S>                                               <C>              <C>                   <C>
        Patents                                                  950                950          5.0
        Accumulated amortization                                (839)              (744)
        Acquired and developed technology                      3,541              2,572          5.8
        Accumulated amortization                              (1,291)              (970)
        Customer relationships                                   775                678          3.0
        Accumulated amortization                                (156)               (19)
        Tradename                                                -                  194          3.0
        Accumulated amortization                                 -                   (5)
                                                         --------------  ----------------
        Total intangible assets, net                     $     2,980      $       2,656
                                                         --------------  ----------------
</TABLE>

         Aggregate   amortization  expense  related  to  intangible  assets  was
$313,000  and  $108,000  for the three  months  ended  March 31,  2007 and 2006,
respectively,  and $547,000 and $216,000 for the six months ended March 31, 2007
and 2006, respectively.  Amortization expense for the three and six months ended
March 31, 2007 includes  $205,000 and $330,000,  respectively,  of  amortization
attributable to intangible assets acquired in the OCP Asia acquisition.

                                       15


<PAGE>


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

         Remaining six months fiscal 2007                       525
         2008                                                   652
         2009                                                   589
         2010                                                   358
         2011                                                   358
         Thereafter                                             498
                                                         ------------
                                                         $    2,980
                                                         ------------

10.  EARNINGS (LOSS) PER SHARE

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

                                                               Three Months Ended March 31,     Six Months Ended March 31,
                                                                   2007             2006            2007          2006
                                                              -------------------------------------------------------------
                                                                         (in thousands, except per share data)

BASIC EPS COMPUTATION:
    <S>                                                         <C>             <C>               <C>          <C>
    Net income (loss) applicable to common stock                $    (17,104)   $      2,136      $  (21,291)  $     3,229
                                                                 ============   =============      ==========  ============
Weighted average common shares outstanding                           113,540         113,193         113,490       113,107
                                                                 ------------   -------------      ----------  ------------
Basic earnings (loss) per share                                 $      (0.15)   $       0.02      $    (0.19)  $      0.03
                                                                 ============   =============      ==========  ============

DILUTED EPS COMPUTATION:
    Net income (loss) applicable to common stock                $    (17,104)   $      2,136      $  (21,291)  $     3,229
                                                                 ============   =============      ==========  ============
Weighted average common shares outstanding                           113,540         113,193         113,490       113,107
Effect of dilutive securities:
     Common stock options                                                 --             951              --           888
                                                                 ------------   -------------      ----------  ------------
Diluted weighted average shares outstanding                          113,540         114,144         113,490       113,995
                                                                 ============   =============      ==========  ============
Diluted earnings (loss) per share                               $      (0.15)   $       0.02      $    (0.19)  $      0.03
                                                                 ============   =============      ==========  ============
</TABLE>

         The basic  earnings  (loss) per share is  computed  using the  weighted
average  number of common shares  outstanding.  For purposes of computing  basic
earnings  (loss) per share,  shares of restricted  stock which are  contingently
returnable  and subject to repurchase if the  purchaser's  status as an employee
terminates are not considered outstanding until they are vested. As of March 31,
2007,   291,667  shares  of  non-vested   restricted  stock  were   contingently
returnable.  Diluted loss per share is also computed  without  consideration  to
potentially  dilutive instruments because the Company incurred losses during the
three and six months  ended March 31,  2007 which  would make these  instruments
antidilutive.  The weighted  average  diluted common shares  outstanding for the
three and six months  ended  March 31,  2006  excludes  the  dilutive  effect of
6,149,014 and 6,242,002 options, respectively. The options are excluded when the
options  have an  exercise  price in excess of the average  market  value of the
Company's  common  stock during the period or as a result of the  Company's  net
loss.

11.  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 March 31, 2007 and 2006 was  $353,000  and $73,000,
respectively,  and for the six months ended March 31, 2007 and 2006 was $720,000
and $212,000,  respectively.  Rental  expense for the three and six months ended
March 31, 2007  includes  $307,000 and $628,000  rental  expense,  respectively,
attributable to our OCP Asia facility.

                                       16


<PAGE>


     The following is a summary of future minimum payments due under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year at March 31, 2007 (in thousands):

                Six months ending September 30, 2007            $    695
                2008                                               1,274
                2009                                               1,122
                2010                                                  83
                2011                                                  70
                                                                ---------
                                                                $  3,244
                                                                =========

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

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

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

         Purchase  Commitments  - As of March 31, 2007,  the Company has entered
into  purchase  commitments  for  materials,  supplies,  equipment  and  outside
services  in  aggregate  of  approximately  $8.7  million for fiscal year ending
September  30,  2007.  Included  in  these  purchase  commitments  are  purchase
commitments to a related party for approximately $2.0 million.

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

<TABLE>
                                                Three Months Ended March             Six Months Ended
                                                           31,                           March 31,
                                             ------------------------------  -------------------------------
                                                  2007            2006             2007            2006
                                             -----------------------------------------------    ------------
<S>                                           <C>            <C>               <C>             <C>
Balance at beginning of period                $         28   $          40     $         26    $         14
Additions charged to expense                            11             (19)              17              17
Deductions                                              (3)             (6)              (7)            (16)
                                               ------------   -------------     ------------    ------------
Balance at end of period                      $         36   $          15     $         36    $         15
                                               ============   =============     ============    ============
</TABLE>

                                       17


<PAGE>


12.  RELATED PARTY TRANSACTIONS

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

         The Company  sells fiber optic  components  and purchases raw materials
from some of these  entities in the regular  course of business.  Sales of fiber
optic  modules to related  parties  amounted  to $4,000 and $7,000 for the three
months ended March 31, 2007 and 2006,  respectively,  and $7,000 and $30,000 for
the six months  ended March 31, 2007 and 2006,  respectively.  Purchases  of raw
materials  from the related party  amounted to $287,000 and  $2,288,000  for the
three months ended March 31, 2007 and 2006,  respectively,  and  $5,418,000  and
$9,569,000  for the six  months  ended  March 31,  2007 and 2006,  respectively.
Accounts receivable due from the related party were $5,000 and none at March 31,
2007  and  2006,  respectively.  Accounts  payable  to the  related  party  were
$2,715,000  and  $5,027,000  at  March  31,  2007  and  2006,  respectively.  No
management  fees were paid in the three and six months  ended March 31, 2007 and
2006, respectively.

13.     SEGMENT INFORMATION

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

                                       18


<PAGE>


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

<TABLE>


                                                                Three Months Ended March 31,        Six Months Ended March 31,
                                                                   2007              2006             2007             2006
                                                               -------------      -----------      -----------      -----------
 REVENUE:
    <S>                                                       <C>               <C>               <C>              <C>
    OCP Woodland Hills                                        $      13,687     $     18,342     $     28,055      $    36,090
    OCP Asia                                                          2,765               -             5,462               -
    Less inter-segment revenue                                          (61)              -              (102)              -
                                                               -------------      -----------      -----------      -----------
        Total Revenue                                         $      16,391     $     18,342     $     33,415      $    36,090
                                                               =============      ===========      ===========      ===========
 GROSS PROFIT (LOSS):
    OCP Woodland Hills                                        $         150     $      6,373     $      4,416      $    12,682
    OCP Asia                                                           (725)              -            (1,784)
    Less inter-segment gross profit                                      -                -                (7)
                                                               -------------      -----------      -----------      -----------
        Total gross profit (loss)                             $        (575)    $      6,373     $      2,625      $    12,682
                                                               =============      ===========      ===========      ===========
 INCOME (LOSS) FROM OPERATIONS:
    OCP Woodland Hills                                        $     (16,647)    $        737     $    (20,257)     $       482
    OCP Asia                                                         (1,893)              -            (4,071)              -
                                                               -------------      -----------      -----------      -----------
       Total income (loss) from operations                          (18,540)             737          (24,328)             482
 INVESTMENT INCOME - OCP Woodland Hills                               1,411            1,451            2,984            2,748
 OTHER INCOME:
    OCP Woodland Hills                                                    2               53               33              139
    OCP Asia                                                             23               -                63               -
                                                               -------------      -----------      -----------      -----------
       Total other income                                                25               53               96              139
 PROVISION FOR INCOME TAXES - OCP
 Woodland Hills                                                          -               105               43              140
                                                               -------------      -----------      -----------      -----------
 NET INCOME (LOSS):
 OCP Woodland Hills                                                 (15,234)           2,136          (17,283)           3,229
 OCP Asia                                                            (1,870)              -            (4,008)              -
                                                               -------------      -----------      -----------      -----------
    Total net income (loss)                                  $      (17,104)    $      2,136     $    (21,291)     $     3,229
                                                               =============      ===========      ===========      ===========
</TABLE>


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

                                    March 31,                 September 30,
                                       2007                       2006
                                -------------------        --------------------
        OCP Woodland Hills      $          169,729         $           180,792
        OCP Asia                            17,197                      26,526
                                   ----------------           -----------------
                                $          186,926         $           207,318
                                   ================           =================

14.     SUBSEQUENT EVENTS

         Oplink  Communications,  Inc. - The Company  issued a press  release on
April 25, 2007, and subsequently filed a Current Report on Form 8-K on April 27,
2007,  announcing  that its board of directors had received a letter from Oplink
indicating that Oplink has entered into a stock purchase agreement with Furukawa
to purchase  Furukawa's  entire  interest in the Company's  outstanding  capital
stock for $1.50 per share payable in cash and stock of Oplink.  Oplink's  letter
also proposed to purchase the Company's remaining  outstanding capital stock not
owned by  Furukawa  by means of a merger of the  Company  with a  subsidiary  of
Oplink at a cash  purchase  price of $1.50 per  share of the  Company's  Class A
common stock,  subject to Oplink's due diligence  investigation  and negotiation
and approval of a definitive  acquisition  agreement.  The Special  Committee is
currently evaluating Oplink's proposal.

         On May 4, 2007, the Company issued a press released and filed a Current
Report  on Form 8-K  announcing  that the  Special  Committee  adopted  a 30-day
shareholder  rights plan on May 3, 2007.  Under

                                       19


<PAGE>


the plan,  the Special  Committee  has declared a dividend  distribution  of one
preferred  share  purchase  right for each  outstanding  share of the  Company's
common stock held by  shareholders  of record as of May 14, 2007.  These rights,
which will  expire on June 2, 2007  unless  previously  redeemed,  exchanged  or
terminated,  will become exercisable only under three specific  conditions:  the
closing of  Oplink's  purchase of  Furukawa's  58.1%  ownership  interest in the
Company,  the acquisition of more than 15% of the Company's  outstanding  common
stock by a third party, or the acquisition of any additional  shares by Furukawa
or Oplink.

         On May 7,  2007,  Oplink  announced  that it has filed an action in the
Delaware  Court  of  Chancery  seeking  to  invalidate  certain  aspects  of the
shareholder  rights plan adopted by the Special  Committee.  The action filed by
Oplink  seeks (i) a  declaration  that the  shareholder  rights  plan is invalid
insofar as it attempts to prevent the sale of Furukawa's shares to Oplink,  (ii)
an  injunction  preventing  the  Company or the  Special  Committee  from taking
further  actions  to  implement  the  shareholder  rights  plan  (including  the
announced  distribution of rights to the Company's  shareholders of record as of
May 14, 2007), (iii) a declaration affirming the right of Oplink and Furukawa to
proceed  with their  announced  transaction,  and (iv) other  relief,  including
unspecified monetary damages. The Company believes the action is without merit.

         StrataLight  Communications,  Inc.  - On April 12,  2007,  the  Company
purchased   a   minority   interest   in   StrataLight   Communications,    Inc.
("StrataLight")  for $5.0  million  StrataLight  is  engaged  in the  commercial
deployment of ultra high capacity  optical  transmission  sub-systems  with line
rates in excess of 40Gbps.

         Olympia  Properties,  LLC - As  described  in Note 11 to the  condensed
consolidated  financial  statements,  on May 10,  2007,  the Company and Olympia
reached an agreement to settle all claims under which the Company  agreed to pay
Olympia $420,000.

                                       20


<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  consolidated  financial
statements  and the  related  notes to such  consolidated  financial  statements
included   elsewhere  in  this  Report.   The  following   discussion   contains
forward-looking  statements that involve risks and uncertainties.  Words such as
"anticipates,"  "expects,"  "intends,"  "plans,"  "believes,"  "may,"  "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,
2006.

 Recent Accounting Pronouncements

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


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

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

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

                                       21


<PAGE>


Critical Accounting Policies

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

Allowance for Doubtful Accounts and Sales Returns

         Our accounts receivable balance, net of allowance for doubtful accounts
and sales  returns,  was $9.5  million as of March 31, 2007 as compared to $11.2
million as of September 30, 2006. The allowance for doubtful  accounts and sales
returns  as of March  31,  2007 was  $456,000  as  compared  to  $550,000  as of
September  30,  2006.   The  allowance  is  based  on  our   assessment  of  the
collectibility of customer accounts and potential  returns.  We regularly review
the  allowance by  considering  factors such as  historical  experience,  credit
quality,  age of the accounts receivable  balances,  current economic conditions
that may affect a customer's ability to pay and historical  customer returns. If
a major  customer's  creditworthiness  deteriorates,  or if actual  defaults are
higher than our historical experience, or if actual future customer returns were
to be higher from our  expectations,  our  estimates  of the  recoverability  of
amounts  due to us could  be  overstated,  and  additional  allowances  could be
required, which could have an adverse impact on our operations.

Inventory Write-Downs

         Our  inventory  balance  was  $24.9  million  as of March  31,  2007 as
compared to $25.7  million as of September  30, 2006. 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.  If there were to be a sudden  and  significant
decrease  in demand for our  products,  or if there were a higher  incidence  of
inventory  obsolescence  because of rapidly  changing  technology  and  customer
requirements,  we could be required to increase inventory  write-downs,  and our
gross margin could be adversely affected.

Long-Lived Assets

         SFAS 144,  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets,"  requires  us  to  monitor  and  evaluate  the  recoverability  of  our
long-lived assets whenever events or changes in circumstances  indicate that the
carrying value of an asset may no longer be recoverable.  If the carrying amount
of a long-lived asset exceeds the expected future cash flows  (undiscounted  and
without interest  charges) from the use of the asset, we recognize an impairment
loss in the amount of the  difference  between the carrying  amount and the fair
value  of  the  asset.  For  purposes  of  estimating  future  cash  flows  from
potentially  impaired assets,  the Company groups assets at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets.  The lowest level for which  identifiable  cash
flows are  determinable  is at the reporting unit level.  Our long-lived  assets
subject  to  impairment  are our  property,  plant  and  equipment  and  certain
intangible  assets  that

                                       22


<PAGE>


had net carrying  values of $30.4  million and $3.0  million,  respectively,  at
March 31, 2007.  Assumptions used in determining  whether our long-lived  assets
are impaired include  estimating if the  undiscounted  future cash flows will be
sufficient  to  recover  the  value  of our  long-lived  assets.  However,  such
estimates  of future  cash flows are subject to change  because  the  underlying
assumptions,  such as revenues and expenses,  are based on projections  that may
differ from actual future results.  Should our estimates of future  undiscounted
cash flows indicate that the carrying value of our long-lived  assets may not be
recoverable,  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.  Based upon our impairment analysis performed during
the  quarter  ended  March 31,  2007 (see Note 4 to the  condensed  consolidated
financial  statements  included  in  Part  1  of  this  document),  the  Company
determined  that the  goodwill was fully  impaired  and  recorded an  impairment
charge of $8.5 million as a non-cash charge to continuing operations.

Stock-Based Compensation

         During the three and six  months  ended  March 31,  2007,  the  Company
recorded   stock-based   compensation   expense  of   $460,000   and   $742,000,
respectively,  in accordance  with SFAS 123(R),  adopted on October 1, 2005. The
current period stock-based  compensation recognized is based on the amortization
of the fair value of stock options on their date of grant using a  Black-Scholes
option valuation model.  The  Black-Scholes  option valuation model requires the
input of highly  subjective  assumptions,  including  the  expected  life of the
stock-based award and stock price volatility.  In addition,  management has made
an estimate of expected  forfeitures and is recognizing  compensation costs only
for  those  equity  awards  expected  to  vest.  These   assumptions   represent
management's best estimates,  but these estimates involve inherent uncertainties
and the application of management  judgment.  As a result,  if other assumptions
had been used, our recorded 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

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

Loss Contingencies

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

Overview

                                       23


<PAGE>


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

         Furukawa beneficially owns all of our outstanding Class B common stock,
representing  58.1% of our  outstanding  shares of common stock and 93.3% of the
combined  voting  power of all of our  outstanding  common stock as of March 31,
2007. Since our inception, we have purchased substantially all of our lasers and
the majority of our other fiber optic  components from Furukawa.  We have relied
on  Furukawa's  research  and  development   capabilities  to  provide  us  with
technologically advanced lasers and fiber optic components that we purchase from
Furukawa for  inclusion in our products.  We currently  purchase the majority of
lasers from Furukawa  under a Master  Purchase  Agreement  which we entered into
with Furukawa on October 1, 2003. This Agreement  automatically renews each year
on October 1st unless it is terminated upon written notice by either Furukawa or
us prior to renewal.

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

         We operate in the following two industry  segments:  (i) the design and
manufacture of fiber optic components for use in MANs and LANs (the OCP Woodland
Hills  reportable  segment) and (ii) the FTTH  network (the OCP Asia  reportable
segment). We sell our products to communication equipment manufacturers or CEMs,
their  contract  manufacturers  or CMs, who  incorporate  them into systems they
assemble for CEMs and to distributors.  We define our customers as CEMs who have
purchased our products directly or indirectly  through CMs and distributors.  We
recognize  revenue  upon product  shipment  and the history of sales  returns is
analyzed  in order to  reasonably  estimate  and record an  allowance  for sales
returns.  A small number of end  customers  have  historically  accounted  for a
significant portion of our total revenue. Our 10 largest customers accounted for
approximately  75.2% and 70.7% of our total  revenue  for the six  months  ended
March 31, 2007 and 2006,  respectively  with  Alcatel,  Cisco Systems and Huawei
Technologies   (including  sales  to  each  of  their  contract   manufacturers)
accounting  for  approximately  18.3%,  16.5% and  14.5% of our  total  revenue,
respectively,  for  the  six  months  ended  March  31,  2007.  Alcatel,  Huawei
Technologies  and  Cisco  Systems  (including  sales to each of  their  contract
manufacturers)  accounted for approximately  17.9%, 13.3% and 11.7% of our total
revenue,  respectively,  for the six  months  ended  March  31,  2006.  No other
customer  accounted  for more than 10.0% of our total revenue for the six months
ended March 31,  2007 and 2006.  Although  our  revenue  from sales to our other
customers   continues  to  increase,   we  expect  that   significant   customer
concentration will continue for the foreseeable  future. Our sales are made on a
purchase  order  basis  rather  than  by  long-term  purchase  commitments.  Our
customers may cancel or defer purchase orders without penalty on short notice.

         In October 1999,  Methode  Electronics,  Inc.  filed a lawsuit  against
Infineon Technologies Corporation and us seeking unspecified damages,  including
monetary damages,  injunctive relief, attorneys' fees and costs arising from our
alleged  infringement  of some of the claims  contained  in patents  assigned to
Methode, including patents relating to our 1x9 pin configuration products. After
Methode initiated the lawsuit, it assigned to Stratos Lightwave, Inc., a Methode
spin-off,  all of Methode's  rights,

                                       24


<PAGE>


title and interest in the patent at issue. The court  subsequently added Stratos
as a  plaintiff  to the  lawsuit.  On April 12,  2002,  we  resolved  our patent
infringement  litigation with Stratos. The settlement resolved all claims in the
lawsuit  among us and  Stratos.  As part of the  settlement,  we entered  into a
five-year  license  agreement  with  Stratos  covering  Stratos'   portfolio  of
optoelectronic  transceiver  patents. In consideration of the license agreement,
we are required to pay a total of $2 million over the license  term. As of March
31, 2007, $200,000 remained outstanding and was paid in April 2007. On April 12,
2007, we extended the license agreement such that it became coterminous with the
expiration  of the licensed  patents for a total  payment of $450,000,  which we
made in April 2007. Our optoelectronic  products covered by this license include
our 1x9, GBIC,  small form factor (SFF) and small  form-factor  pluggable  (SFP)
product families

         The  Company  acquired  OCP Asia on August 24,  2006 (see Note 2 to the
condensed  consolidated  financial  statements  contained  in  Part  I  of  this
document).  OCP Asia was founded in 2000, has its headquarters and manufacturing
facilities in the Hsinchu Science-Based  Industrial Park in Taiwan, ROC, and has
approximately  300 employees.  OCP Asia is currently a leading  supplier of FTTH
modules in Japan, which is presently the world's largest FTTH market. OCP Asia's
results of  operations  are  included in the  Company's  Condensed  Consolidated
Statements of Operations for the three and six months ended March 31, 2007.

         The average  selling prices of our products  generally  decrease as the
products mature from factors such as increased competition,  the introduction of
new products,  increased  unit volumes,  and price  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.

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

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

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

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

         General and  administrative  expenses  consist  primarily  of salaries,
stock-based  compensation and related expenses for our  administrative,  finance
and human resources  personnel,  professional fees and

                                       25


<PAGE>


other corporate  expenses.  Our  professional  fees include fees associated with
litigation and accounting and consulting  fees  associated  with several finance
and accounting  projects,  including our compliance with regulations  associated
with the Sarbanes-Oxley legislation. As a result, our general and administrative
expenses in fiscal 2007 will exceed those incurred in fiscal 2006.

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

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


Results of Operations - Comparison of Three Months Ended March 31, 2007 and 2006

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

         The  following  table  sets  forth  statement  of  operations  data and
percentage of change for the three months ended March 31, 3007 and 2006 (dollars
in thousands):

<TABLE>
                                                                   Three Months Ended March 31,
                                                          -----------------------------------------------                %
                                                                   2007                    2006            Change      Change
                                                          ----------------------- ----------------------- ---------- -----------

<S>                                                     <C>            <C>      <C>            <C>       <C>              <C>
REVENUE                                                 $    16,391    100.0%   $    18,342    100.0%    $   (1,951)      (10.6)%
COST OF REVENUE                                              16,966    103.5%        11,969     65.3%         4,997        41.8%
                                                          ----------              ----------              ----------
GROSS PROFIT (LOSS)                                            (575)    (3.5)%        6,373     34.7%        (6,948)     (109.0)%
                                                          ----------              ----------              ----------
OPERATING EXPENSES:
    Research and development                                  3,047     18.6%         2,497     13.6%           550        22.0%
    Selling and marketing                                     1,474      9.0%         1,313      7.2%           161        12.3%
    General and administrative                                4,107     25.0%         1,826      9.9%         2,281       124.9%
    Transitional costs for contract manufacturing               851      5.2%            --       --            851          --
    Impairment of goodwill                                    8,486     51.8%            --       --          8,486          --
                                                          ----------              ----------              ----------
      Total operating expenses                               17,965    109.6%         5,636     30.7%        12,329       218.8%
                                                          ----------              ----------              ----------
INCOME (LOSS) FROM OPERATIONS                               (18,540)  (113.1)%          737      4.0%       (19,277)    (2615.6)%

INVESTMENT INCOME                                             1,411      8.6%         1,451      7.9%           (40)       (2.8)%
OTHER INCOME, net                                                25      0.1%            53      0.3%           (28)      (52.8)%
                                                          ----------              ----------              ----------
INCOME (LOSS) BEFORE INCOME TAXES                           (17,104)  (104.4)%        2,241     12.2%       (19,345)     (863.2)%
PROVISION FOR INCOME TAXES                                       --       --            105      0.6%          (105)     (100.0)%
                                                          ----------              ----------              ----------
NET INCOME (LOSS)                                       $   (17,104)  (104.4)%  $     2,136     11.6%    $  (19,240)     (900.8)%
                                                          ==========              ==========              ==========
</TABLE>

Revenues

                                                   Three Months Ended
                                                       March 31,
                                       ------------------------------------
                                           2007                    2006
                                       ------------            ------------
                                              (Dollars in thousands)
OCP Woodland Hills                      $   13,687             $   18,342
OCP Asia                                     2,765                     --
                                         ----------            ------------
                                            16,452                 18,342
Less inter-segment revenues                    (61)                    --
                                         ----------            ------------

                                       26


<PAGE>


Total Revenues                          $   16,391             $   18,342
                                         ==========             ==========
Percentage Decrease                                   (10.6) %

         Revenues decreased  $1,951,000 or 10.6% during the comparable quarters.
OCP Woodland  Hills  revenues  decreased by  $4,655,000  or 25.4 % offset by the
inclusion of  $2,765,000 in revenues from OCP Asia during the three months ended
March 31, 2007. The decrease in revenues,  excluding the revenues from OCP Asia,
was primarily  due to an  approximate  7.9%  reduction in unit sales and a 19.0%
reduction in average  sales prices.  The most  significant  product  decrease in
absolute dollars was in Transceivers.

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

                                                      Three Months Ended
                                                          March 31,
                                                 -----------------------------
                                                     2007             2006
                                                 ------------     ------------
Transceivers                                            87.4%            88.1%
Transmitters                                             5.8%             7.7%
Receivers                                                3.0%             3.9%
Other                                                    3.8%             0.3%
                                                 ------------     ------------
                                                       100.0%           100.0%
                                                 ============     ============

Gross Profit (Loss)

                                                     Three Months Ended
                                                         March 31,
                                                -----------------------------
                                                   2007               2006
                                                ----------         ----------
                                                   (Dollars in thousands)
Gross Profit (Loss)
OCP Woodland Hills                             $      150       $      6,373
OCP Asia                                             (725)                --
                                                ----------         ----------
                                                     (575)             6,373
Less inter-segment gross profit (loss)                 --                 --
                                                ----------         ----------
Total Gross Profit (Loss)                      $     (575)      $      6,373
                                                ==========         ==========
Gross Margin
OCP Woodland Hills                                    1.1%              34.7%
OCP Asia                                            (26.2)%                --
Total Gross Margin                                   (3.5)%             34.7%

         Cost of revenue  increased  41.8% to  $16,966,000  in the three  months
ended March 31, 2007 from  $11,969,000 in the three months ended March 31, 2006.
Cost of revenue attributable to OCP Woodland Hills and OCP Asia were $13,537,000
and  $3,490,000,  respectively,  in the three months  ended March 31, 2007.  The
gross  margin  for OCP  Woodland  Hills  and OCP Asia  were  1.1%  and  (26.2)%,
respectively,  for the three months  ended March 31, 2007.  The gross margin for
OCP Woodland  Hills was 34.7% for the three  months ended March 31, 2006.  Gross
profit and margins at OCP Woodland  Hills were  negatively  impacted  during the
current quarter due to competitive pricing pressures and changes in product mix,
resulting in a 19.0% decrease in average  selling prices and a 7.9% reduction in
units shipped which was  partially  offset by an 11.9%  reduction in average raw
material costs. In addition,  the usage of previously  written down OCP Woodland
Hills  inventory  decreased to $459,000 in the three months ended March 31, 2007
from $582,000 in the three months ended March 31, 2006.  OCP Woodland Hills also
wrote down inventory by $2,840,000  during the three months ended March 31, 2007
due to additional  excess and obsolete  inventory on hand due to lower projected
usage, along with lower of cost-or-market reserves due to sales price reductions
for certain  products.  The  negative  gross  margins for OCP Asia is  primarily
attributable to competitive  pricing pressures,  $175,000 associated with excess
manufacturing  capacity  and a $406,000  write down of inventory to market value
during the three months ended March

                                       27


<PAGE>


31, 2007. Stock-based compensation expense charged to manufacturing overhead was
$39,000  and  $22,000  for the  three  months  ended  March  31,  2007 and 2006,
respectively.  The above items will  continue to impact gross profit and margins
in the future.

                                       28


<PAGE>


Research and Development (R&D)

                                                Three Months Ended
                                                     March 31,
                                       -----------------------------------
                                         2007                      2006
                                       ----------                ---------
                                               (Dollars in thousands)
OCP Woodland Hills                    $    2,592                 $   2,497
OCP Asia                                     455                        --
                                       ----------                 ---------
Total Research and Development        $    3,047                 $   2,497
                                       ==========                 =========
Percentage Increase                                    22.0%

         Research and development  expense  increased  $550,000 to $3,047,000 in
the three months ended March 31, 2007 from  $2,497,000 in the three months ended
March 31, 2006.  Research and development  expense  attributable to OCP Asia for
the three months  ended March 31, 2007 was  $455,000.  Research and  development
expense  for OCP  Woodland  Hills  did not  materially  change  on a  comparable
quarterly  basis.  Stock-based  compensation  expense  charged to  research  and
development  expenses  was $82,000 and $91,000 for the three  months ended March
31,  2007 and 2006,  respectively.  We  believe  that  continued  investment  in
research and  development  is critical to our future  success and these expenses
may increase in absolute dollars in the future.

Sales and Marketing

                                                Three Months Ended
                                                     March 31,
                                       -----------------------------------
                                         2007                      2006
                                       ----------                ---------
                                              (Dollars in thousands)
OCP Woodland Hills                    $    1,291               $   1,313
OCP Asia                                     183                      --
                                       ----------                ---------
Total Sales and Marketing             $    1,474               $   1,313
                                       ==========                =========
Percentage Increase                                   12.3%

         Sales and  marketing  expenses  increased  $161,000 in the three months
ended  March 31, 2007 from the three  months  ended  March 31,  2006.  Sales and
marketing expenses  attributable to OCP Asia in the three months ended March 31,
2007  were  $183,000.  Stock-based  compensation  expense  charged  to sales and
marketing  expenses was $42,000 and $14,000 for the three months ended March 31,
2007 and 2006,  respectively.  We believe that investment in sales and marketing
is critical to our success and these  expenses may increase in absolute  dollars
in the future.

General and Administrative

                                                  Three Months Ended
                                                       March 31,
                                           ---------------------------------
                                              2007                   2006
                                           ----------              ---------
                                                 (Dollars in thousands)
OCP Woodland Hills                        $    3,715              $   1,826
OCP Asia                                         392                     --
                                           ----------              ---------
General and administrative expense        $    4,107              $   1,826
                                           ==========              =========
Percentage Increase                                     124.9%

         General and administrative  expenses increased  $2,281,000 in the three
months ended March 31, 2007 from the three months ended March 31, 2006.  General
and administrative  expenses  attributable to OCP Asia in the three months ended
March 31, 2007 were  $392,000.  The  $1,889,000  increase for OCP Woodland Hills
includes an increase in  professional  services of  $611,000,  primarily  due to
legal  expenses  associated  with the Olympia  litigation,  accounting and legal
expenses and fees relative to several finance and accounting projects, including
our compliance with regulations associated with the Sarbanes-Oxley  legislation.
Other  significant  increases  in general and  administrative  expenses  include
$420,000 for

                                       29


<PAGE>


settlement  of the Olympia  litigation,  $97,000 in higher  salary and benefits,
primarily associated with the employment of the Company's new executive officers
in the quarter ended  September 30, 2006, a $61,000  increase in travel  related
expenses and $96,000 of recruitment fees incurred during the quarter ended March
31,  2007.  In  addition,  $217,000 of costs,  such as  depreciation,  taxes and
utilities, associated with space previously occupied by a lessee in our Woodland
Hills  facility,  are now  classified  as general and  administrative  expenses.
Previously,  such  expenses  were offset by rental  income and included in other
income  in  the  accompanying   condensed   consolidated  financial  statements.
Stock-based  compensation expense charged to general and administrative expenses
was  $297,000  and  $121,000 for the three months ended March 31, 2007 and 2006,
respectively.

         The Company expects our general and administrative expenses to increase
significantly  in the quarters  ended June 30, 2007 and  September 30, 2007 as a
result of the activities related to the Oplink proposal.

Transitional costs for contract manufacturing

         OCP Woodland  Hills and OCP Asia have incurred  transitional  costs for
contract manufacturing of $712,000 and $139,000 for the three months ended March
31, 2007, respectively. In connection with the transition to manufacture certain
of our  product  lines in China with SAE,  we expect to  maintain  our  existing
manufacturing facilities but will reduce our workforce once manufacturing at SAE
begins. The transition charges are related primarily to estimated  severance and
retention  payments,  along with  expenses  incurred to relocate  certain  fixed
assets and product qualification associated with the manufacturing of certain of
our product lines in China  commencing in the summer of 2007.  These  transition
charges are estimated to be approximately $3.2 million for fiscal 2007.

Impairment of Goodwill

         The Company recorded a goodwill impairment charge,  associated with its
OCP Woodland  Hills  segment,  of $8,486,000 as a non-cash  charge to continuing
operations  during the three  months  ended March 31, 2007 due to the  Company's
impairment  analysis,  as  described  in  Note 4 to the  condensed  consolidated
financial statements included in Part 1 of this document.

Investment Income and Other Income, Net

                                            Three Months Ended
                                                March 31,
                                   ----------------------------------
                                     2007                     2006
                                   ----------               ---------
                                          (Dollars in thousands)
 Investment income                $    1,411                 $   1,451
 Other income, net                        25                        53
                                   ----------                 ---------
  Total                           $    1,436                 $   1,504
                                   ==========                 =========
 Percentage Decrease                              (4.5)%

         The total of investment income and other income,  net decreased $68,000
in the three  months  ended March 31, 2007 from the three months ended March 31,
2006. This decrease was primarily due to less investment income as a result of a
decrease in cash  equivalents  and marketable  securities  since March 31, 2006.
Other  income  attributable  to OCP Asia and included in other  income,  net was
$23,000 in the three  months  ended March 31, 2007.  Rental  income  included in
other income,  net for the three months ended March 31, 2006 was $53,000.  There
was no rental income for the three months ended March 31, 2007.

                                       30


<PAGE>


Provision for income taxes

                                               Three Months Ended
                                                    March 31,
                                     ----------------------------------------
                                        2007                         2006
                                     -----------                   ----------
                                             (Dollars in thousands)
 Income tax provision                $        --                    $     105
                                        ========                     ========

         There was no income tax  provision  during the three months ended March
31, 2007 as there was no significant  change in net income for our operations in
the United  Kingdom.  The income tax  provision of $105,000 for the three months
ended March 31, 2006 was comprised of foreign taxes in the amount of $93,000 and
state income taxes of $12,000.

Results of Operations - Comparison of Six Months Ended March 31, 2007 and 2006

         The  following  table  sets  forth  statement  of  operations  data and
percentage  of change for the six months ended March 31, 3007 and 2006  (dollars
in thousands):

<TABLE>
                                                                    Six Months Ended March 31,
                                                          -----------------------------------------------                %
                                                                   2007                    2006            Change      Change
                                                          ----------------------- ----------------------- ---------- -----------

<S>                                                     <C>            <C>      <C>            <C>       <C>              <C>
REVENUE                                                 $    33,415    100.0%   $    36,090    100.0%    $   (2,675)       (7.4)%
COST OF REVENUE                                              30,790     92.1%        23,408     64.9%         7,382        31.5%
                                                          ----------              ----------              ----------
GROSS PROFIT                                                  2,625      7.9%        12,682     35.1%       (10,057)      (79.3)%
                                                          ----------              ----------              ----------
OPERATING EXPENSES:
    Research and development                                  5,889     17.4%         5,759     16.0%           130         2.3%
    Selling and marketing                                     2,756      8.3%         2,502      6.9%           254        10.2%
    General and administrative                                8,511     25.5%         3,939     10.9%         4,572       116.1%
    Transitional cost for contract manufacturing              1,311      3.9%            --       --          1,311          --
    Impairment of goodwill                                    8,486     27.7%            --       --          8,486          --
                                                          ----------              ----------              ----------
      Total operating expenses                               26,953     82.8%        12,200     33.8%        14,753       120.9%
                                                          ----------              ----------              ----------
INCOME (LOSS) FROM OPERATIONS                               (24,328)   (74.9)%          482      1.3%       (24,810)   (5,147.3)%

INVESTMENT INCOME                                             2,984      8.9%         2,748      7.6%           236         8.6%
OTHER INCOME, net                                                96      0.3%           139      0.4%           (43)      (30.9)%
                                                          ----------              ----------              ----------
INCOME (LOSS) BEFORE INCOME TAXES                           (21,248)   (65.7)%        3,369      9.3%       (24,617)     (730.7)%
PROVISION FOR INCOME TAXES                                       43      0.1            140      0.4%           (97)      (69.3)%
                                                          ----------              ----------              ----------
NET INCOME (LOSS)                                       $   (21,291)   (65.8)%  $     3,229      8.9%    $  (24,520)     (759.4)%
                                                          ==========              ==========              ==========
</TABLE>


Revenues

                                              Six Months Ended
                                                 March 31,
                                 -------------------------------------------
                                    2007                           2006
                                 ------------                   ------------
                                           (Dollars in thousands)
OCP Woodland Hills                $   28,055                     $   36,090
OCP Asia                               5,462                             --
                                   ----------                   ------------
                                      33,517                         36,090
Less inter-segment revenues             (102)                            --
                                   ----------                   ------------
Total Revenues                    $   33,415                     $   36,090
                                   ==========                     ==========
Percentage Decrease                                 (7.4)%

         Revenues decreased  $2,675,000 or 7.4% during the comparable  quarters.
OCP Woodland Hills revenues decreased by $8,035,000 or 22.3 % and were offset by
the  inclusion  of  $5,462,000  in revenues

                                       31


<PAGE>


from OCP Asia  during the six months  ended  March 31,  2007.  The  decrease  in
revenues,  excluding  the  revenues  from  OCP  Asia,  was  primarily  due to an
approximate  7.0% reduction in unit sales and a 16.4% reduction in average sales
prices.  The most  significant  product  decrease  in  absolute  dollars  was in
Transceivers.

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

                                                Six Months Ended
                                                   March 31,
                                          -----------------------------
                                              2007             2006
                                          ------------     ------------
Transceivers                                     86.7%            87.3%
Transmitters                                      5.1%             7.7%
Receivers                                         3.4%             4.6%
Other                                             4.8%             0.4%
                                          ------------     ------------
                                                100.0%           100.0%
                                          ============     ============

Gross Profit (Loss)

                                               Six Months Ended
                                                  March 31,
                                         -----------------------------
                                            2007               2006
                                         ----------         ----------
                                            (Dollars in thousands)
Gross Profit (Loss)
OCP Woodland Hills                      $    4,416       $     12,682
OCP Asia                                    (1,784)                --
                                         ----------         ----------
                                             2,632             12,682
Less inter-segment gross profit (loss)          (7)                --
                                         ----------         ----------
Total Gross Profit (Loss)               $    2,625       $     12,682
                                         ==========         ==========
Gross Margin
OCP Woodland Hills                            15.7%              35.1%
OCP Asia                                     (32.7)%               --
Total Gross Margin                             7.9%              35.1%

         Cost of revenue  increased 31.5% to $30,790,000 in the six months ended
March 31, 2007 from  $23,408,000 in the six months ended March 31, 2006. Cost of
revenue  attributable  to OCP Woodland Hills and OCP Asia were  $23,639,000  and
$7,246,000,  respectively,  in the six months  ended March 31,  2007.  The gross
margin for OCP Woodland Hills and OCP Asia were 15.7% and (32.7)%, respectively,
for the six months ended March 31, 2007. The gross margin for OCP Woodland Hills
was 35.1% for the six months ended March 31,  2006.  Gross profit and margins at
OCP Woodland Hills were  negatively  impacted during the current fiscal year due
to  competitive  pricing  pressures  and changes in product mix,  resulting in a
16.4%  decrease in average  selling prices and a 7.0% reduction in units shipped
which was partially  offset by a 10.4%  reduction in average raw material costs.
In addition,  the usage of previously  written down OCP Woodland Hills inventory
decreased to $888,000 in the six months ended March 31, 2007 from  $1,411,000 in
the six  months  ended  March 31,  2006.  OCP  Woodland  Hills  also  wrote down
inventory  by  $3,722,000  during  the six months  ended  March  31,2007  due to
additional  excess and obsolete  inventory on hand due to lower projected usage,
along with lower of  cost-or-market  reserves due to sales price  reductions for
certain  products.  The  negative  gross  margins  for  OCP  Asia  is  primarily
attributable to competitive  pricing pressures,  $386,000 associated with excess
manufacturing  capacity  and a $803,000  write down of inventory to market value
during the six months ended March 31,  2007.  Stock-based  compensation  expense
charged to  manufacturing  overhead  was  $75,000 and $40,000 for the six months
ended March 31, 2007 and 2006,  respectively.  The above items will  continue to
impact gross profit and margins in the future.

                                       32


<PAGE>


Research and Development (R&D)

                                                     Six Months Ended
                                                        March 31,
                                           -----------------------------------
                                             2007                      2006
                                           ----------                ---------
                                                    (Dollars in thousands)
OCP Woodland Hills                        $    4,977               $   5,759
OCP Asia                                         919                      --
                                           ----------               ---------
                                               5,896                   5,759
Less inter-segment research and
  development charges                             (7)                     --
                                           ----------               ---------
Total Research and Development            $    5,889               $   5,759
                                           ==========               =========
Percentage Increase                                            2.3%

         Research and development  expense  increased  $130,000 to $5,889,000 in
the six months  ended March 31, 2007  compared to the  comparable  2006  period.
Research and  development  expense  attributable  to OCP Asia for the six months
ended March 31, 2007 was  $919,000.  Research  and  development  expense for OCP
Woodland Hills decreased by $782,000 on a comparable quarterly basis,  primarily
due to the closure of the Colorado  research and development  facility (see Part
IV,  Item 15,  Note 4 to the  consolidated  financial  statements  in our Annual
Report on Form 10-K filed with the SEC) in the  second  quarter of fiscal  2006.
Stock-based  compensation  expense charged to research and development  expenses
was  $142,000  and  $213,000  for the six months  ended March 31, 2007 and 2006,
respectively.  We believe that continued  investment in research and development
is critical to our future  success and these  expenses  may increase in absolute
dollars in the future.

Sales and Marketing

                                                      Six Months Ended
                                                         March 31,
                                            ----------------------------------
                                              2007                     2006
                                            ----------               ---------
                                                   (Dollars in thousands)
OCP Woodland Hills                         $    2,467               $   2,502
OCP Asia                                          289                      --
                                            ----------               ---------
Total Sales and Marketing                  $    2,756               $   2,502
                                            ==========               =========
Percentage Increase                                        10.2%

         Sales and marketing expenses increased $254,000 in the six months ended
March 31, 2007 from the six months  ended March 31,  2006.  Sales and  marketing
expenses  attributable  to OCP Asia in the six months  ended March 31, 2007 were
$289,000.  Stock-based  compensation  expense  charged  to sales  and  marketing
expenses  was $71,000  and  $21,000 for the six months  ended March 31, 2007 and
2006,  respectively.  We  believe  that  investment  in sales and  marketing  is
critical to our success and these  expenses may increase in absolute  dollars in
the future.

General and Administrative

                                                     Six Months Ended
                                                         March 31,
                                             -------------------------------
                                                2007                  2006
                                             ----------            ---------
                                                  (Dollars in thousands)
OCP Woodland Hills                          $    7,753            $   3,939
OCP Asia                                           758                   --
                                             ----------            ---------
General and administrative expense          $    8,511            $   3,939
                                             ==========            =========
Percentage Increase                                      116.1.%

         General and  administrative  expenses  increased  $4,572,000 in the six
months ended March 31, 2007 from the six months  ended March 31,  2006.  General
and  administrative  expenses  attributable  to OCP Asia in the six months ended
March 31, 2007 were  $758,000.  The  $3,814,000  increase for OCP

                                       33


<PAGE>


Woodland Hills includes an increase in professional services of $1,301,000 which
was primarily due to an internal  investigation  into how the Company  accounted
for stock option grants,  legal expenses associated with the Olympia litigation,
accounting  and  legal  expenses  in  connection  with  the  Company's  purchase
accounting analysis and the Form 8-K/A filing regarding the OCP Asia acquisition
and  accounting  fees  relative  to several  finance  and  accounting  projects,
including our compliance with  regulations  associated  with the  Sarbanes-Oxley
legislation.  Other significant increases in general and administrative expenses
include  $420,000  for  settlement  of  the  Olympia  litigation,  $651,000  for
executive severance costs and $284,000 in higher salary and benefits,  primarily
associated  with the  employment of the Company's new executive  officers in the
quarter ended September 30, 2006, a $109,000 increase in travel related expenses
and $129,000 of recruitment  fees incurred during the six months ended March 31,
2007. In addition, $436,000 of costs, such as depreciation, taxes and utilities,
associated  with space  previously  occupied by a lessee in our  Woodland  Hills
facility, are now classified as general and administrative expenses. Previously,
such  expenses  were offset by rental income and included in other income in the
accompanying   condensed   consolidated   financial   statements.    Stock-based
compensation expense charged to general and administrative expenses was $454,000
and $214,000 for the six months ended March 31, 2007 and 2006, respectively.

        The Company expects our general and administrative expenses to increase
significantly in the quarters ended June 30, 2007 and September 30, 2007 as a
result of the activities related to the Oplink proposal.

Transitional costs for contract manufacturing

         OCP Woodland  Hills and OCP Asia have incurred  transitional  costs for
contract  manufacturing  of $990,000 and $321,000 for the six months ended March
31, 2007, respectively. In connection with the transition to manufacture certain
of our  product  lines in China with SAE,  we expect to  maintain  our  existing
manufacturing facilities but will reduce our workforce once manufacturing at SAE
begins. The transition charges are related primarily to estimated  severance and
retention  payments,  along with  expenses  incurred to relocate  certain  fixed
assets and product qualification associated with the manufacturing of certain of
our product lines in China  commencing in the summer of 2007,  and are estimated
at approximately $3.2 million for fiscal 2007.

Impairment of Goodwill

         The Company recorded a goodwill impairment charge,  associated with its
OCP Woodland  Hills  segment,  of $8,486,000 as a non-cash  charge to continuing
operations  during  the six months  ended  March 31,  2007 due to the  Company's
impairment  analysis,  as  described  in  Note 4 to the  condensed  consolidated
financial statements included in Part 1 of this document.

Investment Income and Other Income, Net

                                             Six Months Ended
                                                 March 31,
                                 ------------------------------------------
                                   2007                             2006
                                 ----------                       ---------
                                          (Dollars in thousands)
 Investment income              $    2,984                       $   2,748
 Other income, net                      96                             139
                                 ----------                       ---------
 Total                          $    3,080                       $   2,887
                                 ==========                       =========
 Percentage Increase                               6.7%

         The total of investment income and other income, net increased $193,000
in the six months ended March 31, 2007 from the six months ended March 31, 2006.
This increase was primarily due to an increase in investment  income as a result
of rising interest rates partially  offset by a decrease in cash equivalents and
marketable  securities  since March 31, 2006.  Other income  attributable to OCP
Asia and included in other income,  net was $63,000  during the six months ended
March 31, 2007. Rental income

                                       34


<PAGE>


included  in other  income,  net for the six  months  ended  March 31,  2006 was
$139,000. There was no rental income for the six months ended March 31, 2007.

Provision for income taxes

                                              Six Months Ended
                                                  March 31,
                                   ----------------------------------------
                                      2007                         2006
                                   -----------                   ----------
                                            (Dollars in thousands)
 Income tax provision              $       43                    $     140
                                      ========                     ========

         The income tax  provision of $43,000 for the six months ended March 31,
2007 was  comprised of foreign  taxes  related to our  operations  in the United
Kingdom. The income tax provision of $140,000 for the six months ended March 31,
2006 was  comprised of foreign  taxes in the amount of $121,000 and state income
taxes of $19,000.

Liquidity and Capital Resources

         As of March 31, 2007,  our primary source of liquidity was our cash and
cash equivalents balance of $82.0 million and our marketable  securities balance
of $34.9 million,  which consists of United States  Treasury Notes. At September
30, 2006, we had $57.4 million in cash and cash equivalents and $69.5 million in
marketable securities.

        Current assets and current liabilities

         Since  inception,  we have financed our operations  primarily with cash
generated from operations, through term loans and our initial public offering of
our Class A common  stock,  which we completed on November 3, 2000.  As of March
31, 2007,  our working  capital was $137.7  million with a current  ratio of 9.9
compared to our working  capital of $151.3  million with a current ratio of 10.8
as of September 30, 2006. Our net loss was the primary factor in the decrease in
working  capital  during the six months  ended March 31,  2007.  We believe that
additional  cash  could  be  borrowed  if  necessary;  however,  cash  and  cash
equivalents,  and marketable securities on hand are expected to be sufficient to
fund operations for the next twelve months.

         Cash flows provided by / (used in)

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

                                                        Six Months Ended
                                                            March 31
                                                --------------------------------
                                                   2007               2006
                                                -----------        -----------
Operating activities                           $    (8,274)       $    (1,946)
Investing activities                                32,615              1,301
Financing activities                                   158                383
Effect of exchange rate changes on cash                105                  -
                                                -----------        -----------
Net increase (decrease) in cash and
  cash equivalents                             $   $24,604        $      (262)
                                                ===========        ===========

         During the six months ended March 31, 2007,  net cash used in operating
activities  was  primarily  the  result of the net loss for the  period,  net of
non-cash  items  including  depreciation  and  amortization  expense,  inventory
write-downs  and impairment of goodwill,  an increase in  inventories  partially
offset by a decrease in accounts receivable and accounts payable. During the six
months ended March 31, 2006, net cash used in operating activities was primarily
the result of increases in accounts  receivable  and  inventory  which more than
offset net income.

                                       35


<PAGE>


         During the six months ended March 31, 2007,  cash provided by investing
activities was primarily the result of the  maturation of marketable  securities
greater  than  the  conversion  of  cash  and  cash  equivalents  to  marketable
securities  for a net of  $35.1  million  less  $2.5  million  of  fixed  assets
acquisitions,  particularly  at OCP Asia.  During the six months ended March 31,
2006, cash provided by investing  activities included $1.0 million  attributable
to the sale of assets to Furukawa.  The maturation of marketable  securities net
of the conversion of cash and cash equivalents to marketable securities provided
cash of $0.4  million.  Purchases of  property,  plant and  equipment  were $0.1
million during the six months ended March 31, 2006.

         During the six months  ended  March 31, 2007 and March 31,  2006,  cash
provided by financing activities was from the exercise of stock options.

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

                                       36


<PAGE>


Contractual Obligations

         The  following  is a  summary  of  future  minimum  payments  due under
operating  leases that have  initial or remaining  noncancelable  lease terms in
excess of one year at March 31, 2007 (in thousands):

               Six months ending September 30, 2007             $    695
               2008                                                1,274
               2009                                                1,122
               2010                                                   83
               2011                                                   70
                                                                ---------
               Total minimum lease payments                     $  3,244
                                                                =========

         We also have purchase  commitments for materials,  supplies,  equipment
and outside services in aggregate of approximately  $8.7 million for fiscal year
ending September 30, 2007.  Included in these purchase  commitments are purchase
commitments to a related party for approximately  $2.0 million.  We believe that
our cash and cash  equivalents  and marketable  securities will be sufficient to
meet all of the known requirements.

         Subsequent to March 31, 2007, the Company purchased a minority interest
in Stratalight for $5.0 million.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

         The  primary  objective  of our  investment  activities  is to preserve
capital.  We have not used  derivative  financial  instruments in our investment
portfolio.  Our cash and cash  equivalents  are $82.0  million,  the majority of
which is  invested  in money  market and other  interest  bearing  accounts.  In
addition,  we have  $34.9  million  invested  in  marketable  securities,  which
represents investments in United States Treasury Notes.

         As of March 31, 2007,  our  investment in marketable  securities  had a
weighted-average time to maturity of approximately 55 days. These securities are
classified as held to maturity because we have the intention and ability to hold
the   securities   to   maturity.   Gross   unrealized   gains  and   losses  on
held-to-maturity  marketable  securities  have  historically  not been material.
Maturities on the date purchased of held-to-maturity  marketable debt securities
can range from one to twelve months.

         If interest  rates were to increase or decrease 1%, the result would be
an annual  increase  or  decrease  of  interest  income of $1.2  million  on our
investment  portfolio.  This analysis does not consider the effect of the change
in the  level  of  overall  economic  activity  that  could  exist  in  such  an
environment.

6.      Foreign Currency Risk

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

                                       37


<PAGE>


ITEM 4.        CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

         In connection  with the  preparation of this  Quarterly  Report on Form
10-Q, as of March 31, 2007, an evaluation  was performed  under the  supervision
and with the  participation of the Company's  management,  including the CEO and
CFO,  of the  effectiveness  of  the  design  and  operation  of  the  Company's
disclosure  controls  and  procedures  (as defined in Rule  13a-15(e)  under the
Exchange Act).  Our CEO and CFO have  concluded  that, for the reasons set forth
below,  our disclosure  controls and procedures were not adequate to ensure that
all of the  information  required  to be  disclosed  by us in reports we file or
submit under the Exchange Act is recorded,  processed,  summarized, and reported
within the time periods specified in the rules and forms of the SEC.

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

         The material weakness relates to a deficiency in the design of controls
surrounding the Company's analysis of excess and obsolete inventory and lower of
cost-or-market valuation. Controls designed within the Company's closing process
to detect errors in the valuation of inventory  did not operate  effectively  as
they did not detect an error in the March 31, 2007 inventory valuation analysis.
This deficiency in controls  resulted in the Company  recording an adjustment to
decrease the value of inventory by a material  amount in the quarter ended March
31, 2007.

         The  Company  has  taken  steps to  remediate  the  control  deficiency
identified.  The Company will enhance  controls  related to the  preparation and
review of the quarterly  analysis of excess and obsolete  inventory and lower of
cost or market  inventory  analysis.  Management has discussed  these issues and
remediation  efforts  in detail  with our Audit  Committee.  Our CEO and our CFO
believe that these remediation  measures will address this material weakness and
will also allow us to conclude that our  disclosure  controls and procedures and
our internal  controls over  financial  reporting are effective at future filing
dates.

Changes in Internal Control

         Other  than the  changes  noted  above,  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.

                                       38


<PAGE>


PART II.
                        OTHER INFORMATION AND SIGNATURES

ITEM 1.    LEGAL PROCEEDINGS

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

Olympia Properties

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

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

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

Oplink Communications

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

         On May 4, 2007, the Company issued a press released and filed a Current
Report  on Form 8-K  announcing  that the  Special  Committee  adopted  a 30-day
shareholder  rights plan on May 3, 2007.  Under the plan, the Special  Committee
has declared a dividend  distribution  of one preferred share purchase right for
each  outstanding  share of the Company's  common stock held by  shareholders of
record as of May 14,  2007.  These  rights,  which  will  expire on June 2, 2007
unless previously  redeemed,  exchanged or terminated,  will become  exercisable
only under  three  specific  conditions:  the  closing of  Oplink's  purchase

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of Furukawa's 58.1% ownership  interest in the Company,  the acquisition of more
than 15% of the  Company's  outstanding  common stock by a third  party,  or the
acquisition of any additional shares by Furukawa or Oplink.

         On May 7,  2007,  Oplink  announced  that it has filed an action in the
Delaware  Court  of  Chancery  seeking  to  invalidate  certain  aspects  of the
shareholder  rights plan adopted by the Special  Committee.  The action filed by
Oplink  seeks (i) a  declaration  that the  shareholder  rights  plan is invalid
insofar as it attempts to prevent the sale of Furukawa's shares to Oplink,  (ii)
an  injunction  preventing  the  Company or the  Special  Committee  from taking
further  actions  to  implement  the  shareholder  rights  plan  (including  the
announced  distribution of rights to the Company's  shareholders of record as of
May 14, 2007), (iii) a declaration affirming the right of Oplink and Furukawa to
proceed  with their  announced  transaction,  and (iv) other  relief,  including
monetary damages. The Company believes the action is without merit.

ITEM 1A.   RISK FACTORS

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

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

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

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

         The fiber optic  communication  industry  continues to face challenging
market   conditions.   Capital   spending  by  service   providers   on  network
infrastructure  has remained  substantially  below pre-2001 levels. As a result,
equipment manufacturers have also dramatically reduced their quarterly purchases
of components  and modules from our  competition  and us. While several  service
providers,  including  AT&T and  Verizon,  have  announced  current  and planned
investment in FTTH applications,  which we believe could increase traffic demand
on the MANs into which such FTTH  infrastructure  would feed, it is too early to
predict the outcome of these potential FTTH roll-outs. Because visibility in the
industry  remains  limited,  we cannot provide any assurance as to the timing or
extent of any  increased  business  that we may  receive as a result of these or
other industry developments.

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<PAGE>


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

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

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

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

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

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

         The market for fiber optic modules is highly  competitive and we expect
competition to intensify in the future.  Our primary  competitors  include Avago
Technologies,  ExceLight  Communications  and its parent  corporation,  Sumitomo
Electric, Finisar, JDSU, MRV Communications,  OpNext, and Fiberxon. We also face
indirect competition from public and private companies providing non-fiber optic

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<PAGE>


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

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

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

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

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

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

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

         The market for our  products is  characterized  by rapid  technological
change, new and improved product introductions, changes in customer requirements
and evolving industry standards. Our future success will depend to a substantial
extent on our  ability to develop,  introduce  and  support  cost-effective  new
products  and   technology  on  a  timely  basis.   The   development   of  new,
technologically  advanced  products is a complex and uncertain process requiring
high  levels of  innovation  and  highly  skilled  engineering  and  development
personnel,  as well as the accurate  anticipation  of  technological  and market
trends.  Because the costs for  research  and  development  of new  products and
technology are expensed as incurred,  such costs will have a negative  impact on
our reported net operating  results  until such time, if ever,  that we generate
revenue  from   products  or  technology   resulting   from  such  research  and
development.  If we fail to develop and deploy new  cost-effective  products and
technologies or

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<PAGE>


enhancements of existing  products on a timely basis, or if we experience delays
in  the   development,   introduction   or   enhancement  of  our  products  and
technologies,  our  products may no longer be  competitive  and our revenue will
decline.

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

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

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

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

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. In
addition,  under  applicable  EU  regulations,  we along with  other  electronic
component  manufacturers  are  prohibited  from  using  lead and  certain  other
hazardous  materials in our  products.  Our  inability,  or the inability of our
customers,  to  comply  with  existing  or  evolving  standards  established  by
regulatory  authorities,  or to obtain  timely  domestic  or foreign  regulatory
approvals or certificates will restrict our ability to sell our products.

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

         Historically, we have relied primarily on a limited direct sales force,
supported by third party  manufacturers'  representatives  and distributors,  to
sell our  products.  Our sales  strategy  focuses  primarily on  developing  and
expanding   our  direct  sales   force,   manufacturers'   representatives   and
distributors.  We have  incurred  and may  continue to incur  significant  costs
related to the expansion of our sales operations.  If the expansion of our sales
operations does not generate adequate additional revenue,  our operating margins
may decline.  To the extent we are  unsuccessful  in developing our direct sales
force,   we  will

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<PAGE>


likely be unable to compete  successfully  against the significantly  larger and
well-funded  sales and marketing  operations of many of our current or potential
competitors.  In addition,  if we fail to develop relationships with significant
manufacturers'  representatives or distributors,  or if these representatives or
distributors  are not successful in their sales or marketing  efforts,  sales of
our  products may decrease and our  competitive  position  would be harmed.  Our
representatives  or distributors may not market our products  effectively or may
not  continue to devote the  resources  necessary  to provide us with  effective
sales,  marketing and technical support. Our inability to effectively manage our
domestic and foreign sales and support  staff or maintain  existing or establish
new relationships with manufacturer  representatives and distributors would harm
our revenue and result in declining margins.

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

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

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

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

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

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

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

         We  purchase  several  key  components  that we  incorporate  into  our
products from a limited  number of  suppliers.  We also purchase the majority of
our lasers  from  Furukawa  under a Master  Purchase  Agreement.  We do not have
long-term supply contracts with any of our other key suppliers and our agreement
with  Furukawa  is only  for one  year.  Our  dependence  on a small  number  of
suppliers  and

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<PAGE>


our lack of longer term supply contracts exposes us to several risks,  including
our potential inability to obtain an adequate supply of quality components,  the
discontinuance  of key components  from our suppliers,  price increases and late
deliveries.  For example, we face the risk that price increases imposed on us by
our  suppliers  will be higher  than the  price  increases  (or cost  increases)
imposed  on  our  competitors  when  they  purchase  (or  manufacture)   similar
components;  and we face a  corresponding  risk that any price decreases that we
are able to obtain from our suppliers will be less than the price  decreases (or
cost  reductions)   that  our   competitor's   obtain  when  they  purchase  (or
manufacture)  similar  components.  We have experienced  shortages and delays in
obtaining,  and the  discontinuation of key components in the past and expect to
experience  shortages,  delays, and the discontinuation of key components in the
future.

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

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

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

         On April 23, 2007 our board of directors  received a letter from Oplink
indicating that Oplink has entered into a stock purchase agreement with Furukawa
to purchase  Furukawa's  majority interest in the Company's  outstanding capital
stock.  We are unable to  predict  the impact of the  consummation  of  Oplink's
purchase of Furukawa's  interest in the Company on our supply  relationship with
Furukawa.  Whether or not Oplink completes the purchase of Furukawa's shares, we
cannot assure you that Furukawa will renew the Master  Purchase  Agreement  upon
its expiration on September 30, 2007 or it will continue to provide services and
components  to us, and if not,  whether or on what terms we could find  adequate
alternative sources for these services and components.

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

         We have  entered  into an  agreement  with SAE to  manufacture  certain
product lines in China  commencing in the summer of 2007.  This  agreement  will
allow the Company to move into  high-volume  production  in China to augment our
capabilities  in short-run,  specialized  applications.  If our customers

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do not  qualify  the  manufacturing  lines  of SAE  for  volume  shipments,  our
operating results and customer relationships may suffer.

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

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

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

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

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

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

         There has been  significant  litigation in the United States  involving
patents and other  intellectual  property rights in the networking  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:

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<PAGE>


     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,   others  could
misappropriate this technology,  which would make it difficult for us to compete
in our industry.

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

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

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

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

         Although a significant  portion of our sales has  historically  been in
North  America,  a growing  percentage  of our revenue is  generated  from sales
outside North America. Sales of our products outside North America accounted for
approximately  63.5% and 50.5% of our revenue for the six months ended March 31,
2007 and 2006,  respectively.  We expect that our sales outside of North America
will continue to contribute materially to our revenue.  Prior to the acquisition
of OCP Asia, the Company had no foreign  denominated sales.  Fluctuations in the
exchange rate between the New Taiwan  dollars and the

                                       47


<PAGE>


United States  dollars may  significantly  impact the  financial  results of the
Company.  We have limited  experience in marketing and distributing our products
internationally. One of our objectives is to expand our international operations
in the future.  Significant  management  attention and  financial  resources are
needed to develop our international sales, support and distribution channels and
manufacturing.  We may not be able to establish or maintain international market
demand for our products.

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

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

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

         As a  result  of the OCP Asia  acquisition  and our  intention  to move
certain production to a contract  manufacturer in China, a larger portion of our
revenue and expenses are likely to be denominated  in foreign  currencies in the
future.  The impact in the current period was not significant.  Accordingly,  we
may be subject to the risks of fluctuating  currencies  between the U.S. dollar,
New Taiwan  dollar and Chinese Yuan varying  more  significantly  than it has to
date.  The  Company may engage in currency  hedging  activities  in an effort to
cover  any  exposure  to such  fluctuations.  These  factors  could  impact  our
international sales or increase our costs of doing business abroad or impair our
ability to expand into international  markets,  and therefore harm our business.
Under certain  circumstances,  these  transactions can have an adverse effect on
our operating results.

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

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

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

         On August  24,  2006,  we  purchased  96.88%  of the stock of  GigaComm
Corporation,  now known as OCP Asia., a Taiwan-based supplier of passive optical
network (PON) and fiber-to-the-home (FTTH) components. Prior to the acquisition,
OCP Asia suffered recurring losses from operations that raised

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<PAGE>


substantial  doubt as to its ability to continue as a going  concern.  If we are
unable to successfully  integrate and manage our larger and geographically  more
diverse  organization,  reverse the recurring losses incurred by OCP Asia, or if
we encounter significant delay in achieving successful  integration,  the impact
could have a material adverse effect on us and, as a result, on the market price
of our common stock.

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<PAGE>


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

         We accounted for our  acquisition of OCP Asia using the purchase method
of  accounting.  In  accordance  with GAAP,  we  allocated  the total  estimated
purchase  price to the acquired  company's  net tangible  assets and  intangible
assets based upon  preliminary  estimates of their fair values as of the date of
completion of the  transaction  (August 24, 2006) and recorded the excess of the
purchase  price over the fair values as goodwill.  The  goodwill  was  allocated
solely to OCP Woodland Hills due to expected synergies  associated with OCP Asia
manufacturing  lasers that were  previously  only available  from Furukawa.  The
Company recorded a goodwill impairment charge,  associated with its OCP Woodland
Hills  segment of  $8,486,000,  as a non-cash  charge to  continuing  operations
during the three months  ended March 31, 2007.  We will incur an increase in the
amount of amortization expense over the estimated useful lives of certain of the
intangibles  assets  acquired in connection  with the  acquisition  on an annual
basis.  We cannot  assure you that we will not incur  charges in the future as a
result of any impairment of intangible assets, which charges may have an adverse
effect on our earnings.

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

         In  connection  with the  transition  of certain  manufacturing  to SAE
during fiscal 2007,  we announced a proposed  reduction in workforce in both the
U.S.  and Taiwan with  anticipated  charges to the  statement of  operations  of
approximately  $3.2 million  during fiscal 2007.  These  transition  charges are
primarily estimated severance and retention payments. These workforce reductions
are not  expected  to take place  before  the  summer of 2007.  Should we lose a
significant  portion  of the  workforce  to  attrition  prior to the  move,  our
operations  may be  significantly  impacted  beyond the  anticipated  transition
charges  estimated.  There is a risk that,  during this period of  manufacturing
transition,  management  will  not  sufficiently  coordinate  the  role  of  its
workforce  to  ensure  that all  areas  of our  operations  receive  appropriate
attention. If we are unable to manage our workforce,  manufacturing capacity and
scope of  operations  effectively,  the cost and  quality  of our  products  may
suffer.

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

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

     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 largest
          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 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
introduction will generate  sufficient revenue in subsequent quarters to recover
our research  and  development  expenditures. If

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<PAGE>


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
were below the  expectations  of public  market  analysts or investors in future
quarters,  the  trading  price of our  Class A common  stock  would be likely to
decrease significantly.

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

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

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

         Our three founders  recently left employment  with the Company.  In the
aggregate,  they  beneficially own  approximately  22.9 million shares of common
stock,  including stock options for  approximately  1.9 million  shares.  During
fiscal 2006 and the first quarter of fiscal 2007, the three  co-founders sold an
aggregate of approximately  6.5 million shares of our common stock. One founder,
Muoi Van Tran, remains a director and Chairman of the Board of the Company.  Dr.
Tran  beneficially  owns  approximately  13.3  million  shares of common  stock,
including stock options for  approximately 1.9 million shares. It is likely that
the other two founders, who beneficially own approximately 9.6 million shares of
common  stock,  will be free to sell  additional  shares of their  common  stock
without being subject to volume  limitation rules imposed by federal  securities
laws.  The average daily  trading  volume of our common stock during fiscal 2006
was slightly over 200,000 shares. Sales by our founders in the public or private
market could adversely affect the market price of our common stock by increasing
the supply of shares available for sale compared to the demand in the public and
private markets.

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

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

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<PAGE>


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

         Our  success  depends  on the  continued  contributions  of our  senior
management  and other key  research and  development,  sales and  marketing  and
operations  personnel,  including  Philip  F.  Otto,  our  President  and  Chief
Executive  Officer,  Frederic T.  Boyer,  our Senior  Vice  President  and Chief
Financial  Officer,  Dr.  Liew-Chuang Chiu, our Vice President of Operations and
Jacob  Tarn,  General  Manager of OCP Asia.  Competition  for  employees  in our
industry is intense.  We do not have life insurance policies covering any of our
executives.  There can be no assurance  that we will be  successful in retaining
such key  personnel,  or that we will be  successful in hiring  replacements  or
additional key personnel.  Our loss of any key employee,  the failure of any key
employee  to perform in his or her current  position,  or the  inability  of our
officers  and key  employees to expand,  train and manage our employee  base may
prevent us from executing our growth strategy.

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

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

         If Oplink completes its  recently-announced  agreement with Furukawa to
purchase  Furukawa's  majority  interest in the  Company's  outstanding  capital
stock,  we may lose key personnel  who may  experience  uncertainty  about their
future role with the Company and we may have difficulty attracting and retaining
key management,  sales,  marketing and technical support personnel,  which could
further affect our operating results.

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

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

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

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<PAGE>


may  provide  us with a second  source  for lasers  used  within  certain of our
products,  potentially  reducing our  dependence on Furukawa and improving  lead
times and current cost  structures,  there can be no  assurance  that we will be
able to achieve these benefits in the near future or at all.

         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.

         If Oplink  completes  its  recently  announced  agreement  to  purchase
Furukawa's  majority  interest in the Company's  outstanding  capital stock,  we
cannot  predict how the sale of  Furukawa's  interest in the Company will impact
these  conflicts,  or whether  comparable  conflicts  will exist  between us and
Oplink.

Furukawa  will  control  the outcome of  stockholder  voting and there may be an
adverse  affect on the price of our  Class A common  stock due to the  amount of
shares it holds and the 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 March 31, 2007 represented  93.3% voting control over
all  stockholder  issues.  The  holders of our Class A common  stock and Class B
common  stock have  identical  rights  except that holders of our Class A common
stock are  entitled  to one vote per share  while  holders of our Class B common
stock  are  entitled  to ten  votes  per  share  on  matters  to be  voted on by
stockholders.  The differential in the voting rights of our Class A common stock
and Class B common stock could adversely  affect the price of our Class A common
stock to the extent that  investors  or any  potential  future  purchaser of our
shares of Class A common stock give greater value to the superior  voting rights
of our  Class B common  stock.  Each  share of our  Class B  common  stock  will
automatically  convert  into  one  share  of  Class  A  common  stock  if  it is
transferred to any entity,  other than an entity  controlling,  controlled by or
under common control with Furukawa.  In addition,  our Class B common stock will
automatically  convert  into  shares  of our  Class A common  stock if the total
number of  outstanding  shares of Class B common  stock falls below 20% of total
number of  outstanding  shares of our common  stock.  As long as Furukawa  has a
controlling  interest,  it will continue to be able to elect our entire board of
directors  and  generally  be able to  determine  the  outcome of all  corporate
actions  requiring  stockholder  approval.  As a result,  Furukawa  will be in a
position to continue to control all matters affecting us, including:

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

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

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<PAGE>


         If Oplink  completes  its  recently  announced  agreement  to  purchase
Furukawa's interest in the Company's  outstanding capital stock, Oplink will own
approximately 58.1% of our outstanding Class A common stock, and will be able to
elect our entire board of  directors  and  generally  be able to  determine  the
outcome of all  corporate  actions  requiring  stockholder  approval.  We cannot
predict whether,  and if so, how Oplink will choose to exercise such control, or
how such exercise will impact our business and financial results.

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,  engaged  Bear,  Stearns  & Co.  Inc.  to  advise  it in
evaluating  strategic   alternatives,   including  a  special  dividend,   share
repurchase,  strategic merger or sale of the Company.  The Special  Committee is
currently  evaluating  Oplink's  proposal to purchase  the  Company's  remaining
capital stock not owned by Furukawa.

         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.

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, 2008.  We are  currently  performing
the system and  process  evaluation  and  testing  required  (and any  necessary
remediation)  in an effort to comply with management  certification  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 consolidated  financial  statements.  In addition,  we may be
required to incur costs in improving our internal  control system and the hiring
of  additional

                                       54


<PAGE>


personnel. Any such action could have a material effect on our business, results
of operations and financial condition.

We expect to incur  significant  costs  associated  with the Oplink proposal and
litigation,  which could have a material impact on our results of operations and
financial condition.

         On April 23, 2007 our board of directors  received a letter from Oplink
indicating that Oplink has entered into a stock purchase agreement with Furukawa
to purchase  Furukawa's  shares of the Company's  outstanding  capital stock for
$1.50 per  share  payable  in cash and stock of  Oplink.  Oplink's  letter  also
proposed to purchase the Company's remaining outstanding capital stock not owned
by Furukawa by means of a merger of the Company with a subsidiary of Oplink at a
cash purchase  price of $1.50 per share of the  Company's  Class A common stock,
subject to Oplink's due diligence  investigation and negotiation and approval of
a definitive acquisition agreement. The Special Committee is evaluating Oplink's
proposal.

         On May 4, 2007,  our  Special  Committee  adopted a 30-day  shareholder
rights plan to protect the interests of the Company's minority shareholders.  On
May 7, 2007, Oplink filed an action in the Delaware Court of Chancery seeking to
invalidate the shareholder rights plan adopted by the Special Committee.

         Oplink's  proposal and  consequent  lawsuit could result in substantial
costs to the Company and a diversion of  management's  attention and  resources.
Associated costs with Oplink's  proposal and lawsuit could include,  among other
things,  legal expenses of the Company and our Special Committee and fees of our
Special  Committee's  investment banker and other  professional  advisors.  Such
costs and  distractions  could have a material  adverse  effect on our business,
financial condition and results of operations.

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.

                                       55


<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.

<TABLE>

                                            OPTICAL COMMUNICATION PRODUCTS, INC.,
                                            a Delaware corporation

<S>       <C>                                             <C>
Date:     May 15, 2007                                    By:       /s/ Philip F. Otto
          -----------------------                                   -------------------------------------------------
                                                          Name:     Philip F. Otto
                                                          Title:    Chief Executive Officer and President
                                                                    (principal executive officer)

Date:     May 15, 2007                                    By:       /s/ Frederic T. Boyer
          -----------------------                                   -------------------------------------------------
                                                          Name:     Frederic T. Boyer
                                                          Title:    Chief Financial Officer (principal
                                                                    financial and accounting officer)
</TABLE>


                                       56


<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.