<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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 April 2, 1999


                                       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 000-25103

                              E-TEK Dynamics, Inc.
             (Exact name of registrant as specified in its charter)

                   Delaware                           59-2337308
        (State or other jurisdiction of            (I.R.S. Employer
        Incorporation or organization)          Identification Number)


                                1865 Lundy Avenue
                           San Jose, California 95131
              (Address of principal executive office and zip code)

                                 (408) 546-5000
              (Registrant's telephone number, including area code)

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 filing requirements
for the past 90 days.

                       YES    X           NO
                           ------             ------

As of April 2, 1999,  61,424,128  shares of the  Registrant's  common stock were
outstanding.


<PAGE>



                              E-TEK Dynamics, Inc.

                                    FORM 10-Q
                                  April 2, 1999


                                      INDEX
<TABLE>
<CAPTION>

                                                                            Page

<S>        <C>                                                             <C>   

Part I.     Financial Information

Item 1.     Financial Statements

            Consolidated Statements of Operations for the Quarter and
            Nine Months Ended April 2, 1999 and March 31, 1998             3

            Consolidated Balance Sheets as of April 2, 1999 and June
            30, 1998                                                       4

            Consolidated Statements of Cash Flows for the Nine Months
            Ended April 2, 1999 and March 31, 1998                         5

            Notes to Consolidated Financial Statements                     6

Item 2.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                      8

Part II.    Other Information

Item 1.     Legal Proceedings                                              18

Item 6.     Exhibits and Reports on Form 8-K                               18

Signatures                                                                 19
</TABLE>


                                       2






<PAGE>



PART I Financial Information

Item 1.  Financial Statements

                              E-TEK Dynamics, Inc.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per-share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                 Quarter Ended       Nine Months Ended
                                               -------------------  ---------------------
                                               Apr. 2,   Mar. 31,   Apr. 2,    Mar. 31,
                                                 1999      1998       1999       1998
<S>                                          <C>        <C>        <C>        <C>    
Net revenues                                 $  49,472  $ 23,729   $121,122    $ 76,349                                          
Cost of goods sold                              24,495    11,182     59,338      34,230
                                               --------- ---------  ---------  ----------
  Gross profit                                  24,977    12,547     61,784      42,119
                                               --------- ---------  ---------  ----------

Operating expenses:
  Research and development                       4,233     1,921     10,564       5,322
  Selling, general and administrative            7,065     5,168     18,208      15,478
                                               --------- ---------  ---------  ----------
      Total operating expenses                  11,298     7,089     28,772      20,800
                                               --------- ---------  ---------  ----------

Operating income                                13,679     5,458     33,012      21,319
Interest income                                  1,185       514      2,595       1,295
Interest expense                                  (417)     (112)    (1,042)       (471)
                                               --------- ---------  ---------  ----------

Income before income taxes                      14,447     5,860     34,565      22,143
Provision for income taxes                       5,779     2,439     13,826       8,952
                                               --------- ---------  ---------  ----------

Net income                                       8,668     3,421     20,739      13,191
Convertible Preferred Stock accretion              -       2,393      3,882       6,628
                                               --------- ---------  ---------  ----------

Net income available to Common
  Stockholders                               $   8,668   $ 1,028   $ 16,857    $  6,563  
                                               ========= ========= =========   ==========

Net Income per share:
  Basic                                      $    0.15    $ 0.05   $   0.44    $   0.28                                           
  Diluted                                    $    0.14    $ 0.06   $   0.34    $   0.24                                           
Shares used in net income per share Calculations:
  Basic                                         57,720    21,258     38,244      23,512
  Diluted                                       63,719    57,222     60,910      54,717
</TABLE>


                      See Notes to Consolidated Financial Statements.

                                       3


<PAGE>


                              E-TEK Dynamics, Inc.
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands) 
<TABLE>
<CAPTION>

                                                           April 2,       June 30,
                                                             1999           1998
                                                          ------------  -------------
                         ASSETS                           (Unaudited)    (Audited)
<S>                                                    <C>             <C>   
Current assets:
   Cash and cash equivalents                             $    83,743   $     21,918
   Accounts receivable                                        26,102         15,463
   Advance to joint venture                                     -             7,000
   Inventories                                                17,508          6,909
   Deferred tax assets                                         7,873          7,873
   Other current assets                                        1,656            343
                                                          ------------  -------------
       Total current assets                                  136,882         59,506

 Property and equipment, net                                  52,863         30,872
 Long-term investments                                        10,665            -
                                                          ------------  -------------
       Total assets                                      $   200,410   $     90,378
                                                          ============  =============

          LIABILITIES AND STOCKHOLDERS' EQUITY

 Current liabilities:
   Accounts payable                                      $    15,043   $      8,281
   Accrued liabilities                                        26,447         16,187
   Income taxes payable                                        2,748          -
   Current portion of capital lease obligations                1,234          1,240
   Current portion of long-term debt                           5,830            216
                                                          ------------  -------------
       Total current liabilities                              51,302         25,924
 Capital lease obligations, net of current portion             2,609          3,557
 Long-term debt, net of current portion                       20,796         10,251
 Deferred Income Taxes                                         3,481
                                                          ------------  -------------
       Total liabilities                                      78,188         39,732
                                                          ------------  -------------

 Commitments and contingencies:
 Mandatorily Redeemable Convertible Preferred Stock,
   none authorized,  issued or outstanding; no par 
   value, 30,000 shares authorized,
   issued and outstanding                                       -           125,144
                                                          ------------  -------------

 Stockholders' equity:
   Preferred stock, $0.01 par value, 25,000 shares
     authorized, none issued and outstanding; none
     authorized, issued or outstanding                          -             -
   Common stock, $0.001 par value, 300,000 shares                        
     authorized, 61,424 shares issued and outstanding;
     no par value, 65,000 shares authorized, 27,299
     shares issued and outstanding                                61         19,468
   Additional paid-in capital                                199,693          -
   Notes receivable from stockholders                        (14,377)       (14,215)
   Deferred compensation                                      (5,014)        (4,753)
   Distribution in excess of net book value                  (83,901)       (83,901)
   Retained earnings                                          25,760          8,903
                                                          ------------  -------------
       Total stockholders' equity                            122,222        (74,498)
                                                          ------------  -------------
       Total liabilities and stockholders' equity        $   200,410   $     90,378
                                                          ============  =============
</TABLE>

                     See Notes to Consolidated Financial Statements.




                                        4
<PAGE>


                              E-TEK Dynamics, Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands, unaudited)
<TABLE>
<CAPTION>

                                                                  Nine Months Ended
                                                               Apr. 2,         Mar. 31,
                                                                 1999            1998
                                                             -----------------------------
  <S>                                                     <C>            <C>    

  Cash flows from operating activities:
  Net income                                                $    20,739     $   13,191
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization                                 8,382          4,777
    Stock compensation expense                                    1,126            637
    Imputed interest income                                        (721)          (400)
    Changes in assets and liabilities:
       Accounts receivable                                      (10,639)         3,731
       Inventories                                              (10,599)          (836)
       Deferred income taxes                                        -           (3,066)
       Other current assets                                      (1,313)          (175)
       Accounts payable                                           6,762           (429)
       Accrued liabilities                                       10,260          5,123
       Income taxes payable                                       2,748           (506)
                                                             -------------   -------------
         Net cash provided by operating activities               26,745         22,047
                                                             -------------   -------------

  Cash flows from investing activities:
    Additions to property and equipment                         (30,373)       (10,891)
    Payment from joint venture                                    7,000            -
    Long-term investments                                        (1,964)           -
    Maturities and sale of short-term investments                   -           10,143
    Purchase of short-term investments                              -           (4,143)
                                                             -------------   -------------
         Net cash used in investing activities                  (25,337)        (4,891)
                                                             -------------   -------------

  Cash flows from financing activities:
    Repurchase of Common Stock                                      -         (120,000)
    Proceeds from issuance of Mandatorily Redeemable                          
     Convertible Preferred Stock, net                               -          116,123
    Proceeds from issuance of Common Stock, net                  43,518            107
    Principal payments on capital lease obligations                (953)          (524)
    Principal repayments on notes receivable from                             
    stockholders                                                  1,694            -                    
    Borrowings on long-term debt                                 20,175          3,000
    Payments on long-term debt                                   (4,017)          (129)
                                                             -------------   -------------
         Net cash provided by(used in) financing activities      60,417         (1,423)
                                                             -------------   -------------

  Net increase in cash and cash equivalents                      61,825         15,733
  Cash and cash equivalents at beginning of period               21,918          8,259
                                                             -------------   -------------
  Cash and cash equivalents at end of period                $    83,743      $  23,992
                                                             =============   =============

  Supplemental disclosure of cash flow information:
  Interest paid                                             $     1,020      $     784
  Income taxes paid                                         $    11,078      $  12,470
</TABLE>

                      See Notes to Consolidated Financial Statements.



                                        5
<PAGE>

                              E-TEK Dynamics, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1. Basis of Presentation

The  accompanying  unaudited  financial  data as of April 2,  1999 and March 31,
1998,  and for the quarter and nine month  periods ended April 2, 1999 and March
31, 1998,  have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial  statements prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the financial  statements and the notes thereto included in our
Registration Statement on Form S-1 declared effective on December 1, 1998.

In the  opinion of  management,  all  adjustments  (which  include  only  normal
recurring  adjustments)  necessary  to present  fairly the  financial  position,
results of  operations,  and cash flows as of April 2, 1999 and for the  quarter
and nine months (as  applicable)  ended April 2, 1999 and March 31,  1998,  have
been made.  The results of operations for the period ended April 2, 1999 are not
necessarily indicative of the operating results for the full year.

2. Inventories

The components of inventories consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                         April 2,        June 30,
                                                           1999            1998
                                                        ------------   -------------
<S>                                                     <C>            <C>    
      Raw materials.....................................  $ 10,884          $3,473 
      Work in process...................................     5,402           2,216 
      Finished goods....................................     1,222           1,220 
                                                        ------------   -------------
                                                          $ 17,508          $6,909 
                                                        ============   =============
</TABLE>


                                       6


<PAGE>



3.  Earnings per share


The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>

                                             Quarter Ended     Nine Months Ended
                                             -------------    ---------------------

                                            Apr. 2,   Mar. 31,  Apr. 2,  Mar. 31,
                                            -------  --------- --------- ----------
                                              1999       1998     1999      1998
                                              ----       ----     ----      ----
<S>                                        <C>       <C>       <C>       <C>   
Numerator:
  Net income.............................    $ 8,668   $ 3,421  $ 20,739   $13,191
  Convertible Preferred Stock accretion.         -       2,393     3,882     6,628
                                           ---------- -------- --------- ----------
  Net income available to Common
    Stockholders (Basic).................      8,668     1,028    16,857     6,563
  Convertible Preferred Stock accretion.         -       2,393     3,882     6,628
                                           ---------- -------- --------- ----------
  Net income available to Common
    Stockholders and assumed
    Conversions (Diluted)................    $ 8,668   $ 3,421  $ 20,739   $13,191
                                           ========== ======== ========= ==========
Denominator:
  Denominator for basic earnings per
    share-weighted average common shares.     57,720    21,258    38,244    23,512
  Effect of dilutive securities
    Common Stock options.................      2,280       264     1,772       132
  Unvested Common Stock subject
    to repurchase........................      3,719     5,700     4,549     3,482
  Convertible Preferred Stock............        -      30,000    16,345    27,591
                                           ---------- -------- --------- ----------
  Denominator for dilutive earnings per
    share-adjusted weighted average common
    shares and assumed conversions.......     63,719    57,222    60,910    54,717

Basic earnings per share.................      $0.15     $0.05     $0.44     $0.28
                                           ---------- -------- --------- ----------
Diluted earnings per share...............      $0.14     $0.06     $0.34     $0.24
                                           ---------- -------- --------- ----------
</TABLE>

4. Recent Financial Pronouncements

In June 1997, the Financial Accounting Standards Board issued two new Statements
of Financial Accounting Standards ("SFAS").  SFAS 130, "Reporting  Comprehensive
Income," establishes standards for reporting and display of comprehensive income
within a  financial  statement.  SFAS 131,  "Disclosures  about  Segments  of an
Enterprise  and  Related  Information,"   establishes  standards  for  reporting
information about operating segments in annual and interim financial statements.
We have  adopted  SFAS 130  "Reporting  Comprehensive  Income,"  for the interim
period of fiscal 1999.  The adoption of SFAS 130 did not have a material  impact
on our presentation of our consolidated financial statements. We will adopt SFAS
131 for the fiscal year ending June 30, 1999 and we are  currently  studying its
provisions.

In  June  1998,  the  Financial  Accounting  Standards  Board  issued  SFAS  133
"Accounting  for  Derivative  Instruments  and  Hedging  Activities."  SFAS  133
establishes  accounting and reporting  standards for derivative  instruments and
for hedging  activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. We do not expect the adoption of SFAS 133 to have
a material impact on our results of operations.
                                    

                                       7
<PAGE>


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

Certain statements  contained in this Quarterly Report on Form 10-Q,  including,
without limitation,  statements containing the words "believes,"  "anticipates,"
"estimates,"  "expects," and words of similar  import,  may  constitute  forward
looking  statements  within the  meaning of the  Private  Securities  Litigation
Reform Act of 1995.  Readers are  referred to the Risk  Factors  section in this
report and to the risk factors set out in our Registration Statement on Form S-1
which  describes  factors  that could cause  actual  events to differ from those
contained in the forward looking statements.

Overview


We generate revenues  primarily from the sale of passive optical  components and
modules.  Revenue from product  sales is  generally  recognized  at the time the
product is shipped,  with provisions  established for estimated  product returns
and  allowances.  A  relatively  small  number of  telecommunications  equipment
manufacturers  have accounted for a significant  portion of our revenue to date.
This has historically  resulted in uneven orders and fluctuating  demand for our
products.

The fiber  optic  components  industry  is  characterized  by rapidly  declining
average  selling  prices  (ASPs)   resulting  from  such  factors  as  increased
competition and increasing unit volumes as  telecommunication  service providers
continue  to deploy  and expand  fiber  optic  networks.  These  price  declines
affected our margins and operating  performance.  However,  these  declines have
been  accompanied by increased unit demand.  Cost and component size  reductions
driven by advances in component  technology and manufacturing  efficiencies,  as
well as the increasing integration of components, are expected to accelerate the
rate of growth in  existing  optical  components  markets and enable new markets
such as metropolitan area networks.  As a result,  telecommunications  equipment
manufacturers  are increasingly  demanding high volume  manufacture of low cost,
high performance, integrated components and modules.

We are engaged in continuing efforts to expand our manufacturing capabilities to
address  anticipated  unit volume growth.  We have increased the size of our San
Jose facility from  approximately  90,000 square feet to  approximately  160,000
square  feet.  We have also  leased  an  additional  80,000  square  feet,  with
occupancy  scheduled for May 1999. We increased our number of employees from 906
at the end of the second  quarter of fiscal  year 1999 to 1131 at the end of the
third quarter fiscal year 1999. In addition to building  capacity,  we have been
and will continue to invest  considerable effort in improving the performance of
our components and decreasing their costs.


Our fiscal quarter ends on the Friday that is closest to the end of the calendar
quarter (April 2 for the third quarter in fiscal year 1999). Our fiscal year end
is always June 30.



                                       8
<PAGE>



Results of Operations

The following table sets forth,  for the periods  indicated,  the percentages of
net  revenues  represented  by  certain  items  reflected  in  our  Consolidated
Statement of Operations:
<TABLE>
<CAPTION>

                                                Quarter ended       Nine Months ended
                                             Apr. 2,    Mar. 31,    Apr. 2,    Mar. 31,
                                             -------    --------    -------    --------
                                              1999        1998        1999       1998
                                              ----        ----        ----       ----
<S>                                        <C>        <C>         <C>        <C>    

Net revenues..............................    100.0%     100.0%      100.0%      100.0%
Cost of goods sold........................     49.5       47.1        49.0        44.8 
                                           ---------- ---------- ----------- -------------
    Gross profit..........................     50.5       52.9        51.0        55.2 
                                           ---------- ---------- ----------- -------------
Operating expenses:
    Research and development..............      8.6        8.1         8.7         7.0 
    Selling, general and administrative...     14.3       21.8        15.0        20.3 
                                           ---------- ---------- ------------ ------------
       Total operating expenses...........     22.9       29.9        23.7        27.3 
                                           ---------- ---------- ------------ ------------
Operating income..........................     27.6       23.0        27.3        27.9 
Interest income...........................      2.4        2.2         2.1         1.7
Interest expense..........................     (0.8)      (0.5)       (0.9)       (0.6) 
                                           ---------- ---------- ------------ ------------
Income before income taxes................     29.2       24.7        28.5        29.0 
Provision for income taxes................     11.7       10.3        11.4        11.7 
                                           ---------- ---------- ------------ ------------
Net income................................     17.5%      14.4%       17.1%       17.3%
                                           ---------- ---------- ------------ ------------

</TABLE>

Quarters Ended April 2, 1999 and March 31, 1998

Net Revenues


Net revenues  increased  108.5% to $49.5  million in the third quarter of fiscal
1999 from  $23.7  million  in the third  quarter  of fiscal  1998.  The  revenue
increase was primarily  due to increased  shipments of our  Wavelength  Division
Multiplexer   components  and  modules  ("WDMs"),   Couplers,   Isolators,   and
Micro-Optic  Integrated Components ("MOICs").  Isolator revenues are expected to
decline in the future due to lower  purchases  by a major  customer as well as a
product shift to integrated components that incorporate Isolator  functionality.
A relatively small number of customers have accounted for a significant  portion
of our total  revenue to date,  and we expect that this trend will  continue for
the foreseeable future.


Gross Profit

Gross profit  increased  99.1% to $25.0  million for the third quarter of fiscal
1999 from $12.6 million in the third quarter of fiscal 1998.  Cost of goods sold
consists of raw material costs,  direct labor costs,  warranty costs,  royalties
and overhead  related to our  manufacturing  operations.  Gross  profit  margins
declined from 52.9% to 50.5%  between  these periods  primarily due to declining
ASPs and increased  costs  associated  with the  expansion of our  manufacturing
capacity to address unit volume growth.  Our gross margins in the future will be
affected by a number of factors, including market pricing, fixed costs of adding
manufacturing   capacity,   manufacturing  volumes,   efficiencies  and  yields,
fluctuations  in the  availability  and price of raw materials,  product mix and
labor costs. As a result,  these factors may cause our gross margins to increase
or decrease in future periods.

     
                                       9
<PAGE>

Research and Development Expenses

Research and development  expenses consist of compensation  costs for personnel,
depreciation  of equipment,  and prototype  materials.  Research and development
expenses  were $4.2  million for the third  quarter of fiscal 1999  representing
8.6% of net revenues.  This  represents a 120.4% increase over the third quarter
of fiscal 1998  research  and  development  expenses of $1.9  million or 8.1% of
revenues.  The  increase  was  primarily  due to the  increase in  research  and
development  personnel  and  related  expenses.  We  expect  that  research  and
development  expenses will continue to increase for the remainder of fiscal 1999
in absolute dollars.

Selling, General and Administrative Expenses

Selling,  general and administrative  expenses consist of compensation costs for
personnel, sales commissions,  travel expenses, marketing programs, professional
services,  accounting,  human  resources,  executive  management and consulting.
Selling,  general and  administrative  expenses  were $7.1 million for the third
quarter of fiscal 1999,  representing  14.3% of net revenues.  This represents a
36.7% increase over selling,  general and administrative  expenses for the third
quarter of fiscal 1998 of $5.2 million or 21.8% of net revenues. The increase in
absolute  dollars  of  expenditures  over this  period  reflected  the hiring of
additional  selling,   marketing  and  administrative  personnel  and  increased
commissions paid on higher revenues. We anticipate that our selling, general and
administrative  expenses will increase in absolute  dollars for the remainder of
fiscal 1999.

Interest Income and Interest Expense

Our interest  income was  approximately  $1.2  million for the third  quarter of
fiscal  1999.  We  earned  interest  income  on our  cash  investments  and also
recognized  imputed interest income of $0.2 million relating to notes receivable
from  stockholders.  Interest  expense,  incurred on  borrowings  secured by our
property and equipment,  and on capital  leases,  was $0.4 million for the third
quarter of fiscal 1999.

Provision for Income Taxes

Our  combined  federal  and state  income  tax  provision  was 40% for the third
quarter of fiscal 1999,  consistent  with fiscal 1998 and the first two quarters
of fiscal 1999.

Nine Months Ended April 2, 1999 and March 31, 1998

Net Revenues

Net revenues  increased 58.6% from $76.4 million for the nine months ended March
31, 1998 to $121.1 million for the nine months ended April 2, 1999. The increase
in net revenues reflected higher shipments of our WDMs, Couplers,  Isolators and
MOICs.  Isolator  revenues  are  expected  to decline in the future due to lower
purchases  by a  major  customer  as  well  as a  product  shift  to  integrated
components that incorporate Isolator functionality. A relatively small number of
customers have accounted for a significant portion of our total revenue to date,
and we expect that this trend will continue for the foreseeable future.

                                       10

                                     
<PAGE>

Gross Profit

Gross profit increased 46.7% to $61.8 million for the nine months ended April 2,
1999 from $42.1  million for the nine months ended March 31, 1998.  Gross profit
margins  declined  from 55.2% to 51.0% during these  periods,  primarily  due to
declining  ASPs  and  increased  costs  associated  with  the  expansion  of our
manufacturing capacity.

Research and Development Expenses

Research and development expenses increased 98.5% from $5.3 million for the nine
months  ended March 31,  1998,  which  represented  7.0% of  revenues,  to $10.6
million  for the nine  months  ended April 2, 1999,  which  represented  8.7% of
revenues.  The increase was primarily due to the hiring of additional  personnel
and the purchase of prototype materials and depreciation on equipment.

Selling, General and Administrative Expenses

Selling,  general and administrative expenses increased 17.6% from $15.5 million
for the nine months ended March 31, 1998 which  represented 20.3% of revenues to
$18.2 million for the nine months ended April 2, 1999, which  represented  15.0%
of revenue.  The increase was primarily due to the hiring of additional selling,
general and administrative  personnel to support our growth and due to increases
in other expenses.

Interest Income and Interest Expense

Interest  income  increased from $1.3 million in the nine months ended March 31,
1998 to $2.6  million in the nine months ended April 2, 1999,  primarily  due to
higher cash balances as a result of our initial  public  offering on December 1,
1998.  Interest  expense  increased  from $0.5  million in the nine months ended
March  31,  1998 to $1.0  million  in the  nine  months  ended  April  2,  1999,
reflecting a higher level of borrowings.

Liquidity and Capital Resources

Since  inception,  we have financed  operations and met our capital  expenditure
requirements  primarily  through cash flows from operations and borrowings.  Our
operating  activities  provided  cash of $26.8 million for the nine months ended
April 2, 1999 as compared to $22.1  million for the nine months  ended March 31,
1998.  Cash  provided by operating  activities  is  primarily  the result of net
income,  depreciation  and  amortization  expenses,  and  increases  in  accrued
liabilities  and  accounts  payable,  offset in part by  increases  in  accounts
receivable and inventory.  At April 2, 1999 we had cash and cash  equivalents of
$83.7 million and working capital of $85.6 million.

Net cash used in  investing  activities  was $25.3  million  for the nine months
ended April 2, 1999 as compared to $4.9  million for the nine months ended March
31, 1998, and consisted primarily of capital expenditures.

We  have an  equity  basis  investment  in a  German  company,  ADVA AG  Optical
Networking ("ADVA"). On March 30, ADVA completed its initial public offering and
began trading on the Neuer Markt, of the Frankfurt  Stock Exchange,  and we have
increased the carrying value of our investment to reflect the increase in ADVA's
net  book  value.  We  recorded  such  increase  as an  addition  to  additional
paid-in-capital, net of the deferred tax liability.

Net cash provided by financing  activities was $60.4 million for the nine months
ended April 2, 1999 as compared to $1.4 million used in financing activities for

                                       11
<PAGE>

the nine months ended March 31, 1998. Net cash provided by financing  activities
resulted  primarily  from net proceeds of  approximately  $43.5 million from our
initial public offering in the nine months ended April 2, 1999. In addition,  we
borrowed $20.2 million during this period.

Our $15 million  revolving  credit  agreement  expired on March 31, 1999. We are
currently evaluating our revolving credit alternatives.

Qualitative and Quantitative Disclosure about Market Risk

The  following  discusses  our  exposure  to market  risk  related to changes in
interest rates and foreign  currency  exchange rates.  This discussion  contains
forward-looking  statements that are subject to risks and  uncertainties set out
below and in the section of this report entitled "Risk Factors."

Interest Rate Sensitivity

Cash and Cash-Equivalents. As of April 2, 1999, we had cash and cash equivalents
of $83.7  million  invested in liquid money market funds or bank  accounts  with
average  maturities  of less  than 90 days.  The cash and cash  equivalents  are
subject to interest rate risk and we may receive higher or lower interest income
if market  interest  rates  increase or  decrease.  A  hypothetical  increase or
decrease  in market  interest  rates by 10 percent  from levels at April 2, 1999
would not have a material impact on our cash or cash equivalents.

Outstanding  Debt and  Capital  Lease  Obligations.  As of April 2,  1999 we had
outstanding  long-term debt and capital lease obligations of approximately $30.5
million at fixed interest rates ranging from 6.4% to 8.6%.  Because the interest
rates on these instruments are fixed, a hypothetical decrease in market interest
rates of 10  percent  from  levels  at April 2, 1999  would not have a  material
impact on our outstanding debt and capital lease obligations.

Foreign Currency Exchange Rate Risk

Currently, all of our international sales are U.S. dollar denominated. We have
not entered into any currency hedging activities.

Year 2000 Compliance

We rely on our  systems,  applications  and  control  devices in  operating  and
monitoring  all major  aspects of our  business.  We  installed  new  Enterprise
Resource  Planning  software during fiscal 1998 at a cost of approximately  $1.0
million  which we  believe  is Year  2000  compliant.  With  respect  to our own
systems,  we rely on the  representations  of our primary  software vendors that
their products are Year 2000 compliant.  Based in part on these representations,
we believe our other systems, software and devices are also Year 2000 compliant.
We have reviewed the effect of Year 2000 issues on our other systems,  including
both our information technology and non-information technology systems, software
and  devices,  and  believe  that they are year  2000  compliant.  However,  the
noncompliance  of our systems,  software and devices could severely  disrupt our
operations  and  have a  material  adverse  affect  on our  business,  financial
condition and results of operations.

We also rely,  directly and  indirectly,  on external  systems of our customers,
suppliers,   creditors,   financial   organizations,   utilities  providers  and
governmental  entities,  both domestic and international.  None of these systems
are  under  the  control  of us.  Consequently,  we  could be  affected  through
disruptions  in the  operations  of the  enterprises  with  which  we  interact.
Furthermore,  the  purchasing  

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<PAGE>


frequency and volume of customers or potential customers may be affected by Year
2000 issues as companies  expend  significant  resources  to make their  current
systems Year 2000  compliant.  Certain of our  customers,  including each of our
three largest  customers,  have  requested  information  from us concerning  our
exposure to Year 2000 problems, the steps we have taken to resolve any Year 2000
problems and what level of  management  attention is being focused on the issue.
Similarly,  we have  sent  inquiries  to  certain  of our  suppliers  requesting
substantially  the same information from them. We have received  representations
from certain of our suppliers,  including each of our sole source suppliers,  as
to the Year 2000 compliance of their systems and products.  We have not assessed
the Year 2000 compliance of our customers.  If our customers encounter Year 2000
problems that prevent their products from functioning properly,  these customers
may be forced to devote  significant  resources to fixing these problems and may
reduce or suspend the  manufacture of new  telecommunications  equipment  during
such time. As a result,  our sales of fiber optic  components to these customers
could be  materially  and adversely  affected.  In addition,  if our  suppliers,
particularly  our  sole-source  suppliers,  are unable to manufacture or deliver
supplies to us as a result of Year 2000 problems, our ability to manufacture and
sell  our  products  would  be  materially  and  adversely  affected.  We do not
currently  have in place any  contingency  plans for our operations if Year 2000
issues are not resolved in time or go  undetected.  The  incomplete  or untimely
resolution  of any of these issues could have a material  adverse  effect on our
business, financial condition and results of operations.

The  foregoing is a Year 2000  Readiness  Disclosure as defined by the Year 2000
Information and Readiness Disclosure Act of 1998.

Risk Factors

This  report  contains  forward-looking  statements  within  the  meaning of the
Private  Securities  Litigation  Reform  Act of  1995  that  involve  risks  and
uncertainties. Our actual results could differ materially from those anticipated
in these  forward-looking  statements as a result of certain factors,  including
those set forth in the following risk factors and elsewhere in this report.

We Depend on a Limited Number of Major Customers

The  telecommunications  equipment  industry is  dominated  by a small number of
large companies and is currently consolidating. Consolidation reduces the number
of potential  customers in the industry.  The loss of one or more of our largest
customers,  any reduction or delay in sales to these customers, our inability to
successfully  develop  relationships with additional  customers,  or any further
price reductions could have a material adverse effect on our business, financial
condition and results of operations.

In addition,  our customers  also compete for  particular  projects in which our
products  will be  deployed.  The failure of our  customer to be selected or the
delay by their  customers'  project  deployment  could have a  material  adverse
effect on our business, financial condition and results of operations.

Our Quarterly and Annual Results May Fluctuate

Our net revenues and operating  results have in the past  fluctuated  and may in
the future fluctuate significantly from quarter to quarter and from year to year
as a result of the size and timing of  customer  orders,  the  ability to obtain
sufficient  supplies of sole or limited source  materials for our products,  the
ability to manufacture  products on a timely basis,  pricing pressure,  customer
product specifications and qualifications, and changes in the product mix, among
other


                                       13
<PAGE>

factors. Our net revenues in any quarter are also dependent on the receipt
of orders to be booked and shipped  within the quarter,  as well as the existing
backlog.  As a  result,  quarter-to-quarter  sequential  revenue  and  operating
results are likely to fluctuate and therefore may not be reliable  indicators of
annual  performance.  Changes in the incoming  customer  order rate,  refusal of
customers to accept shipped  products,  returns of products or  difficulties  in
collecting accounts receivable could result in significant material fluctuations
in net  revenues  and/or  charges  against  income,  which could have a material
adverse effect on our business, financial condition and results of operations.

We Depend on a Limited Number of Product Lines

A small number of products have historically accounted for a majority of our net
revenues.  We may not be successful in developing  any other  products or taking
other  steps to  mitigate  the risks  associated  with  reduced  demand  for our
existing  products.  Isolator revenues are expected to decline in the future due
to lower  purchases by a major customer as well as a product shift to integrated
components  that  incorporate  Isolator  functionality.  Reduced  demand for our
existing  products  could  have a  material  adverse  effect  on  our  business,
financial condition and results of operations.

We Depend on the Success of the Telecommunications Industry

Our  future  success  depends  on  the  continued  growth  and  success  of  the
telecommunications    industry.   This   industry   is   changing   rapidly   as
telecommunication  markets  around  the  world  deregulate  and  open to  global
competition. Globalization, deregulation and other trends causing an increase in
the  need   for   bandwidth   that  are   currently   driving   growth   in  the
telecommunications  industry  may not  continue in a manner that is favorable to
us.

Our Sales Process is Long and Unpredictable

The period of time  between our initial  contact with a customer and the receipt
of an actual  purchase  order may span a year or more.  In  addition,  customers
perform, and require us to perform,  extensive product evaluation and testing of
new  components  before  purchasing  them.  Reduction or termination of customer
purchases,  particularly if  unanticipated  by us, could have a material adverse
effect on our business, financial condition and results of operations.

There has been a Decline in Prices of our Products

The fiber optic component  industry is very  competitive and is characterized by
declining  prices  resulting  from  factors such as  increased  competition  and
greater unit volumes as  telecommunication  service providers continue to deploy
fiber optic networks. If we are unable to continue to develop and introduce on a
timely basis new products that  incorporate  features that can be sold at higher
prices, as well as reduce our manufacturing  costs, there is a risk that our net
revenues and/or gross margins could decline, which could have a material adverse
effect on our business, financial condition and results of operations.

We Face Intense Competition

The market for fiber optic  components  is  intensely  competitive.  Many of our
current and potential  competitors  and  customers  have  significantly  greater
financial,  technical,  marketing,  purchasing and other resources than we have,
and as a  result,  may be  able  to  respond  more  quickly  to new or  emerging
technologies  or standards  and to changes in customer  requirements,  to devote
greater  resources to 

                                       14
<PAGE>

the  development,  promotion  and sale of  products,  or to deliver  competitive
products  at  lower  prices.  In  addition,  consolidation  in the  fiber  optic
component  industry could intensify the  competitive  pressures faced by us. For
example,  two of our  competitors,  JDS Fitel,  Inc.  and Uniphase  Corp.,  have
recently announced their plan to merge. The merged company intends to offer more
integrated  products that could make our products less competitive.  Many of our
competitors manufacture their products in countries offering significantly lower
labor costs than in the United States.  In addition,  some of our customers have
fiber optic component  manufacturing  capabilities,  which may represent further
competition if those customers  choose to manufacture  products  internally that
they formerly  purchased  from us. We also compete in new design  evaluations of
our products and our competitors'  products with new and existing customers.  We
may not be able to compete  successfully  with our existing or new  competitors,
which could have a material adverse effect on our business,  financial condition
and results of operations.

Our  Growth  is  Dependent  on  our  Ability  to  Expand Our Manufacturing and 
Corporate Facilities

We currently  manufacture  the majority of our products at our facilities in San
Jose, California. We are in the process of increasing our manufacturing capacity
at these facilities as well as adding overseas  manufacturing capacity through a
joint venture in Taiwan. The development of overseas manufacturing  capabilities
and the expansion of corporate  facilities involve significant risks,  including
unanticipated  cost  increases,  unavailability  or late  delivery of equipment,
unforeseen environmental or engineering problems,  personnel recruitment delays,
political  instability,  and weather interference.  Any one of these risks could
have a material  adverse effect on the start up or operation of new  facilities.
Our manufacturing and corporate  expansion and related capital  expenditures are
being  made in  anticipation  of a level  of  customer  orders  that  may not be
sustained over multiple  quarters,  if at all. If anticipated levels of customer
orders  are not  received,  we will not be able to reduce our  expenses  quickly
enough to prevent a decline in our gross  margins  and  operating  income.  Such
decline  could  have  a  material  adverse  effect  on our  business,  financial
condition  and  results  of  operations.  Conversely,  in the event our plans to
expand our  manufacturing  capacity are not  implemented  on a timely basis,  we
could face production capacity constraints,  which could have a material adverse
effect on our business, financial condition and results of operations.

We Depend on a Limited Number of Suppliers

We are dependent on a limited  number of suppliers of materials for our products
as well as equipment used to manufacture our products. Some of our suppliers are
sole sources. The reliance on a sole or limited number of suppliers could result
in reduced control over pricing,  quality and or delivery  problems.  Any future
difficulty in obtaining sufficient and timely delivery of materials could result
in delays or reductions in product shipments, cancellation of orders and loss of
future  business,  which could have a material  adverse  affect on our business,
financial condition and results of operations.

We Depend on Sales Representatives, Distributors and Key Employees

We  sell   substantially  all  of  our  products  through  a  network  of  sales
representatives and distributors,  the majority of whom have exclusive rights to
sell  our  products  in  certain  territories.  There is a risk  that our  sales
representatives  and distributors may discontinue sales of our products in order
to  switch  to  representing  one or more of our  competitors.  The loss of,  or
reduction in sales made by, any of our key sales representatives or distributors
could have a 


                                       15
<PAGE>

material  adverse  effect on our  business,  financial  condition  or results of
operations.   Our  success  is  dependent,  in  large  part,  on  the  long-term
effectiveness of our executive officers, other key employees and their continued
service.  Our success will also depend in large part upon our ability to attract
and retain highly-skilled technical,  managerial, sales and marketing personnel,
particularly  those skilled and experienced  with fiber optics.  The loss of the
services  of such key  personnel  could  have a material  adverse  effect on our
business, financial condition and results of operations.

We Face Technological Change and the Uncertainty of Introducing New Products

We expect that new  technologies  will emerge as  competition in the fiber optic
industry  increases  and the need for higher and more cost  efficient  bandwidth
expands. The introduction of new products  incorporating new technologies or the
emergence  of  new  industry   standards   could  make  our  existing   products
noncompetitive,  obsolete or unmarketable.  Products as complex as those offered
by us may contain defects when first  introduced or as new versions are released
and new products often take longer to develop than  originally  anticipated.  We
may not be able to  identify,  develop,  manufacture,  market or support  new or
enhanced  products  successfully or on a timely basis,  our new products may not
gain market acceptance and we may not be able to respond  effectively to product
announcements  by  competitors,   technological  changes  or  emerging  industry
standards, which could have a material adverse effect on our business, financial
condition and results of operations.

We Face Risks from International Operations

We generate a  significant  portion of our net revenues  from sales to companies
located  outside  the  United  States,  principally  in Europe.  As a result,  a
significant  portion of our sales and  operations  may be subject to  government
controls,  export  licensing  requirements and  restrictions,  tariffs and other
trade barriers, slower cash collections, exchange controls and potential adverse
tax  consequences.  Currently,  all of our  international  sales are U.S. dollar
denominated.  As a result,  our customer's orders could fluctuate  significantly
based upon changes in our customer's  currency exchange rates in relation to the
U.S.  dollar,  which  could  have a  material  adverse  effect on our  business,
financial condition and results of operations.

If  We  Cannot  Protect  or  Enforce  Our  Intellectual  Property  Rights, our
Competitive Position may be Impaired

Our success will  depend,  in part,  on our ability to protect our  intellectual
property.  We rely  primarily on patent,  copyright,  trademark and trade secret
laws,  as well as  nondisclosure  agreements  and other  methods to protect  our
proprietary technologies and processes. Such measures may not provide meaningful
protection for our proprietary  technologies and processes.  Despite  reasonable
precautions,  it may be possible for a third party to copy or  otherwise  obtain
and use our  products  or  technology  without  authorization,  develop  similar
technology  independently or design around our patents. The steps taken by us to
prevent misappropriation or infringement of the intellectual property of ours or
of  our  customers  may  not be  successful.  The  telecommunications  equipment
industry is  characterized  by vigorous  protection and pursuit of  intellectual
property  rights,  and  we  have  also  entered  into  certain   indemnification
obligations  in favor of our  customers  and  strategic  partners  that could be
triggered  upon an allegation or finding of our  infringement  of other parties'
proprietary rights. We have in the past received  notifications alleging that we
are infringing the intellectual  property rights of third parties.  Irrespective
of the validity or  successful  assertion of such claims,  we would 

                                       16
<PAGE>

likely incur  significant  costs and diversion of our resources  with respect to
the defense of such claims,  which could also have a material  adverse effect on
our business, financial condition and results of operations.

Our Results May be Affected by Potential Acquisitions and Strategic Investments

We are reviewing  acquisition  and  strategic  investment  prospects  that would
complement our existing product offerings,  augment our market coverage,  secure
supplies of critical materials or enhance our technological capabilities. Future
acquisitions or investments by us, including an increase in ownership  interests
in joint  ventures,  could result in  potentially  dilutive  issuances of equity
securities,  large  one-time  write-offs,  reduced  cash  balances  and  related
interest  income,  the  incurrence  of  debt  and  contingent   liabilities  and
amortization   expenses  related  to  goodwill  and  other  intangible   assets.
Furthermore,  acquisitions involve numerous risks, including difficulties in the
assimilation   of  operations,   personnel,   technologies,   products  and  the
information  systems  of  the  acquired  companies,  diversion  of  management's
attention  from other  business  concerns,  the diversion of resources  from our
existing businesses, products or technologies,  risks of entering geographic and
business  markets  in  which  we have no or  limited  prior  experience  and the
potential  loss of key employees of acquired  organizations.  A failure by us to
successfully integrate any businesses,  products, technologies or personnel that
might be acquired in the future,  could also have a material  adverse  affect on
our business, financial condition and results of operations.

We Face Environmental and Disaster Risks

We handle  small  amounts of hazardous  materials  as part of our  manufacturing
activities.  Although  we  believe  that we have  complied  with all  applicable
environmental  regulations in connection with our operations, we may be required
to undertake environmental remediation in order to comply with current or future
environmental  laws. The cost of any remedial actions or the paying of penalties
or damages for environmental matters, regardless of fault, could have a material
adverse effect on our business,  financial  condition and results of operations.
Our facilities are susceptible to damage from  earthquakes as well as from fire,
floods,  power  loss,   telecommunications  failures  and  similar  events.  The
occurrence of any of these events could  significantly  disrupt our  operations,
which could have a material adverse effect on our business,  financial condition
and results of operations.


                                       17

<PAGE>



Part II Other Information

Item 1. Legal Proceedings

We are involved in disputes and litigation in the normal course of our business.
We do not believe that the outcome of any of these  disputes or litigation  will
have a material adverse effect on our business,  financial  condition or results
of operations.


Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits

                  The following exhibit is filed herewith.

                  27.1 Financial data schedule

(b)   Reports on Form 8-K - None


                                       18
<PAGE>



Signatures

In accordance with the  requirements  of the Securities  Exchange Act of 1934 as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.






Date: May 7, 1999       By    /s/ Sanjay Subhedar                         
                              ---------------------------------------
                        Senior Vice President Operations
                        Chief Financial Officer and Secretary
                        (Principal Financial and Accounting Officer)



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