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

                                    FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended  September  28, 2002 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

                                 OPTICNET, INC.
             (Exact name of Registrant as specified in its charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   94-3368561
                      (I.R.S. Employer Identification No.)

                           One Post Street, Suite 2500
                         San Francisco, California 94104
              (Address of principal executive officers) (Zip code)
        ---------------------------------------------------------------

                                 (415) 956-4477
        ---------------------------------------------------------------
              (Registrant's telephone number, including area code)

             Securities registered pursuant to Section 12(b) of the
                                      Act:
                                      None
                                      ----
             Securities registered pursuant to Section 12(g) of the
                                      Act:
                         Common Stock, $.0001 par value
                       ----------------------------------

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 if disclosure  of  delinquent  filers  pursuant to Item
405 of  Regulation S-K is not contained  herein,  and will not be contained,  to
the  best  of  Registrant's   knowledge,  in  proxy  or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]

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

Common  Stock:  $0.0001 Par Value;  3,093,202  shares of Voting Common Stock and
2,998,902 shares of Nonvoting Common Stock outstanding as of December 11, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's  Proxy  Statement  with  respect  to its  2003  Annual  Meeting  of
Stockholders  to be  filed  with  the  Securities  and  Exchange  Commission  is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this report.

                                       1

<PAGE>

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
                                                                                                               Page
<S>           <C>                                                                                                 <C>
PART I


         Item 1.           Business.......................................................................        3

         Item 2.           Properties.....................................................................       21

         Item 3.           Legal Proceedings..............................................................       21

         Item 4.           Submission of Matters to a Vote of Security Holders............................       21

PART II

         Item 5.           Market for Registrant's Common Equity and
                           Related Stockholder Matters....................................................       22

         Item 6.           Selected Financial Data........................................................       24

         Item 7.           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations..................................       25

         Item 7a.          Quantitative and Qualitative Disclosures About Market Risk.....................       32

         Item 8.           Financial Statements and Supplementary Data....................................       33

         Item 9.           Changes in and Disagreements with Accountants
                           on Accounting and Financial Disclosure.........................................       55

PART III

         Item 10.          Directors and Executive Officers
                           of the Registrant..............................................................       55

         Item 11.          Executive Compensation.........................................................       55

         Item 12.          Security Ownership of Certain Beneficial
                           Owners and Management..........................................................       55

         Item 13.          Certain Relationships and Related Transactions.................................       55

PART IV

         Item 14.          Controls and Procedures...........................................................    55

         Item 15.          Exhibits, Financial Statement Schedules,
                           and Reports on Form 8-K........................................................       56

Signatures                 ...............................................................................       59
</TABLE>


                                       2

<PAGE>

Except for historical  information  contained herein,  the following  discussion
contains certain forward-looking statements that are based on the beliefs of our
management,  as well as assumptions made by, and information currently available
to,  our  management.  We have based  these  forward-looking  statements  on our
current  expectations  and projections  about future events and trends affecting
the financial condition of our business.  These  forward-looking  statements are
subject to risks,  uncertainties  and assumptions about us, several of which are
identified below and discussed in Item 1.  "Business--Risk  Factors" and Item 7.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."   In   particular,   the  words  and  phrases  such  as  "expects,"
"estimates,"  "intends," "plans," "believes,"  "projection," "will continue" and
"is anticipated" are intended to identify forward-looking statements.

These  forward-looking  statements  may differ  materially  from actual  results
because they involve estimates,  assumptions and uncertainties.  We undertake no
obligation  to update or revise  any  forward-looking  statements,  whether as a
result of new information, future events or otherwise.

PART I

ITEM 1.           BUSINESS

Introduction

We are a  development  stage  company  that  aspires to design  and  manufacture
optical components used to interconnect,  switch, attenuate and otherwise manage
optical  signals in fiber optic  circuits.  Our products are being developed for
use in  broadband  telecommunications  networks.  Virtually  all of our products
developed to date are based on micro  electromechanical  structures  (MEMS) made
from  monocrystalline  silicon,  a material  similar to that used to manufacture
electronic microcircuits.

We use specialized equipment and proprietary  fabrication processes which enable
us to produce small scale devices with  advantageous  optical and  environmental
characteristics and unique multi-function  capabilities that can be conveniently
applied in a wide variety of fiber optic applications.

Our   prospective   customers   are   makers   and   users  of  many   types  of
telecommunications equipment. Our existing and prospective products are intended
for  use  throughout   fiber  optic  systems   including   those  for  long-haul
transmission,  metro-area  distribution  networks and  enterprise  or local area
networks.  The  demanding  technical  requirements  for our  products  typically
require  that  our  engineering   staff  consult  closely  with  our  customers'
engineering  staff.  We  endeavor  to  cultivate  long-term  relationships  with
prospective customers in order to facilitate the required communication.

Our Background

We were incorporated in February 2000 in Delaware as a majority-owned subsidiary
of BEI  Technologies,  Inc.  ("BEI  Technologies"),  a  publicly  held  Delaware
Company,  to extend  proprietary  MEMS  production  processes  developed  by BEI
Technologies  to the  field of  optical  networks.  BEI  Technologies,  a global
provider of highly engineered motion sensing and motion control  components used
in automotive, aerospace and factory automation systems, has engaged in research
and development in the field of silicon MEMS technology  since 1993. The silicon
MEMS technology  research  initiative  undertaken by BEI Technologies led to new
MEMS  fabrication  techniques  relevant  not only to motion  sensing  and motion
control, but also to optical and potentially biomedical applications.

In November  2000, we were  separated  from BEI  Technologies  in order to focus
exclusively   on  the   commercialization   of  MEMS   technology   for  optical
telecommunications  applications.  We were  established as a separate company by
BEI  Technologies'  distribution to its stockholders of approximately 42% of our
outstanding  securities at the time of the  distribution,  with BEI Technologies
retaining  approximately 24% of our outstanding  securities and the remainder of
our securities  continuing to be held by contributing  founders.  At the time of
our separation from BEI  Technologies  certain  MEMS-based  proprietary  product
designs  were  transferred  to us  and we  were  granted  exclusive,  worldwide,
royalty-free  and  perpetual  rights to utilize  BEI  Technologies'  proprietary
MEMS-based  processing  technologies  in the manufacture of our products for the
telecommunications  market.  In recognition  of our early stage of  development,
immediately  prior to our separation from BEI  Technologies we


                                       3

<PAGE>

imposed  transfer  restrictions  on our common  stock and  accordingly  there is
presently no authorized public trading market for our securities. We continue to
have significant intercompany arrangements with BEI Technologies.

In June 2000, we received our first customer order and in November 2000 made our
first prototype deliveries.  Our total revenue for fiscal 2001 was $499,000, for
engineering work performed for one customer. During fiscal 2001 we also recorded
payments  or  receivables  from a total  of five  customers  for  deliveries  of
prototype  products,  accounted  for as an offset to  research  and  development
expense.  During  fiscal 2002, we recorded  revenue of $112,500 for  engineering
work  performed  for  two  unaffiliated   customers  and  recorded  payments  or
receivables for prototype deliveries from two other customers. Proceeds from the
development of prototypes delivered under customer agreements were approximately
$210,000 and $187,000 for fiscal 2001 and fiscal 2002, respectively.

Importance of Optical Components in Telecommunications Networks

Analogous  to pipes for water or copper  wire for  electrical  systems,  optical
fibers   transport   coded   pulses   of   light  to  the   users   of   optical
telecommunications systems.  Accordingly,  the optical components in fiber optic
systems  perform  functions  that are analogous to those provided by the diverse
parts found in water distribution or electrical systems. For example,  different
types of optical  components  exist to adjust the  intensity  of an optical data
stream. Other components switch the optical data stream into alternative carrier
circuits.  Still others combine  multiple data streams together or separate data
from a larger stream into a smaller stream. Widely varying approaches to optical
system design and  performance  are common and the  components  used for a given
system must,  accordingly,  be designed to optimize the system's  functionality,
efficiency and cost.

The myriad designs of valves and  regulators  that have evolved for plumbing and
the variety of switches and relays to control electrical currents are indicative
of  the  diversity  of  components   needed  to   accommodate   optical   system
requirements.  Those  familiar with the offerings in the  electrical or plumbing
aisles of any home repair  store will  appreciate  this  analogous  diversity of
functions and implementations that evolve for such systems.

The optical  telecommunications  industry is still a relatively young field with
much ongoing innovation and variation in system designs.  The optical components
that are needed to  support  optical  telecommunication  systems  are  similarly
diverse and  dynamically  evolving.  Due to the technical  complexity of optical
telecom systems,  optical  components are used at multiple  locations within the
system,  sometimes with dozens or even hundreds or thousands of component  sites
occurring in a given  system at junctions or nodes  between data streams or near
the end points of optical circuits.

Our Business Objective and Strategy

Our  long-term  business  objective is to be recognized  as the  preeminent  and
preferred  independent  supplier  of  highly  engineered  proprietary  or custom
designed MEMS-based optical components. We aspire to cultivate close and ongoing
relationships with significant customers.

Our  strategy  is to  use a  combination  of  design  experience,  sophisticated
processing   know-how,   including   deep   reactive  ion  etching   (DRIE)  and
monocrystalline  silicon wafer  bonding,  and the creative  capabilities  of our
engineers to devise unique solutions for our customers.  We expect this strategy
to require close liaison between our  engineering  personnel and the engineering
staff of our  prospective  customers.  Our goal is to  enhance  the value of our
products for our customers by creating designs that have performance,  packaging
or multi-function capabilities that exceed those which are otherwise available.

We possess certain  immediately  available  proprietary  product designs that we
intend to modify or adapt as building  blocks to accommodate  specific  customer
requirements,  thereby reducing product  development  time. We also carry out an
ongoing program of  proprietary-product  development,  continually  updating our
portfolio  of  product  designs.  By means  of this  expansion  of our  standard
products,  we expect to continually expand our custom-design  capabilities.  Our
management  possesses broad experience in implementing these business strategies
and we believe that our heritage of  engineer-to-engineer  problem  solving is a
competitive advantage.


                                       4

<PAGE>

In  summary,  our  strategy  focuses on  providing  value to our  customers  and
emphasizing the following attributes:

     *    Superior  technology  involving  striving  for  the  highest  industry
          achievement in optical properties, production yields and environmental
          robustness;

     *    Creative  and   responsive   custom  designs  that  will  enhance  the
          performance of our customers' systems; and

     *    Rapid design and design validation cycles.

Because of very depressed conditions in the telecommunications  equipment market
during 2002 and 2001, the Company has not realized  revenue growth as originally
planned.  Due to the shortage of funding,  the scope of the  Company's  business
development activity was substantially  reduced during fiscal 2002. Our business
strategy  has,  accordingly,  been adjusted to preserve  essential  capabilities
while  anticipating  the additional  time required to develop a base of products
and customers and uncertainty of future prospects.

Technology

The   technological   foundation   of  our  business  is  based  on  a  thorough
understanding of and expertise in the processes for  microfabrication of optical
and electromechanical devices using silicon as the structural material.

In the past,  the most  commonly  used  microfabrication  processes  for silicon
included bulk  micromachining  by wet chemical etch and surface  micromachining.
Bulk  micromachining,   sometimes  referred  to  as  chemical  micromilling,  is
essentially  a  subtractive  process in which  chemical  etchants  are used in a
controlled fashion to alter the shape of a bulk material.

Surface  micromachining  is  typically  an  additive  process  that  adopts  the
technique   of   microcircuit   manufacturing   to   deposit   thin   layers  of
polycrystalline  silicon  or  other  materials  on the  surface  of a  substrate
material.  Bulk and surface micromachining are both useful processes that have a
certain  utility  for  producing  optical  components.  They also  have  certain
disadvantages.  Chief  among  these are the lack of  mechanical  precision,  low
yields, poor surface finish,  slow processing (all seen in bulk  micromachining)
and an inability to create  strong,  rigid and  thermally  stable  structures (a
disadvantage of surface micromachining).

We possess  exclusive,  worldwide,  royalty-free and perpetual rights to utilize
BEI  Technologies'   proprietary  MEMS-based  processing   technologies  in  the
manufacture of our products.  We believe these licensed  processes  overcome the
most significant  shortcomings of bulk micromachining and surface micromachining
and we continue to work  strategically  with BEI Technologies to further enhance
and improve  upon these  processes.  We believe our  exclusive  license to these
processing technologies represents a substantial competitive advantage.

Our licensed  Deep  Reactive  Ion Etching  ("DRIE")  and Direct  Fusion  Bonding
processes have the following characteristics and advantages:

Deep Reactive Ion Etching

Our licensed DRIE process enables the creation of fine mechanical details.  This
process has virtually  unlimited form factor relative to bulk micromachining and
helps  assure  reliable,  high  yield  fabrication  of complex  structures.  For
example,  very  narrow,  straight-sided  channels  or  structural  webs  can  be
produced,  and structures that flex in one dimension while retaining rigidity in
another are  therefore  possible.  The process  also enables  small-mouthed  but
smooth-sided  plunge cuts which,  together with  proprietary  deep  lithographic
techniques developed by us, are useful for creating electrical "via" pathways to
electrically interconnect control elements on the top and bottom of our devices.


                                       5

<PAGE>

Direct Fusion Bonding

Direct  fusion  bonding is a process  used by us for  combining  monocrystalline
silicon wafers.  These bonds do not rely on any glue-like material and when used
in conjunction with our licensed DRIE processing technique, enable our engineers
to create unique  multi-functional  devices having  superior  optical,  thermal,
structural, electrical and packaging advantages.

Packaging

Due to financial  constraints  and personnel  reduction,  our present ability to
perform packaging services was discontinued during fiscal 2002.

Optical Engineering and Assembly

In addition to using our MEMS-based  technology  for making  components as noted
above, we seek to enhance our capabilities with applied engineering, fabrication
and assembly skills. Our engineering and assembly capabilities for micro optical
electromechanical   systems   include   mirror   metallization   and   coatings;
MEMS-assisted  fiber  management   (including   alignment,   strain  relief  and
protection);  thermal and electrostatic  actuation;  latching; fiber lenses; and
metrology.

Our Products and Markets

Products and Services

Our product  offerings  include mirrors and mirror arrays;  optical switches and
switch arrays;  variable optical attenuators ("VOA") and VOA arrays. To date, we
have made only  prototype  deliveries  of our products.  Revenue  recorded by us
during fiscal 2001 was derived from one  unaffiliated  customer for  engineering
work  performed by us to design and develop large  actuated  mirror arrays for a
maker of large,  multi-port  3D  optical  switching  systems.  We also  recorded
payments or receivables during fiscal 2001 from five customers for deliveries of
prototypes of mirror arrays, fiber alignment devices and optical benches.  These
payments or receivables  for prototypes  have been accounted for as an offset to
our research and development expense. During fiscal 2002, we recorded revenue of
$112,500 from two  unaffiliated  customers for the design and  development of 2D
optical switches and actuated mirrors.  We also recorded payments or receivables
of $187,000,  accounted  for as an offset to research and  development  expense,
during fiscal 2002 from two unaffiliated customers for delivery of prototypes of
actuated mirrors.

Mirrors  and  Mirror  Arrays.

When  used in  fiber  optic  telecommunications  applications,  mirrors  must be
optimized  for  one or  more  of the  following  characteristics:  size,  shape,
environmental  temperature tolerance,  gimballing,  actuation,  integration with
electronics,  environmental  packaging,  reflectivity and mounting means. Mirror
arrays  require  mounting means to hold two or more mirrors in rigid or variable
juxtaposition  as may be required in our customers'  systems or  subsystems.  We
manufacture  our mirrors and mirror arrays in various  existing  configurations,
and alternative versions can be customized to meet a customer's requirements.

Optical switches.

These enable an optical  signal to be moved between two or more  signal-carrying
or control  fibers  without the need for the signal to be  converted  to another
energy  state.  All-optical  switches  avoid  optical to  electronic  to optical
conversion,  which can compromise  bandwidth,  system size,  power  consumption,
switching  speed  and  cost.   Optical  switches  must  generally   provide  two
dimensional  (2D) or  three  dimensional  (3D)  flexure  means  and a  means  of
actuating and precisely positioning the switch elements. We presently design and
have the  capability  to  manufacture  2D  optical  switches  to  accommodate  a
customer's  unique  requirements.  We presently  offer 2D optical  switches in a
variety of standard and  customized  configurations.  We do not expect to devote
resources  to  developing  complete 3D optical  switching  systems,  but we have
developed,  tested and delivered  pre-production  units of large (>1000  mirror)
arrays that are  designed to be  components  of 1000 port (or larger) 3D optical
switches.  Large,  multi-port  mirror arrays for such switches have  comprised a
significant  part  of  our  business  to  date.  In  the  future,  however,  our
expectation is that other components,  including 2D optical switches and optical
switch  arrays and  variable  optical  attenuators  will become a more  dominant
portion of our business.

Optical Switch Arrays.

Arrays must be provided  for a very wide range of 2D or 3D  configurations.  Two
dimensional arrays meeting in a wide variety of  characteristics  are needed for
switching between 1 or more fibers aligned in a common plane, for example,  1x2,
1x4, 1xn, 2x2, 2x4, 2xn. Three dimensional switches must route


                                       6

<PAGE>

signals  among fiber  circuits  aligned in  different  planes.  One  challenging
configuration can require an ability to receive optical signals from a 1000 port
fiber  bundle and switch the  signal(s)  across  free space into any  channel of
another 1000 port fiber bundle. Our arrays are presently  available in 2D and 3D
configurations and are adapted and customized as necessary.

Variable  Optical  Attenuators.

VOA's are used to adjust or to equalize the  intensity of optical  signals among
cooperating  fiber  optic  circuits.  VOA  arrays  accommodate  the need to have
multiple  attenuators in close  proximity for widely varying fiber optic circuit
configurations.  Our VOA's are offered with different actuation means and can be
either dynamically variable or lockable and unlockable.  "Variable"  attenuators
are adjusted upon setup after  installation and remain at the selected set point
as long as  control  power is  available.  "Lockable"  means  that the amount of
attenuation is fixed at a particular  setting upon initial setup and will remain
at this  setting  even if  control  power is lost.  "Unlockable"  means that the
amount of attenuation  that has been previously fixed at a desired set point can
be changed later to a different setting.  "Dynamically  variable" means that the
attenuator can be continuously  modulated by an external  feedback control while
the circuit is in use. The ability to choose among these  different  performance
characteristics allows additional flexibility to system design engineers.

Product Development Efforts

Our goals for  future  products  include  MEMS-based  tunable  filters,  optical
add-drop multiplexers and integrated subsystems with controlling electronics. We
strive to design our  components  and  subsystems  in a manner  that  allows our
customers  to cascade our  products to build very dense,  scalable  systems.  We
intend to expand the  functionality  of our switching  products by incorporating
combinations  of new  features and  functionalities  into a single  package.  In
metropolitan  area and  enterprise  level  markets in  particular,  the manifold
branching  of  circuits  to  reach  individual  users  creates  the  need  for a
proliferation  of individual  component  functions near each end point.  Each of
these  installations  requires  individual access switches,  separate protection
switches and means for balancing  circuit strength by use of attenuators.  Also,
fibers must be aligned with lenses and all of these must be durably packaged for
installation by technicians  working in crowded  equipment racks or closets.  We
believe our future  integration of the various  individual  component  functions
into compact,  easily  installed  unitary  packages would save  installation and
maintenance labor costs for customers and reduce the space required for mounting
the  individual  components.   Our  ability  to  offer  this  level  of  product
integration  would be expected to translate to reduced cost of ownership for our
customers and their end customers.

Markets for Optical Components

The  demand  for  broadband  telecommunications  components  is being  fueled by
expanded    use   of    the    Internet    and    rising    expectations    that
high-information-content  data (photos, music and video in addition to voice and
text)  can  be  rapidly  transmitted.   The  worldwide  need  to  support  these
expectations  with  telecom  and  Information   Technology  (IT)  infrastructure
including  those  for long  haul,  metro  area and local or  enterprise  LANs is
expected to create an associated need for new types of broadband components such
as the MEMS-based  components we produce. We believe the engineering  challenges
presently  facing   telecommunications   equipment  suppliers,   subsystems  and
components  manufacturers create an opportunity throughout the broadband telecom
marketplace that can be addressed by our MEMS-based products.

Prospective  users of MEMS-based  optical  components  include large,  worldwide
suppliers of optical  telecommunications  systems. Companies that supply optical
telecommunication   equipment  and  buy  components  include:  Alcatel  and  its
affiliates, Cisco Systems, Inc., Ciena Corporation,  Lucent Technologies,  Inc.,
Marconi  plc,  NEC  Corporation,  and  Toshiba.  Other  existing or  prospective
customers for  MEMS-based  optical  components  include  suppliers of subsystems
purchased by the equipment  companies.  Manufacturers of such subsystems include
(in addition to the equipment companies  themselves)  companies such as Calient,
Corning,  JDS  Uniphase,  Finisar  Corporation,  OpLink  Communications,   Inc.,
Sycamore   Networks,   Inc.,  Movaz,   Northrop  Grumman   PolyScientific,   and
Glimmerglass  Networks.  Our business focus is primarily on the  manufacture and
sale of  components  used in multiple  types of optical  networking  systems and
subsystems,  rather  than a focus  on  development  and sale of  entire  optical
switching systems.

Customers and Strategic Relationships

We aspire  to  develop  relationships  with  manufacturers  of  optical  network
equipment to define,  develop and manufacture several different types of optical
components to accommodate  their specific  requirements.  Some of


                                       7

<PAGE>

these products are  adaptations of existing  designs and processes  while others
involve custom designs or development for use together with our existing designs
and  processes.  In some cases we may assess special  charges for  non-recurring
engineering  work  whereas in others we may charge  only for  special  setups or
tooling.

Our revenue for fiscal 2001 was  $499,000,  which was entirely  attributable  to
engineering  work performed for Glimmerglass  Networks,  Inc. on actuated mirror
arrays for use in a 3D optical switching system being developed by that company.
We also recorded payments or receivables, accounted for as an offset to research
and development  expense,  from  Glimmerglass  Networks and four other customers
during fiscal 2001 for deliveries of prototype products.  Our revenue for fiscal
2002 was $112,500,  which was attributable to engineering work performed for two
customers on 2D switches  and actuated  mirrors.  We also  recorded  payments or
receivables  during  fiscal  2002  from two  other  customers  for  delivery  of
prototypes of actuated mirrors as an offset to research and development expense.

Research and Development

We have invested substantial  resources in research and development  activities.
We possess  expertise in fiber optics  systems  processing  and  packaging,  the
microfabrication of electromechanical  devices,  system architecture and silicon
wafer  bonding  techniques.  Management  and the  Company's  board of  directors
decided in March 2002 to reduce the level of  incremental  spending for research
and development and to reduce operations to a level that will solely support the
current  customer  base.  Our current  research and  development  is directed to
enhancements and improvements to existing products. Our research and development
expenses were approximately $2.8 million,  $972,000, and $3.8 million for fiscal
years ended  September  28, 2002 and  September  29,  2001,  and the period from
inception to September 28, 2002, respectively,  net of proceeds from development
of  prototypes   delivered  under  customer  agreements  totaling  $187,000  and
$210,000, respectively, and have totaled approximately $397,000.

Manufacturing and Operations

We consider our  manufacturing  expertise to be one of our core competencies and
strengths,  and  our  manufacturing  processes  to  be  significant  competitive
advantages.   To  this  end  management  has  invested  time  in  designing  and
implementing our manufacturing  processes. We consider our manufacturing process
a core component of our ability to achieve the production  volumes  required for
our current customer  commitments.  We have not manufactured any of our products
in production quantity.

Our manufacturing  operations will, in the future,  produce products in response
to  customer  orders  and we do not  carry a ready  product  inventory.  Product
designs that have been previously  produced are sometimes used for production in
response  to a  customer  order or  modified  or  combined  with new  designs to
accommodate customer requirements.  Processes we internally perform include mask
design and layout,  photolithography,  precision  metrology,  wafer cleaning and
polishing,  wafer  bonding,  wafer  machining,  material  deposition or plating,
annealing,  parametric testing,  wafer dicing, fiber cleaving,  fiber polishing,
and fiber fusion. We rely on subcontractors for implanting  application-specific
integrated circuits if required.  We require  specialized  equipment to engineer
the majority of our products,  and  processing  must often be carried out within
contamination-free  clean  room  conditions,  such  as  those  available  at our
Hayward, California facility.

Competition

We compete with both large,  diversified and also small,  focused companies that
also supply optical components  intended for the  telecommunications  market. We
believe  that the  principal  bases of  competition  in our market  include  the
overall  performance  of the  components  and  subsystems  and the  total  cost,
flexibility and  scalability of products.  Large,  diversified  companies we may
compete  with  include  Analog  Devices,   Inc.,  Avanex  Corporation,   Corning
Corporation and its  affiliates,  JDS Uniphase,  Finisar  Corporation and Oplink
Communications,  Inc. Historically, the majority of optical components used have
been assembled from discrete parts manufactured from traditional  materials such
as metal,  plastic or glass.  Some of the larger  companies  we may compete with
have acquired or developed their own business units that utilize MEMS technology
for certain types of broadband components.  These include acquisitions by Analog
Devices,  Corning  Corporation  and JDS Uniphase.  In addition,  we compete with
smaller  similarly  focused  companies also developing  products  utilizing MEMS
fabrication   processes.   These   include   Applied  MEMS,   Inc.,   Integrated
MicroMachines,  Inc., OMM, Inc.,  MegaSense,  Inc., MEMSCAP,  S.A., and Standard
MEMS, Inc.


                                       8

<PAGE>

We  believe  the  MEMS  processes  used  and  components   manufactured  by  our
prospective  competitors have distinguishing  characteristics from the processes
and  products we employ.  We also  believe  that our  processes,  including  our
licensed  processes,  enable the  creation of products  that will  differentiate
themselves  from those made by other  companies.  In particular,  we believe our
DRIE and direct fusion  bonding  processes  enable  thicker  mirrors of a single
material that help assure constant  flatness over extremes of  temperature.  The
process also preserves the inherently smooth fine surface finish of the polished
wafers and assures  optimum  reflectivity.  Also,  our  bonding is  accomplished
without the addition of other materials such as organic  adhesives or glass frit
that can compromise temperature stability,  dimensional control and flatness. We
believe our licensed processes together with our engineers' know-how enables our
flexures  to be free of  undesirable  cross-axis  effects,  bending  only in the
intended  direction  without  simultaneously  bending in an  undesired  way. Our
flexures,  if designed to flex left or right, are intended to do so without also
having any  undesirable  components  of up or down movement at the same time. We
also believe the  expertise  possessed by our  management  team and engineers in
large volume  component  production  with  favorable  process  yields gives us a
competitive advantage when compared to similarly situated companies.

No assurance can be given however,  that our competitors will not  independently
develop processes that are capable of supplying components competitive with ours
or in time acquire the equipment and experience necessary to compete with us.

Patents and Intellectual Property

We rely on a  combination  of  intellectual  property  and trade secret laws and
nondisclosure  and  confidentiality  agreements  to  establish  and  protect our
intellectual property.

We have 4 issued U.S.  patents  expiring in 2016 through 2019, 8 pending  patent
applications  in the United  States,  2 pending  application  with the  European
Patent Office, and 1 pending application in Canada. In addition,  at the time of
our  separation  from BEI  Technologies  we were granted  exclusive,  worldwide,
royalty-free and perpetual rights to utilize BEI Technologies'  proprietary DRIE
and direct fusion bonding MEMS-based processing  technologies in the manufacture
of our products.  These  licenses are restricted to our use of the technology in
the telecommunications data transmission market.

The  possession  of patent rights may in the future be helpful in enabling us to
assert claims to exclusive rights to a product or process. We expect to continue
to file for patent  protection  for products and processes we develop as we deem
appropriate.  Such patent rights may not be sufficient protection by themselves,
however, and for this reason, we seek to preserve certain know-how and processes
as trade secrets.  This affords some additional  protection against copying,  as
the means by which  certain  physical  product  features  are  achieved  are not
readily  discernable  merely by inspection.  However,  if our current  processes
should become common knowledge and widely taught and practiced,  our competitive
advantage  could be  diminished  unless  we  continue  to  enhance  our  process
know-how.

Policing any unauthorized use of our technology and other intellectual  property
is difficult,  and we cannot assure you that the measures we take to protect our
intellectual  property  will be adequate or  successful.  While our  competitive
position may be affected by our ability to protect our proprietary  information,
we  believe  that other  factors  including  the  expertise  of our  engineering
personnel and specialized  processing  techniques will be significant in helping
us to achieve a competitive position in our principal markets.

Employees

In April  2002,  the  Company  underwent a  reduction  in force  resulting  in 8
individuals  departing  employment  with  the  Company,  including  engineering,
manufacturing  and marketing  personnel.  Severance pay for the affected persons
was per Company  policy,  including  cash  payment and the  acceleration  of the
vesting of options for certain affected individuals. Total cash costs related to
the  reduction in force of  approximately  $86,000  were  recorded in the fiscal
quarter ending June 29, 2002.

To further reduce costs for the Company in the near term,  during July 2002, all
of the Company's  remaining 15 employees  were  released from  employment by the
Company and accepted employment with a subsidiary of BEI


                                       9

<PAGE>

Technologies,  as agreed to by both  companies.  The Company's  newly  appointed
President and Chief Technical Officer, respectively,  have also become employees
of this same subsidiary of BEI Technologies,  but continue to serve as executive
officers of the Company. The services of certain key individuals,  including the
Company's newly appointed President and Chief Technical Officer, are expected to
continue  to  be  available  to  the  Company  on  an  as  needed  basis,   with
reimbursement  by the Company to their  present  employer  for the time value of
their services.

Facilities

Our administrative headquarters are located in San Francisco,  California, where
we  occupy  office  space  subleased  to us by BEI  Technologies  as part of the
administrative  support  received from BEI  Technologies  under our intercompany
services agreement. Our engineering and manufacturing operations are carried out
in a 15,571 square foot facility located in Hayward,  California.  This facility
is subleased from BEI Technologies, which also conducts research and development
at this  location.  As of March 30, 2002,  the Company,  in  recognition  of its
inability to obtain  significant  strategic  partners or third party  financing,
concluded it was necessary to reduce  operating  costs.  The Company agreed with
BEI  Technologies  that this  reduction in  operations  would lower usage of the
equipment and the subleased facilities described above. Accordingly,  the annual
lease payments to BEI Technologies have been prorated  beginning March 31, 2002,
based on the  portion of the  facilities  the  Company  requires  to support its
current  customers.  We believe  our  facility  is  adequate to meet our current
needs.

RISK FACTORS

Described  below are some of the risks we face,  although these are not the only
risks and  uncertainties we may encounter.  If any of the conditions giving rise
to the following risks occur,  our business,  financial  condition or results of
operations  could be materially  adversely  affected.  Our actual  results could
differ  materially  from those  anticipated  in the  forward-looking  statements
included in this registration  statement as a result of many factors,  including
the occurrence of any of the conditions described below.

RISKS RELATED TO OUR BUSINESS

We may be unable to continue as a going concern

Given our history of net losses,  combined  with our inability to date to obtain
third party financing or interest from strategic investors,  we may be unable to
continue as a going  concern.  During  fiscal 2002,  we reduced  operations  and
expenditures  in an effort to  control  costs in light of the  continued  severe
downturn  in  the  telecommunications  industry.  We  are  currently  unable  to
significantly  grow  or  expand  our  business  in  light  of  recent  personnel
reductions  and  other  cost-cutting  measures.   Unless  we  obtain  additional
financing,  either as debt or  equity  funding,  we will not have the  necessary
resources to take advantage of any upturn in the telecommunications industry and
grow our  business.  Our ability to continue  operations  will be  contingent on
obtaining additional  financing during fiscal 2003.

Management's plan to enable the Company to continue as a going concern calls for
the Company's operations to be frozen at a minimal level,  sufficient to support
current product delivery commitments. The Company reduced its fixed cost base to
an absolute  minimum  and no longer  maintains  any  employees  of its own.  The
majority of operating costs are paid by a related party which shares the Hayward
facility  and  from  whom  engineering  and  other  services  are  rented  on an
as-required  basis. The cash outlay for the Company's portion of these costs are
recorded as additional  investment in the Company by the related  party.  Future
operating  expenses are expected to be funded by product and  prototype  revenue
under existing contracts.  In addition,  new prototype or product contracts will
not be initiated if these contracts  cannot generate  positive cash flows within
the next 12 months.  Management  believes that  additional  funding of less than
$1.0 million  will enable the Company to continue on a reduced  basis as a going
concern through  September 30, 2003 and that such funding will be available from
the related party, if required.  Management  continues to seek additional equity
financing from new and existing  sources on an  opportunistic  and  as-available
basis.  Management  plans to defer  substantially  all research and  development
activity in the absence of additional equity financing.  Although  management is
confident  in its  ability to execute its plan to enable the Company to continue
as a going concern there is no assurance that the Company will be able to reduce
expenditures  sufficiently,  estimate future contract cost accurately, or secure
the necessary financing, in order to continue operations.

We are a  company  with a very  limited  operating  history,  which  may make it
difficult to evaluate our business prospects.

We were  incorporated in February 2000 and commenced  independent  operations in
November  2000.  We have not  generated  revenues from sales of our products but
only  from  engineering  work  performed  for  three  customers  to date.  Since
inception,  a total of six customers have engaged us to supply  prototype models
of our  MEMS-based  products  and we have yet to sell  our  products  in  volume
quantities.  As a result of our limited operating history,  we have only limited
data from  operations  on which to rely in estimating  future  revenues and as a
basis for evaluating our future prospects. If we fail to accurately estimate our
future revenue and future operating expenses, we may incur substantially greater
losses or use substantially greater resources than we currently anticipate which
would cause harm to our financial condition and results of operations.

We expect to incur net losses for the foreseeable  future.  We may never achieve
profitability  and we may not  succeed as a going  concern  and our  independent
auditor has  included a statement to this effect in their most  recently  issued
audit report.


                                       10

<PAGE>

We expect to  continue  to  invest  considerable  resources  in  developing  our
technology,  marketing our products and establishing customer relationships.  We
incurred a net loss of  approximately  $4.1  million  for  fiscal  2002 and have
incurred a net loss of approximately $5.8 million since inception through fiscal
2002 and we expect to continue to incur net losses for the  foreseeable  future.
In order to achieve profitability, we will need to generate significantly higher
revenue while containing  manufacturing costs and operating expenses. Even if we
achieve  profitability in the future,  we may not be able to sustain or increase
profitability  on a quarterly or annual  basis.  Prior to  realizing  sufficient
revenue levels to achieve  profitability,  we will require additional private or
public financing, which may not be available on acceptable terms and conditions.
If we are  unable to  obtain  necessary  financing  in order to allow us time to
achieve profitability,  our business may fail. Even if we achieve profitability,
we must sustain profitability in the future for our business to succeed.

We may not  obtain  sufficient  affordable  capital  in the  future  to fund our
continued  need to invest  in our  manufacturing  operations  and  research  and
development.

We will need to continue to make significant capital  expenditures to expand our
operations  to  enhance  our  manufacturing  capability  and  for  research  and
development activities to keep pace with rapidly changing technologies. Based on
our current operating plans, we will require  additional  external  financing to
fund our capital  expenditures,  facilitate our research and development efforts
and for operating  expenses.  During the past few years,  the markets for equity
and debt securities have  fluctuated  significantly,  especially with respect to
technology-related  companies,  and during some  periods  public  offerings  and
private  placements  of  those  securities  have  been  extremely  difficult  to
complete.  As a  result,  in the  future,  we may  not be  able  to  obtain  the
additional  capital  required to fund our operations on reasonable  terms, or at
all, and this lack of capital may have a material adverse effect on our business
and results of operations.

Our  original  line of credit from BEI  Technologies  was for up to $2.0 million
with  interest  at prime plus 1.5%,  expiring  on  September  28,  2002,  unless
extended by mutual  agreement of the parties.  In March 2002,  BEI  Technologies
increased this line of credit by $1.0 million.  As of June 29, 2002, the Company
had outstanding  borrowings totaling  approximately $2.7 million on this line of
credit.  During the fiscal quarter ended June 29, 2002, the Company was informed
by BEI Technologies  that no further advances would be made to the Company under
this line of credit beyond the approximately  $2.7 million funded as of June 29,
2002. This  determination  was the result of the Company's  inability to attract
significant  strategic partners or third party financing to sustain  operations.
In October 2002, BEI Technologies extended the due date of the line of credit to
December 31, 2002.  To maintain  sufficient  liquidity in the future and to fund
operations,  we may need to enter into a new credit agreement in the future with
a commercial lender or issue additional equity to a new or existing investors. A
new credit line, if available to us, could have less favorable terms for us than
our existing line of credit agreement with BEI Technologies,  including a higher
borrowing rate, more restrictive  terms and possibly  requiring liens on some or
all of our assets.  New equity  financing,  if  available to us, could have less
favorable provisions for us than our existing equity instruments.

A  significant  portion  of our  business  comes from a few  customers,  and our
revenues may decline  significantly if any of these customers  discontinue doing
business with us, or cancel, reduce or delay purchases of our products.

Our  success  will  depend  on our  continued  ability  to  develop  and  manage
relationships  with significant  customers.  For the fiscal year ended September
29, 2001,  one customer  accounted for 100% of our  revenues,  all of which were
attributable to an engineering  agreement with that one customer.  During fiscal
2002, we recorded  revenue for engineering  work from two customers and payments
or receivables for deliveries of prototype  products  accounted for as an offset
to research  and  development  expense from two other  customers.  We expect our
dependence  on revenues  generated  from one or a small  number of  customers to
continue in the near future.

The  markets  into  which  we plan to  sell  our  products  are  dominated  by a
relatively   small  number  of  optical   networking   systems  and   subsystems
manufacturers  thereby  limiting  the number of our  potential  customers.  As a
result, our relationships with significant customers are critically important to
our  business.  We  cannot  assure  you  that we will  be  able  to  retain  any
significant  customers,  that we will be able to attract additional customers or
that


                                       11

<PAGE>

our customers will be successful in selling their products that  incorporate our
components.  The loss of, or a significant  reduction in orders from one or more
of our largest customers,  or an inability to successfully develop relationships
with additional or replacement  customers  could adversely  affect our financial
position and results of operations.

We must  manufacture  products  that meet  industry  quality  standards,  or our
customers  may  choose  not to  purchase  our  products,  which  would  harm our
operating results and ultimately our business.

The  manufacturing  process  for our  MEMS-based  products,  as well as each new
manufacturing  process we might in the future develop, must pass through varying
levels  of  qualification  by our  customers.  Customers  may  require  that our
products  be  certified  under  international  quality  standards,  such  as the
Telecordia  and  Belcore  specifications,   or  other  industry  standards.  The
Telecordia and Belcore  standards help insure that components or subsystems used
by carrier companies meet certain minimum requirements for technical performance
and physical and environmental  durability.  In some cases our customers will be
responsible for verifying that our components comply with these standards, while
in other cases the responsibility  will be ours. We have not yet applied for any
such  certifications,  nor subjected  our products to the complete  testing that
such  certification  might  require.  Our  products  may also have to meet other
customer specific  requirements.  If we experience delays in receiving  industry
standard certification or in meeting customer qualifications,  our customers may
choose not to purchase  our  products,  which would result in  significant  lost
revenue opportunities that could harm our business.

Failure to effectively manage our manufacturing  facility could adversely affect
our business, financial condition or results of operations.

The operation and  management of our high volume  facility is a recent  activity
for us, and,  therefore we cannot  guarantee that we will be able to meet future
customer development deadlines, minimize development costs or effectively manage
these  operations.  It is critical  to our growth  that we achieve and  maintain
acceptable  yields in the  manufacturing  of our  products  and that we maintain
these  yields  and  quality   requirements  for  each  new  product  or  product
enhancement that we introduce.  If we fail to achieve and maintain these yields,
our ability to deliver  products  to  customers  in a timely and  cost-effective
manner  and  in  the  quantities   that  our  customers  may  require  could  be
significantly impaired.

We must continue to develop,  expand and protect our  intellectual  property and
proprietary rights.

We regard our patents,  trade secrets and other proprietary  rights as important
to our success, and rely primarily on a combination of intellectual property and
trade  secret  laws and  contractual  restrictions  to protect  our  proprietary
rights.  We have 4 issued U.S.  patents expiring in 2016 through 2019, 8 pending
patent  applications  in the  United  States,  2  pending  application  with the
European  Patent Office,  and 1 pending  application in Canada.  There can be no
assurance  that any of our  pending  patent  applications  or any future  patent
applications  will be granted or will not be  challenged  successfully  by third
parties,  that any  patents  that may be  issued  will  adequately  protect  our
technology or intellectual  property or will not be challenged by third parties,
or that the patents of others will not have an adverse  effect on our ability to
do business.

We also use employee and third party  nondisclosure  agreements  to limit access
to, and distribution of, our proprietary information.  There can be no assurance
that the steps we have taken to protect our intellectual property rights will be
adequate to protect our rights, to deter misappropriation of such rights or that
we will be able to detect  unauthorized  uses and take  immediate  or  effective
steps to enforce our rights. A substantial  amount of our intellectual  property
was  contributed to us by BEI  Technologies,  and there can also be no assurance
that the steps we have taken to obtain ownership of this  intellectual  property
will be sufficient to assure our continued  ownership of all proprietary rights.
Our  license  and   technical   assistance   agreement   with  SiTek,   Inc.,  a
majority-owned  subsidiary  of  BEI  Technologies,  governs  our  rights  to our
licensed DRIE and direct fusion bonding processes,  which are exclusive to us in
the  telecommunications  field.  Our license to these processes is perpetual and
royalty-free,  except with respect to certain permitted third-party sublicenses.
Although the grant of these licensed processes is perpetual by its terms, in the
event we should  breach the terms or  conditions  of the  license,  SiTek  could
potentially seek to revoke the license. We consider our rights to these licensed
processes important to our future success.


                                       12

<PAGE>

Although we rely on trade  secrets to protect  our  proprietary  technology,  no
assurance can be given that others will not  independently  develop or otherwise
acquire the same or  substantially  equivalent  technologies  or otherwise  gain
unauthorized access to our proprietary technology. In addition, no assurance can
be given that third parties will not obtain patent rights to our trade  secrets,
which patent rights could be used to assert infringement claims against us. When
deemed   appropriate  or  necessary,   we  intend  to  vigorously   protect  our
intellectual property rights. However, there can be no assurance that we will be
able to enforce our rights or prevent other parties from designing and marketing
unauthorized  products that are based on our technology.  Our ability to compete
may be affected by our  ability to protect and enforce our  proprietary  rights,
and any failure to do so for any reason could have a material  adverse effect on
our business, results of operations and financial condition.

We may be unable to obtain  licenses  for the use of third party  technology  on
acceptable terms.

From time to time, we may be required to license  technology  from third parties
to develop  new  products  or product  enhancements.  We cannot  assure you that
third-party  licenses will be available to us on commercially  reasonable terms,
if at all. Our inability to obtain any necessary or desired  third-party license
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost,  any of which could result in reduced  margins and
loss of market share and could seriously harm our business,  financial condition
and results of operations.

We have no present  intention  of listing our common  stock with any  recognized
national securities exchange or quotation system.

We do not intend to apply for the listing of any class of our equity  securities
on any securities  exchange or for the inclusion of our equity securities in any
automated  quotation  system in the near  future.  Further,  our common stock is
subject to transfer  restrictions,  and beneficial ownership in our common stock
may not be sold,  transferred or  hypothecated in any manner.  Accordingly,  our
stock is illiquid,  and our stockholders will be required to wait for an unknown
time to sell shares of our stock they currently hold.

Future  acquisitions  we  undertake  could harm our  business by  diverting  our
resources and increasing our operating costs.

We may pursue  opportunities to buy other  technologies or businesses that would
complement  our current  products  and  offerings,  expand our  industry  focus,
enhance  our  technical  capabilities,   or  that  may  otherwise  offer  growth
opportunities.  Any future  acquisitions  could result in the use of significant
amounts of cash or equity,  the  incurrence of debt, and  amortization  expenses
related  to  certain  intangible  assets.  Our  experience  in  acquiring  other
technologies  and businesses is limited.  Acquisitions  involve  numerous risks,
including:

     *    difficulties in integrating  operations,  products,  technologies  and
          personnel;

     *    unanticipated costs or write-offs associated with the acquisition;

     *    diversion of management's attention from other business concerns;

     *    diversion of capital and other resources from our existing businesses;
          and

     *    the potential loss of key employees of purchased organizations.

Our  products,  following our  commencement  of commercial  product  sales,  may
contain  defects  that are not  detected  until after these  products  have been
integrated into our customers'  systems or products.  These defects may cause us
to incur additional costs and suffer damage to our reputation.


                                       13

<PAGE>

Some of our  MEMS-based  optical  components  and  subsystems  may originally be
designed to be, or eventually be,  deployed in large and complex optical network
systems or products used in conjunction  with optical  networking  systems.  Our
products must be compatible  with other  components and subsystems  incorporated
into the optical  networking system or product.  The reliability of our products
and their  compatibility  with other system or product  components  will only be
fully  tested when  deployed in the final  application.  If we are unable to fix
defects  or  other  problems  that  may be  identified  in  full  deployment  or
utilization, we could experience:

     *    a loss of, or delay in, revenue;

     *    a loss of existing customers;

     *    increased repair and warranty costs;

     *    increased product development expenses;

     *    damage to our reputation; and

     *    legal actions by our customers.

Our facility could experience  catastrophic loss, which would seriously harm our
operations.

Our subleased  research and  development  and  manufacturing  facility  could be
subject to a  catastrophic  loss.  Any loss of functions  at our facility  could
disrupt our operations,  delay production,  shipments and revenue, and result in
large expense to repair and replace such losses,  assuming repair or replacement
is even economically feasible or practical for us.

RISKS RELATED TO OUR INDUSTRY

We depend on the continued growth of the optical  communications market. If this
market does not develop as rapidly as we expect, our growth could be constrained
and our business could fail.

Our products are targeted towards optical  communications systems and subsystems
manufacturers  and suppliers and depend on the continued  development and growth
of the optical communications market. If optical communications networks are not
expanded  significantly  by  communications  service  providers,  a  significant
commercial  market for our products will fail to develop.  Acceptance of optical
communications networks technology depends on many factors, including:

     *    its capacity to handle growing demands for  transmission of increasing
          amounts of video, voice and data;

     *    its cost effectiveness, performance, reliability and security compared
          to other forms of communications technology;

     *    ability to manufacture products in sufficient volume;

     *    scalability of products; and

     *    flexibility of products.

We expect  substantially  all of our  revenues  to be  derived  from  MEMS-based
devices,  and if the  use  of  MEMS-based  products  in  optical  communications
networks fails to achieve commercial success, our business may fail.

We expect MEMS-based devices to account for a substantial  portion,  if not all,
of  our  total  revenues  for  the  foreseeable  future.  Market  acceptance  of
MEMS-based products by optical network systems and subsystems


                                       14

<PAGE>

manufacturers  and suppliers  will be critical to our future success and growth.
To date, we have developed prototype models of custom-designed  devices, but our
products have yet to be deployed in any commercial  communications  systems.  If
our customers do not integrate  our products into their  systems,  subsystems or
products,  or if these  systems,  subsystems  and  products  do not in turn gain
acceptance among  communication  networks service  providers,  manufacturers and
integrators our revenues will not grow and our business, financial condition and
results of operations will be seriously harmed.

We must develop new  products  and  technology  as well as  enhancements  to our
existing products and technology in order to remain  competitive.  If we fail to
do so, our products will be unable to compete in the marketplace and we will not
achieve sales growth.

The market  for  optical  communications  systems  products  and  technology  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 new products,  enhance our existing  MEMS-based
technology or develop new  technologies  on a successful and timely basis. If we
fail to develop and deploy new products or enhancements of existing  products on
a successful  and timely basis or if we  experience  delays in the  development,
introduction  or  enhancement  of  our  products,   our  products  will  not  be
competitive and we will not be able to generate  sufficient sales to support our
business.

The  development of products  utilizing our  MEMS-based  technology is a complex
process  requiring high levels of innovation and highly skilled  engineering and
development personnel, as well as the accurate anticipation of technological and
market trends.  We cannot assure you that we will be able to identify,  develop,
manufacture, market or support new or enhanced products successfully, if at all,
or on a timely basis.  Further,  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.  Any failure to respond to technological  change could  significantly
harm our business.

Our ability to reduce costs is limited by our ongoing need to invest in research
and development.

Our industry is characterized  by the need for continued  investment in research
and development.  If we fail to invest sufficiently in research and development,
our  products  could become less  attractive  to  potential  customers,  and our
business and financial condition could be materially  adversely  affected.  As a
result of our need to maintain our spending  levels in this area,  our operating
results  could  be  materially   harmed  if  our  net  sales  do  not  meet  our
expectations.  In  addition,  as a  result  of  our  emphasis  on  research  and
development  and  technological  innovation,  our  operating  costs may increase
further in the future.

Management and the Company's board of directors  decided in March 2002 to reduce
the level of  incremental  spending for research and  development  and to reduce
operations to a level that will solely support the current customer base.

We face competition  from other providers of optical network systems  components
and subsystems that could harm our business and results of operations.

The  market  for  optical   components  and   technology   solutions  is  highly
competitive,   highly   fragmented  and   characterized   by  rapidly   changing
technological  needs  and  capabilities.  Existing  or  future  competitors  may
presently offer or develop optical  components that provide design,  performance
or other  types of  advantages  over the  products  that we  provide.  We expect
competition  to  persist  and  intensify  in the  future.  We  believe  that the
principal bases of competition in our market are:

     *    overall performance of the product;

     *    total cost of a particular supplier's product;

     *    the scalability of the product;


                                       15

<PAGE>

     *    length of the design and production cycles;

     *    timeliness of the introduction of new products;

     *    scope and responsiveness of technical support;

     *    environmental tolerance; and

     *    versatility of applications.

Our current and potential  competitors include large,  diversified companies who
have developed or acquired competitive product lines,  including Analog Devices,
Inc., Avanex Corporation,  Corning Corporation and its affiliates, JDS Uniphase,
Finisar  Corporation,  and Oplink  Communications,  Inc.  We also  compete  with
smaller  companies  similarly  strategically  focused on  developing  MEMS-based
products,  including  Applied  MEMS,  Inc.,  Integrated  Micro  Machines,  Inc.,
MegaSense, Inc., MEMSCAP S.A., OMM, Inc., and Standard MEMS, Inc.

Many of our current and potential  competitors have longer  operating  histories
and significantly  greater financial,  technical,  marketing and other resources
than us. As a result,  these  competitors  are able to devote greater  resources
than we can to the development,  promotion,  sale and support of their products.
Some of our competitors have larger market capitalizations or cash reserves than
we do and may be much better  positioned  than we are to acquire other companies
in order to gain access to new  technologies  or products  that may displace our
products.  In addition,  some of our  competitors  have more extensive  customer
bases, better-developed distribution channels and broader product offerings than
we have.  These  companies can leverage their customer bases and broader product
offerings and could adopt aggressive  pricing policies to gain market share, all
of which could harm our business.  In addition,  some of our existing  customers
are also potential  competitors.  These companies may attempt to integrate their
operations  by  producing  their own  optical  components  or  subsystems  or by
acquiring one of our competitors,  thereby  eliminating the need to purchase our
products.  Further,  our current  and future  competitors  may develop  products
comparable or superior to those developed by us or adapt more quickly than us to
new technologies, evolving industry standards or customer requirements.

We may be subject to claims of intellectual property infringement.

In the future,  we may face litigation  regarding patent and other  intellectual
property  rights.  Litigation  may be  necessary  in the future to  enforce  our
intellectual  property  rights,  to protect our trade secrets,  to determine the
validity and scope of the  proprietary  rights of others,  or to defend  against
claims of infringement,  invalidity or breaches of indemnities, and there can be
no assurance that adverse  parties in any such  litigation  would not be able to
devote substantially  greater financial resources to any litigation  proceedings
or that we could prevail in any future litigation. Any such litigation,  whether
or not  determined  in our favor or  settled  by us,  could be costly  and would
divert the efforts and attention of our management and technical  personnel from
normal business  operations,  which could have a material  adverse effect on our
business, financial condition and results of operations.

Any potential  intellectual property litigation also could force us to do one or
more of the following:

          *    stop selling or  incorporating  into our products the  challenged
               intellectual property;

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

          *    oblige us to pay indemnities; or

          *    redesign the products that use the technology.


                                       16

<PAGE>

Additionally,  we may in the future initiate claims or litigation  against third
parties for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our  proprietary  rights or the  proprietary
rights of  competitors.  These claims could result in costly  litigation and the
diversion of our technical and management personnel.

We are subject to environmental  laws and other legal requirements that have the
potential to subject us to substantial liability and increase our costs 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  used in our
manufacturing processes. We cannot assure you that these legal requirements will
not  impose  on us  the  need  for  additional  capital  expenditures  or  other
requirements in order to comply with future laws and regulations.  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.

RISKS RELATED TO OUR RECENT  SEPARATION FROM BEI TECHNOLOGIES AND OUR CONTINUING
RELATIONSHIP

Our future  success  will  depend on our  ability to  implement  the systems and
controls necessary to support our business.

The  technology  comprising  the  core  of  our  business  was  contributed  and
transferred to us by BEI  Technologies in October 2000.  Prior to that time, BEI
Technologies  conducted  activities  related  to our  present  business  through
various  divisions  and  subsidiaries  and  has  historically  provided  us with
operational,  financial  and  other  support.  Since our  separation,  effective
November 2000, we have operated as an independent company, but have yet to fully
develop  and  implement  all  of  the  financial,  management,  information  and
reporting systems and controls  necessary to support our business.  Furthermore,
we will need to continually  improve our systems and controls as the size of our
company increases.  BEI Technologies initially agreed to provide us with various
interim services through  September 2001,  however these  arrangements have been
extended and may now be terminated by either party upon reasonable notice to the
other party. After the termination of these arrangements,  we may not be able to
replace these interim  services on terms,  including cost, as favorable as those
we will receive from BEI Technologies. We cannot give any assurance that we will
be able to develop the necessary  systems  resources and controls to support our
business.

BEI Technologies and our directors and management  collectively have substantial
control over us, which could delay or prevent a change in our corporate control.

As of December 11, 2002,  BEI  Technologies  and our  directors  and  management
beneficially owned in the aggregate  approximately 50% of our outstanding shares
on a fully  diluted  basis,  assuming the  conversion  of all Series A Preferred
Stock to common  stock and exercise of  outstanding  options.  BEI  Technologies
alone owns  approximately  25% of our total  outstanding  securities  on a fully
diluted basis and 40% of our voting securities on a fully diluted basis, and, as
the holder of our Series A preferred stock, has the right to approve significant
corporate  actions,  including  the issuance of  additional  shares of preferred
stock,  certain  acquisitions  or  asset  transfers  of  the  corporation,   and
dissolution or liquidation  proceedings.  BEI Technologies and our directors and
management  are in the aggregate able to exercise  substantial  control over all
matters requiring shareholder approval,  including the election of directors and
approval  of  mergers  or  other  significant  corporate  transactions,   future
issuances of common stock, or other securities,  including debt securities,  and
may have the  ability to delay or prevent an  outside  party from  acquiring  or
merging with us.

Two of our directors and certain of our executive officers may have conflicts of
interest  because  they are also  directors  of BEI  Technologies,  formerly  or
presently  provided  services  to or were  employed by BEI  Technologies  or own
significant amounts of BEI Technologies' stock.


                                       17

<PAGE>

Two members of our board of directors  are also  directors of BEI  Technologies,
one  of  whom  is  also  our  Chief  Financial  Officer.  These  directors  have
obligations to both companies 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 BEI Technologies
or its affiliates and us. These directors collectively own and may in the future
own or have options to purchase  significant amounts of BEI Technologies' stock,
as well as  collectively  own significant  amounts of our stock.  This ownership
could create,  or appear to create,  potential  conflicts of interest when these
directors are faced with decisions that could have  different  implications  for
BEI Technologies and us.

Out  of an  average  of 12  business  days  spent  each  month  on  professional
management  activities,   our  Chief  Financial  Officer  devotes  approximately
three-quarters of his time to us and the remainder to BEI  Technologies.  During
fiscal  2001,  our then  incumbent  President  split  his time  equally  between
providing  services  to us and  BEI  Technologies,  with a total  average  of 16
business days spent each month on professional management activities.  As of the
commencement of our fiscal year 2002, he began providing services exclusively to
us.  As of June  2002,  the  Company's  current  President/General  Manager  was
appointed by the Board of Directors.  The Company's new President also serves as
President of a subsidiary of BEI Technologies.

To date, we have not instituted formal procedures for our directors and officers
to follow to safeguard against conflict of interest disputes.  We presently rely
on our  directors'  awareness  of  their  fiduciary  duties  and  our  executive
officers'  understanding  of  their  responsibilities  to us and to  each  other
company for whom they may serve as a director or in an executive capacity.  This
informal  policy may not  adequately  protect us from all  conflict  of interest
situations.  Additionally,  when proposed rules  requiring  adoption of a formal
code of ethics issued by the Securities  and Exchange  Commission are effective,
we will adopt such a formal policy.

We may have potential  business conflicts of interest with BEI Technologies with
respect to our past and ongoing  relationships,  the resolution of which may not
be as favorable to us as if we were dealing with an unaffiliated party.

We currently have various interim and ongoing  agreements with BEI Technologies.
However,  disputes  could arise between BEI  Technologies  and us in a number of
areas relating to our past and ongoing relationships, including:

          *    the nature,  extent of, and pricing of the interim  services  BEI
               Technologies has agreed to provide to us;

          *    intellectual property rights, employee benefits and other matters
               arising from our separation from BEI Technologies; and

          *    major business combinations involving us.

We cannot  assure you that we will be able to resolve any  conflicts we may have
with BEI  Technologies  or, if we are able to do so, that the resolution will be
as favorable as if we were dealing with an unaffiliated party. The agreements we
have entered into with BEI  Technologies  may be amended by mutual  agreement of
the parties.  It is possible future amendments to these agreements could contain
provisions less favorable to us than the current terms of these agreements.


                                       18

<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Name                            Age                    Position
------------------------------  ----    ----------------------------------------
Dr. Lawrence A. Wan ..........   64     Chairman of the Board
Gerald D. Brasuell............   54     President
Gary D. Wrench. ..............   69     Chief Financial Officer and Director
Martin Lim. ..................   38     Chief Technical Officer
Danforth Joslyn ..............   72     Director
Charles Crocker ..............   63     Director
Dr. James W. Seeser...........   59     Director

Dr. Lawrence Wan has served as our Chairman of the board and as a director since
our inception.  From September 1997 to September  2002, Dr. Wan served as Senior
Vice President and Chief Technical  Officer of BEI Technologies and President of
SiTek, Inc., a subsidiary of BEI Technologies.  Prior to that, from July 1990 to
September 1997, Dr. Wan served as Vice President and Chief Technical  Officer of
BEI Electronics, Inc., renamed BEI Medical Systems Company, Inc. From 1984 until
1990,  Dr.  Wan  served  as  Vice  President,  engineering,  of  Systron  Donner
Corporation,  and held various technical and general  management  positions with
that company  between 1979 and 1984.  From 1968 through 1979, he served as Chief
Executive Officer of Sycom, Inc., a commercial  electronics company, of which he
was also a  founding  member.  Dr. Wan holds  B.S.,  M.S.  and Ph.D.  degrees in
Engineering  and  Applied  Sciences  from Yale  University.  Dr. Wan served as a
director of BEI Medical Systems Company,  Inc. until the sale of that company to
Boston Scientific Corporation in July 2002.

Mr. Gerald D. Brasuell has been our President  since June 2002. Mr.  Brasuell is
also Vice President and General Manager of the Systron Donner Inertial  Division
of BEI Technologies and President of SiTek,  Inc. Mr. Brasuell has served in the
Systron Donner Inertial  Division  position since December 6, 2002. Mr. Brasuell
previously  served as Vice  President  and  General  Manager of  Systron  Donner
Inertial Division from October 1995 through February 2002. From 1985 until 1995,
Mr.  Brasuell held executive  staff level  positions at Systron Donner  Inertial
Division in Program and Contracts  Management,  Advanced Product Development and
Manufacturing.  Between 1976 and 1985 Mr.  Brasuell  held various  technical and
management positions at Systron Donner Inertial Division.

Mr.  Gary  Wrench has served as our Chief  Financial  Officer  and as a director
since  inception.  Mr.  Wrench's  present  time  commitment  to us as our  Chief
Financial  Officer is part-time.  Mr. Wrench served as Senior Vice President and
Chief  Financial  Officer  of BEI  Technologies  from  September  1997 until his
retirement from BEI Technologies in May 2000.  Following Mr. Wrench's retirement
from full-time service to BEI Technologies,  Mr. Wrench has continued to provide
professional  services to BEI  Technologies as an independent  consultant.  From
July 1993 until  September  1997,  he served as Senior Vice  President and Chief
Financial Officer of BEI Electronics, Inc., renamed BEI Medical Systems Company,
Inc.  From  April  1985  to July  1993,  he  served  as  vice  president  of BEI
Electronics,  Inc.  and  President  and Chief  Executive  Officer  of BEI Motion
Systems Company, Inc., then a wholly owned subsidiary of BEI Electronics,  Inc.,
now a part of BEI Technologies.  Mr. Wrench holds a B.A. from Pomona College and
an M.B.A. from the University of California, Los Angeles. Mr. Wrench serves as a
member of the board of directors of BEI  Technologies,  Inc. He also served as a
director of BEI Medical Systems Company,  Inc. until the sale of that company to
Boston Scientific Corporation in July 2002.

Mr. Martin Lim has served as our Chief  Technical  Officer since May 2000.  From
May 1997 to January  2001,  Mr. Lim served as the  director  of  technology  for
SiTek,  Inc., a subsidiary of BEI Technologies,  where he initiated  programs in
microfluidics,  biomedical implants and photonic devices.  From March 1995 until
May  1997,  Mr.  Lim  served  as  Senior   Technologist  for  BEI  Technologies,
specializing in developing advanced  silicon-based  sensors and microfabrication
initiatives.  From December  1989 to January  1995,  Mr. Lim was a member of the
research staff at Xerox's Palo Alto research  center focusing on MEMS technology
research as applied to microfluidic ink jet printing. Mr. Lim has been awarded 9
U.S. patents in both device and processes  technologies.  Mr. Lim holds B.S. and
M.S.  degrees in  Mechanical  Engineering  from the  University of California at
Berkeley.

Mr. Danforth Joslyn has served as a director since inception.  From inception to
June 2002,  Mr. Joslyn served on a part-time  basis as the Company's  President.
From 1998 to the present,  Mr.  Joslyn has served on a less than full time basis
as an executive  officer of Neovasys,  Inc., a development  stage medical device
company of which he


                                       19

<PAGE>

was a founder. From 1998 to the commencement of our 2002 fiscal year, Mr. Joslyn
provided services to BEI Technologies as an independent consultant. From 1993 to
1998,  Mr.  Joslyn  served  in an  executive  capacity  with  similarly  focused
predecessor  companies to Neovasys.  Mr. Joslyn was a founder of Optical Coating
Laboratory,  Inc. (OCLI),  a company  specializing in vacuum deposited thin film
products serving the optical networking,  medical and defense markets. From 1988
to 1993, Mr. Joslyn served as President and Chief  Executive  Officer of a joint
venture established to develop  color-shifting  pigments for the security market
by OCLI and Imperial Chemical  Industries.  From 1959 to 1993, Mr. Joslyn served
as a member of OCLI's board of directors and in various executive positions with
OCLI, including as its President and chief operating officer. Mr. Joslyn holds a
B.S. and a J.D. from George Washington University

 Mr.  Charles  Crocker  has served as a member of our board of  directors  since
inception.  Mr.  Crocker  was a founder of BEI  Technologies,  and has served as
Chairman  of  the  board  of  directors  and  Chief  Executive  Officer  of  BEI
Technologies  since  September 1997. Mr. Crocker also served as President of BEI
Technologies  until May 2000. Mr. Crocker served as President of Crocker Capital
Corporation from 1970 to 1985, and as general partner of Crocker  Associates,  a
venture capital investment  partnership,  from 1970 to 1990. Mr. Crocker holds a
B.S. from Stanford  University and an M.B.A.  from the University of California,
Berkeley.  Mr. Crocker serves as a member of the board of directors of Fiduciary
Trust Company  International,  Pope & Talbot,  Inc., BEI Technologies,  Inc. and
Teledyne Technologies, Inc.

Dr. James W. Seeser was elected as a Director of OpticNet in August 2002. He has
advised several  companies in technical  management  after  completing a 18 year
career in 2001 with Optical Coating  Laboratories,  Inc. ("OCLI"), a division of
JDS  Uniphase  ("JDSU").  He was most  recently a vice  president  at OCLI after
serving for 7 years as Chief  Technical  Officer for OCLI in charge of U.S.  and
foreign  technology  integration.  Prior to that,  he was in charge  of  various
operating  units of OCLI.  Dr.  Seeser  received  his  Ph.D.  and M.S.  from the
University of Missouri and his B.A. from Drury College.  Dr. Seeser has received
several  patents  for  his  inventions  and  has  published  numerous  technical
articles.

Board of Directors and Officers

The members of our board of directors are currently  elected annually for a term
of one year.  Upon  election,  all  directors  hold office until the next annual
meeting of stockholders  at which their terms expire and until their  successors
have  been  duly  elected  and  qualified.  In the  event we should no longer be
subject to certain provisions of the California  Corporations Code with which we
must presently comply, we intend to provide for a classified board of directors,
which could have the effect of deterring  hostile  takeovers or delaying changes
in control of management.  Our executive officers serve at the discretion of the
board of directors.  There are no family relationships among any of our officers
and  directors.  Directors  who are not  officers of  OpticNet do not  presently
receive any compensation for their services as board members, though they may be
reimbursed for expenses in connection with attendance at board meetings.

Committees of the Board of Directors

We do not presently have any standing committees of the board. We will establish
an audit and  compensation  committees  prior to listing  our shares for trading
with any nationally recognized securities exchange or quotation system.

Services Provided by our President and Chief Financial Officer

Mr. Joslyn,  our former  President  (until June 2002), was party to a consulting
Agreement with us, and Mr. Wrench,  our Chief Financial  Officer,  is party to a
consulting  agreement  with BEI  Technologies.  During fiscal 2002,  each of Mr.
Joslyn and Mr.,  Wrench  divided  their time  spent on  professional  management
activities  between service to us and service to BEI Technologies.  Mr. Joslyn's
agreement with us covered Mr. Joslyn's continuing monthly services to us. During
fiscal 2001,  Mr.  Joslyn split his time equally  between  service to us and BEI
Technologies,  based on an average of 16  business  days  combined  service  per
month,  and payments to Mr. Joslyn under this  agreement  were  allocated to our
account and that of BEI  Technologies  on an equal  basis.  During  fiscal 2001,
payments to Mr.  Joslyn  allocated to our account under this  agreement  totaled
$32,000 and $32,000 was allocated to the account of BEI Technologies.  As of the
commencement  of our 2002 fiscal  year,  Mr.  Joslyn  began  providing  services
exclusively to us under this agreement. As of June 2002, we recognized


                                       20

<PAGE>

payments to Mr. Joslyn of approximately $53,000. Mr. Wrench's agreement with BEI
Technologies  includes coverage of services performed on our behalf and payments
to Mr. Wrench under this  agreement are allocated to our account and that of BEI
Technologies  on the basis of time spent by Mr.  Wrench  each month on behalf of
each company. Mr. Wrench's agreement provides Mr. Wrench is to be compensated at
a rate of $6,000 per month,  plus payment of $1,200 per day for service to us or
to BEI  Technologies  that exceeds  five days per month.  Service to us averages
approximately  three quarters of Mr. Wrench's  professional time each month, out
of an  average  of  twelve  business  days  of  combined  service  to us and BEI
Technologies each month. During fiscal 2002, payments to Mr. Wrench allocated to
us under this agreement totaled $94,000.  The agreement between BEI Technologies
and Mr. Wrench provides for a one-year term,  renewable annually in June of each
year upon mutual agreement of the parties and is cancelable by either party upon
thirty days written notice.

ITEM 2.  PROPERTIES

Our properties  consist of leased facility space and leased equipment.  We lease
facility space used for  administrative  purposes in San Francisco,  California,
and we lease a facility for sales,  manufacturing  and research and  development
purposes  in  Hayward,  California.  We lease  certain  core  equipment  used in
operations  that  we  have  installed  at  our  Hayward,   California  facility.
Additionally,  we may use facilities located in Concord, California from time to
time as permitted under our  intercompany  agreement with BEI  Technologies.  We
believe  that our existing  properties  and  equipment  are adequate for present
operations. The Company's principal facilities are as follows:


Location                                      Description of Facility
--------------------------------------------------------------------------------

Hayward, California       Leases approximately 15,571 square foot manufacturing,
                          research and development facility.

ITEM 3.  LEGAL PROCEEDINGS

The Company has pending  various legal  actions  arising in the normal course of
business.  Management believes that none of these legal actions, individually or
in the  aggregate,  will  have a  material  impact  on the  Company's  business,
financial  condition or operating  results.  The Company is a  codefendant  in a
dispute  with a  former  employee,  which  at  September  28,  2002,  cannot  be
reasonably  estimated as to the future  financial  impact.  The Company believes
this claim has no merit and is rigorously defending the allegation.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


                                       21

<PAGE>

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no  established  public  trading  market for our voting common stock or
nonvoting  common  stock.  As of December 11, 2002,  shares of our voting common
stock were held by approximately  3,000 record holders,  shares of our nonvoting
common stock were held by 22 individuals and approximately 146,000 shares of our
voting  common stock were subject to  outstanding  options.  Our common stock is
currently  subject to significant  restrictions  on transfer as set forth in our
bylaws.  We have paid no  dividends  during the past  three  fiscal  years.  The
payment and amount of cash dividends on our common stock is at the discretion of
our board of directors.  We anticipate that for the  foreseeable  future we will
retain earnings, if any, for use in our business.

Effective  September 28, 2002, the Company and BEI  Technologies  had determined
the Company would authorize and issue to BEI  Technologies a series of nonvoting
preferred  stock.  In November  2002,  the Company  issued a total of 18,146,420
shares of nonvoting  Series B Preferred Stock to BEI  Technologies,  in exchange
for financing  provided  during the third and fourth  quarters of fiscal 2002 in
the  amount  of  $1,814,642.  The  sale was  exempt  under  Regulation  D of the
Securities Act of 1933.


                                       22

<PAGE>

<TABLE>
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
         Plan Category             Number of securities to be      Weighted-average exercise         Number of securities
                                     issued upon exercise of     price of outstanding options,      remaining available for
                                      outstanding options,            warrants and rights        future issuance under equity
                                     warrants and rights (a)                                          compensation plans
                                                                                                     (excluding securities
                                                                                                   reflected in column (a))
-----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                             <C>                            <C>
Equity Compensation plans
approved by security holders:

   2000 Equity Incentive Plan                145,833                         $0.09                          830,481

Equity Compensation plans
not approved by security
holders:                                       --                              --                             --


Total                                        145,833                         $0.09                          830,481
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       23

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

Selected Financial Data

The following table sets forth our selected  historical  financial  data,  which
includes research and development  expenses borne by BEI Technologies  since our
inception  through  fiscal  2002.  We derived  the data as of and for the fiscal
years ended  September 28, 2002 and  September  29, 2001,  and from February 23,
2000 (inception) to September 30, 2000 and from February 23, 2000 (inception) to
September 28, 2002 from our audited financial statements and related notes. This
data should be read in  conjunction  with our audited  financial  statements and
related  notes for the fiscal years ended  September  28, 2002 and September 29,
2001,  and from  February 23, 2000  (inception)  to September  30, 2000 and from
February 23, 2000  (inception)  to September 28, 2002 included at Item 7 of this
Form 10-K, and "Management's  Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
                                                                                 Period From            Period From
                                   Year Ended              Year Ended         February 23, 2000         February 23,
                                  September 28,           September 29,         (Inception) to       2000 (Inception) to
                                     2002                     2001            September 30, 2000      September 28, 2002
                       -------------------------------------------------------------------------------------------------------
<S>                              <C>                     <C>                     <C>                     <C>
Statement of
Operations Data:
Revenues                         $   112,500             $   499,000             $      --               $   611,500
Gross Profit                          28,699                 239,360                    --                   268,059
Net Loss                          (4,131,429)             (1,574,755)               (105,746)             (5,811,930)
Balance Sheet Data:
Cash and Cash
Equivalent                       $     4,881             $   828,489             $ 1,012,803             $     4,881
Total Assets                           9,196               1,048,849               1,012,803                   9,196
Stockholders' Deficit             (2,915,327)               (614,177)                944,073              (2,915,327)
</TABLE>


The information  for the 2002,  2001 and 2000 fiscal years'  quarters  presented
below is  unaudited  but has been  prepared  on the  same  basis as the  audited
financial  statements  appearing  elsewhere in this form 10-K. In the opinion of
management,  all  necessary  adjustments  consisting  only of  normal  recurring
adjustments,  have been  included  to  present  fairly the  unaudited  quarterly
results when read in conjunction with our audited  financial  statements and the
related notes.  These operating  results are not  necessarily  indicative of the
results of any future period. All expense  categories below include  stock-based
compensation.


<TABLE>
<CAPTION>
                      September       June 29,     March 30,    December       September     June 30,
                      28, 2002         2002          2002        29, 2002       29, 2001       2001
                     -----------   -----------   -----------   -----------   -----------   -----------
<S>                  <C>           <C>           <C>           <C>           <C>           <C>
Statement of
Operations Data:
Revenues             $      --     $    25,000   $      --     $    87,500   $      --     $   174,000
Gross Profit (loss)      (27,549)       12,500          --          43,748          --         109,360
Net Loss                (496,217)   (1,149,501)   (1,767,771)     (717,940)   (1,001,371)     (239,364)
Loss Per Share             (0.09)        (0.20)        (0.32)        (0.13)        (0.19)        (0.05)
Balance Sheet Data
(as of the dates
noted above):
Cash and Cash
Equivalents          $     4,881   $    21,655   $   106,834   $   530,893   $   828,489   $ 1,071,404
Total Assets               9,196        74,749       308,538       852,919     1,048,849     1,247,258
Stockholders'
Deficit               (2,915,327)   (3,080,376)   (3,090,926)   (1,328,502)     (614,177)      430,529
                     -----------   -----------   -----------   -----------   -----------   -----------


                                                                        February 23,
                                                                           2000
                                                                        (inception)
                      March 31,     December      September    July 2,   to April 1,
                        2001        30, 2000      30, 2000      2000        2000
                     -----------   -----------   -----------   --------  ---------
Statement of
Operations Data:
Revenues             $   325,000   $      --     $      --     $   --    $    --
Gross Profit (loss)      130,000          --            --         --         --
Net Loss                (157,992)     (176,028)     (105,746)      --         --
Loss Per Share             (0.03)        (0.04)        (0.08)      --         --
Balance Sheet Data
(as of the dates
noted above):
Cash and Cash
Equivalents          $ 1,062,724   $ 1,278,834   $ 1,012,803       --         --
Total Assets           1,164,580     1,381,318     1,012,803       --         --
Stockholders'
Deficit                  669,893       868,971       944,073       --         --
                     -----------   -----------   -----------   --------  ---------
</TABLE>


                                       24
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

The following  discussion and analysis  should be read in  conjunction  with our
historical  financial  statements and the notes to those  financial  statements,
which are  included  in this Form 10-K.  Except for the  historical  information
contained herein, the following discussion contains  forward-looking  statements
that involve risks and uncertainties. Our actual results could differ materially
from  those  discussed  in, or implied  by,  these  forward-looking  statements.
Factors that could cause or contribute to such differences  include, but are not
limited  to;  those  discussed  in  this  section  and  in  the  "Business--Risk
Factors"--section of this Form 10-K.

See "Critical accounting policies and the use of estimates" for a description of
the Company's critical accounting policies.

The following  table sets forth,  for the fiscal years ended  September 28, 2002
and  September  29, 2001 and the period from  February 23, 2000  (inception)  to
September 30, 2000, the percentage of net sales  represented by certain items in
the Company's Statements of Operations.


                                                         Fiscal Period Ended
                                                     2002       2001        2000
                                                    -----      -----       -----
Net sales .........................................   100%       100%       -- %
Cost of sales .....................................    74         52        --
                                                    -----       ----        ----
Gross profit ......................................    26         48        --
Operating expenses:
Selling, general and administrative expenses ......  1137        174        --
Research, development and related expenses ........  2453        195        --
                                                    -----       ----       -----
Loss before interest and taxation (EBIT) .......... (3564)      (321)       --
Other income ......................................     3         10        --
Interest expense ..................................  (112)        (5)       --
                                                    -----       ----       -----
Net loss .......................................... (3673%)     (316%)      -- %
                                                    =====       ====       =====


Results of Operations

Years ended September 28, 2002 and September 29, 2001

Revenues

Revenues  during  fiscal  2002  reflected  work  performed   under   engineering
agreements with two unaffiliated customers and decreased  approximately $387,000
to $112,500  from a similar  period in fiscal  2001.  The decrease is due to the
slow down of demand for new telecommunications  equipment components as compared
to prior periods.  During fiscal 2001,  revenues were $499,000,  which reflected
work performed  under an engineering  agreement with one customer,  Glimmerglass
Networks.

Cost of Revenues and Gross Profit

Cost of revenues as a  percentage  of  revenues in fiscal 2002  increased  by 22
percentage  points  to 74%.  The  increase  is due to  higher  direct  costs  on
engineering  agreements in the current year. In fiscal 2001, cost of revenues as
a percentage of net revenues was 52%, resulting in gross profit of approximately
$239,000. Cost of revenues includes salaries, materials and production overhead.

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  during  fiscal  2002  increased
approximately  $410,000  over  fiscal 2001 to $1.3  million.  The  increase  was
primarily  due  to  increased   professional,   consulting  and  legal  fees  of
approximately  $567,000.  The remaining increase was due to facility rent, which
in fiscal 2002 was the first full year of rent expense,  travel and other costs.
Selling,  general and  administrative  expenses  included  payments


                                       25
<PAGE>

made to BEI  Technologies  for various  accounting,  human  resources  and other
administrative  services  provided by BEI Technologies  pursuant to the Services
Agreement  between the two  companies.  These  payments  during fiscal 2002 were
$50,000.  The cost of these  services  was  established  at  $25,000  per fiscal
quarter  at the time of  entrance  into the  Services  Agreement  based upon the
square footage,  headcount,  usage and other methods  management  believes to be
reasonable.  In the fiscal quarter ended June 29, 2002, BEI Technologies  agreed
to suspend charges for the third and fourth fiscal quarters and reduce the level
of administrative  support to a minimal level reflecting the reduced  operations
of the Company in the six months ended  September  28, 2002 due to the Company's
inability to obtain significant strategic partners or third party financing.  As
a percentage of net revenues,  selling,  general and administrative  expense was
1137% in fiscal 2002 compared to 174% in fiscal 2001.

Research and Development Expenses

Research and  development  expenses  during fiscal 2002 increased  approximately
$1.8 million over fiscal 2001 to $2.8 million. The increase was primarily due to
increased  gross  costs for direct  employee  compensation  expense  and related
benefits of approximately $1.3 million resulting from a significant  staffing up
of research and development headcount in expectation of increased market demand,
increased gross costs for facility rent and operations of approximately $95,000,
as well as increased  gross costs for  materials  and supplies of  approximately
$470,000.  Many of these  costs had a full  year  effect  for the first  time in
fiscal 2002.  The  remaining  increase  was due to gross costs for  professional
fees, travel and other costs.  During fiscal 2002, the Company recorded payments
or  receivables  of  $187,000  for  deliveries  of  prototype  products  to  two
unaffiliated  customers as a net against  research and development  expense.  In
addition,  the  Company  recorded  payments or  receivables  for  deliveries  of
prototype  products  during  fiscal  2001  of  $210,000  from a  total  of  five
customers,   including  Glimmerglass  Networks.   Payments  or  receivables  for
deliveries of prototype products were accounted for as an offset to research and
development  expense. As a percentage of net revenues,  research and development
expense was 2453% in fiscal 2002 compared to 195% in fiscal 2001.

Related Party Financing

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

In October  2000,  BEI  Technologies  agreed to provide  OpticNet with a line of
credit  originally  established for up to $2.0 million.  During fiscal 2002, the
line of credit was amended to allow for  borrowings up to $3.0  million.  During
the  fiscal  quarter  ended  June  29,  2002,  BEI  Technologies  suspended  the
availability  of advances to the Company  under the line of credit,  under which
amounts outstanding at such time totaled approximately $2.7 million in principal
amount. As of March 30, 2002, the Company was advised by BEI Technologies  that,
in view of the Company's inability to obtain outside financing to date and other
general  indications  of  investor   dissatisfaction   with  businesses  in  the
telecommunications  market,  further debt financing would not be provided by BEI
Technologies.  During October 2002, BEI Technologies  extended the maturity date
of the line of credit to December 31, 2002. In the six months  ending  September
28, 2002, BEI Technologies  provided an additional $1.8 million,  approximately,
of financing to the Company,  which was advanced with the intent to convert such
cash advances into additional equity.  Effective September 28, 2002, the Company
and BEI Technologies had determined the Company would authorize and issue to BEI
Technologies  a series of  nonvoting  preferred  stock.  In November  2002,  the
Company  issued a total of  18,146,420  shares of nonvoting  and  nonconvertible
Series B  Preferred  Stock to BEI  Technologies,  in  consideration  of the $1.8
million advanced during the third and fourth quarters.  See Note 2 for a further
description of the relationship with BEI Technologies.

Interest Expense and Interest Income

Interest expense during fiscal 2002 increased approximately $102,000 to $125,000
as compared to fiscal 2001 due to the increased average  outstanding balance and
additional  borrowings  on the  Company's  line of  credit  agreement  with  BEI
Technologies.

Interest income was $4,000 in fiscal 2002, and $50,000 in fiscal 2001 due to the
decrease in income earned on highly liquid investments.


                                       26
<PAGE>

Liquidity and Capital Resources

During fiscal 2002 total cash used in operations was approximately $4.1 million.
Cash provided by  operations  included the positive  impact of non-cash  charges
from  depreciation  and  amortization of $21,000 and $14,000,  respectively.  In
addition,  positive  impacts to cash resources  resulted from decreases in trade
receivables,  prepaid expenses, and other current assets, of $100,000,  $15,000,
and $62,000,  respectively and an increase in other related party liabilities of
$214,000.  These cash inflows were offset by a net loss of $4.1 million, as well
as decreases in trade accounts payable, accrued and other liabilities,  customer
advances,  and  deferred  rent  of  $119,000,  $284,000,  $25,000  and  $15,000,
respectively.

Cash provided by investing activities during fiscal 2002 consisted of a purchase
of  approximately  $3,000 in capital  equipment,  offset by a decrease  in other
assets of $21,000.  Rent expense related to this equipment totaled approximately
$399,000  during the first six  months of fiscal  2002.  Beginning  in the third
quarter of fiscal 2002, the Company  reduced  operations due to its inability to
obtain additional  financing from  unaffiliated  investors to date. Thus, due to
reduced usage now expected on the subleased equipment, past rent expenses on the
subleases is not  necessarily  indicative  of future  results.  Rent expense for
fiscal 2002 was approximately $0.7 million.  Transactions with BEI Technologies,
a minority investor and the Company's former parent company, are not necessarily
on an arms-length  basis and the Company may receive more favorable  terms under
these arrangements than it would from an unrelated party.

Cash  provided by  financing  activities  during  fiscal 2002  consisted  of net
proceeds of $1.5 million from  borrowings on the  Company's  note payable to BEI
Technologies under its related party line of credit arrangement.  The borrowings
were used to fund daily operations, capital investments and product development.
In March 2002, BEI  Technologies  increased this line of credit by $1.0 million.
Also during fiscal 2002, cash from financing  activities  included the provision
of  financing,  subsequently  converted  into  Series B  preferred  stock of the
Company   following   year-end  and  option   exercises   for  common  stock  of
approximately $2,000.

If the Company continues as a going concern,  the Company anticipates  incurring
substantial  additional  losses  over at least  the next  several  years.  Since
inception, the Company has incurred recurring operating losses and negative cash
flows from operations.  As of September 28, 2002, the Company had an accumulated
deficit of $5.8 million.  After extensive  discussions with prospective  outside
investors  throughout  fiscal 2002,  during March 2002 the Company  became aware
that none of these  discussions  would result in near term equity  financing for
the Company.  As of March 30, 2002, the Company was advised by BEI  Technologies
that, in view of the Company's inability to obtain outside financing to date and
other  general  indications  of investor  disaffection  with  businesses  in the
telecommunications  market,  further debt financing would not be provided by BEI
Technologies.  These  conditions  raise  substantial  doubt about the  Company's
ability  to  continue  as a going  concern.  During  fiscal  2002,  the  Company
completed an equity investment in the Company by BEI  Technologies,  in the form
of nonvoting  preferred stock, in consideration of amounts received in the third
and fourth  quarters of fiscal 2002.  As of the end of the  Company's  March 30,
2002 fiscal  quarter,  management  determined  that the  Company  would not have
sufficient financing for the remainder of its 2002 fiscal year without modifying
the Company's  business  plan,  implementing  strict  cost-cutting  measures and
obtaining  additional  financing was  obtained.  Therefore,  management  and the
Company's  board of  directors  reduced the level of spending by the Company for
research and development and facility and equipment  expenditures  and to reduce
operations to a level that will solely  support the current  customer  base. The
Company  intends  to  continue  to operate in such a scaled  back  manner  until
additional outside financing is available or other prospects are realized by the
Company.

In April  2002,  the  Company  underwent a  reduction  in force  resulting  in 8
individuals  terminating  employment  with the Company,  including  engineering,
manufacturing  and marketing  personnel.  Severance pay for affected persons was
per Company policy,  including cash payment and the  acceleration of the vesting
of options for certain  affected  individuals.  Total cash costs  related to the
reduction in force of  approximately  $86,000 was recorded in the fiscal quarter
ending June 29, 2002.

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

                                       27
<PAGE>


serve as  executive  officers  of the  Company.  The  services  of  certain  key
individuals,  including  the  Company's  newly  appointed  President  and  Chief
Technical Officer, are expected to continue to be available to the Company on an
as needed basis, with reimbursement by the Company to their present employer for
the time value of their services.

Management  has  developed  a plan to enable the  Company to continue as a going
concern, see "Item 1. Business - Risk Factors" and Note 1.

Year ended September 29, 2001 and Period from Inception to September 30, 2000

Revenues

During fiscal 2001,  revenues were $499,000,  reflecting work performed under an
engineering agreement with one customer,  Glimmerglass  Networks.  There were no
revenues generated in the period from inception to the end of fiscal 2000.

Cost of Revenues and Gross Profit

In fiscal  2001,  cost of  revenues as a  percentage  of net  revenues  was 52%,
resulting in gross profit of approximately  $239,000.  Cost of revenues includes
salaries,  materials and production  overhead.  There was no cost of revenues in
the period from inception to the end of fiscal 2000.

Selling, General and Administrative Expenses

Selling,  general and administrative  expenses in fiscal 2001 increased $854,000
from  $15,000 in the period of  inception to the end of fiscal 2000 to $869,000.
These expenses consisted primarily of direct employee  compensation  expense and
related benefits of approximately $396,000, as well as professional,  consulting
and legal fees of  approximately  $273,000.  As a  percentage  of net  revenues,
selling, general and administrative expense was 174% in fiscal 2001.

Selling,  general and  administrative  expenses paid to BEI  Technologies  by us
during fiscal 2001 totaled  $75,000,  which covered  services  received from BEI
Technologies under our InterCompany Services Agreement for three fiscal quarters
during  fiscal  2001 at a cost of  $25,000  per fiscal  quarter.  The per fiscal
quarter cost of $25,000 for services  covered under our  InterCompany  Agreement
was established  based upon square footage,  headcount,  usage and other methods
that management believes to be reasonable.

Research and Development Expenses

Research  and  development  expenses  in fiscal  2001  increased  $870,000  from
$102,000 in the period of inception  to the end of fiscal 2000 to $972,000.  The
increase  was  due  to a  full  year  operating  period  in  fiscal  2001  as an
independent  company  dedicated to  expanding  operations,  compared  with seven
months in fiscal 2000  during  which we were still in an  organizational  stage.
Research and  development  expenses in fiscal 2001 consisted  primarily of gross
costs  for  direct  employee   compensation  expense  and  related  benefits  of
approximately  $614,000 and gross costs related to facility rent and  operations
of approximately  $219,000. In addition, we recorded payments or receivables for
deliveries of prototype products during fiscal 2001,  accounted for as an offset
to research and development expense,  from a total of five customers,  including
Glimmerglass Networks. As a percentage of net revenues, research and development
expense was 195% in fiscal 2001.

Interest Expense and Interest Income

Interest  expense was $24,000 in fiscal 2001 due to  borrowings  during the year
under our line of credit agreement with BEI Technologies.

Interest  income was  $50,000 in fiscal  2001,  and  $11,000 in the period  from
inception  to the end of  fiscal  2000 due to income  earned  on  highly  liquid
investments.

Liquidity and Capital Resources

During  fiscal  2001,  we  used  $1,316,000  of cash  and  cash  equivalents  in
operations.  Increases in accrued  expenses and other  liabilities  and accounts
payable of $319,000 and $131,000, respectively,  together with a non-cash charge
for depreciation  and amortization of $12,000,  and other cash inflows of $3,000
provided  $465,000  in cash.  These cash  inflows  were  offset by a net loss of
$1,575,000, as well as increases in trade receivables,  other current assets and
prepaid expenses of $100,000, $62,000 and $19,000,  respectively, and a decrease
in customer advances of $25,000.


                                       28
<PAGE>

Investing  activities  in fiscal 2001  consisted  of our  purchase of $21,000 in
capital equipment to support increased research,  development and production and
our  entrance  into an equipment  sublease  arrangement  with BEI  Technologies.
During fiscal 2001, we financed  equipment  with a value of $708,000  under this
arrangement,  with an initial lease term of three years. Our  transactions  with
BEI  Technologies,  a minority  investor and our former parent company,  are not
necessarily  on an  arms-length  basis and we may receive more  favorable  terms
under  these  arrangements  than we  would  from an  unrelated  third-party.  In
addition, an increase in deposits resulted in cash outflows of $22,000.

Financing activities for us in fiscal 2001 generated $1,175,000 of cash inflows.
Borrowings  were  $1,331,000  during  the  year  on  our  note  payable  to  BEI
Technologies  under our line of credit.  The borrowings  were used to fund daily
operations,  capital  investments  and product  development.  Additionally,  the
issuance of common  stock  generated  $8,000 in cash.  These cash  inflows  were
partially offset by $164,000 of principal repayments on the note payable.

Effects of Inflation

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

Financing from Related Party

Pursuant to the facilities sublease agreement,  equipment sublease agreement and
the Services Agreement, payments due to BEI Technologies were as follows:
<TABLE>
<CAPTION>
                                                                        Fiscal Years Ended:
                                      Period from February 23,    September 29,    September 28,    Period from February 23,
                                         2000 (inception) to           2001            2002            2000 (inception) to
                                         September 30, 2000                                            September 28, 2002
                                     ----------------------------------------------------------------------------------------
<S>                                            <C>                  <C>              <C>                    <C>
Subleases
    Facilities sublease  .......               $8,486               $213,569         $134,585               $356,640
    Equipment sublease  ........                 --                     --            660,449                660,449

Total amounts financed under
subleases.......................                8,486                213,569          795,034              1,017,089
Intercompany service
charges.........................                 --                   75,000           50,000                125,000
Total payments due..............               $8,486               $288,569         $845,034             $1,142,089
</TABLE>


Recent Developments

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

Critical Accounting Policies and the Use of Estimates

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


                                       29
<PAGE>

from those on which the Company based its assumptions.  The Company believes the
following  critical  accounting   policies  affect  significant   judgments  and
estimates used in the preparation of its financial statements.

Allowance for Doubtful Accounts

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

Litigation

The Company  reserves for legal claims when payments  associated with the claims
become  probable  and can be  reasonably  estimated.  Due to the  difficulty  in
estimating  costs of resolving legal claims,  actual costs may be  substantially
higher than the amounts reserved.

Environmental Matters

The Company reserves for known environmental  claims, of which there are none in
fiscal 2002,  when payments  associated  with the claims become probable and the
costs can be reasonably estimated. The Company's environmental reserves, for all
periods presented,  are recorded at the expected payment amount. The actual cost
of resolving environmental issues may be higher than that reserved primarily due
to difficulty in  estimating  such costs and potential  changes in the status of
government regulations.

Significant Accounting Policies

Revenue Recognition

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

To date, the Company has not recognized revenue related to non-prototype product
offerings.  All  revenue  recognized  to  date  consisted  of  engineering  work
performed under engineering agreements with unaffiliated customers.  Revenue for
this  engineering work is recognized  based on customer  acknowledgement  of the
achievement of milestones in the engineering agreement.

Research and Development Expense

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


                                       30
<PAGE>

Property, Plant and Equipment and Related Depreciation

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

Accrued Expenses and Other Liabilities

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


                                       31
<PAGE>

 ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company's exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of U.S.  interest  rates, as a
portion of the Company's  cash  equivalents  are in short-term  debt  securities
issued  by  corporations.   The  Company's  cash  equivalents  are  placed  with
high-quality  issuers  and the  Company  attempts  to limit the amount of credit
exposure  to any one  issuer.  Due to the  nature  of the  Company's  short-term
investments,  the Company believes that it is not subject to any material market
risk  exposure.  The  Company  does  not  have  any  foreign  currency  or other
derivative financial instruments.


                                       32
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

OpticNet, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>

                                                           September 28,   September 29,
                                                                2002           2001
                                                             ----------     ----------
<S>                                                          <C>            <C>
Assets

Current assets:
   Cash and cash equivalents .............................   $    4,881     $  828,489
   Trade receivables, less customer allowance for
    doubtful accounts (2002--$57,080; 2001--$0) ..........         --           99,720
   Prepaid expenses ......................................        3,263         18,528
   Other current assets ..................................          324         62,103
                                                             ----------     ----------

Total current assets .....................................        8,468      1,008,840

   Property and equipment, net ...........................         --           17,984
   Deposits ..............................................          728         22,025
                                                             ----------     ----------
                                                             $    9,196     $1,048,849
                                                             ==========     ==========
</TABLE>
See accompanying notes.


                                       33
<PAGE>

OpticNet, Inc.
(a development stage company)
Balance Sheets (cont.)
<TABLE>
<CAPTION>
                                                                                           September 28,    September 29,
                                                                                               2002             2001
                                                                                            -----------      -----------

<S>                                                                                         <C>              <C>
Liabilities and stockholders' deficit

Current liabilities:
   Accounts payable ...................................................................     $    13,713      $   132,574
   Accrued expenses and other liabilities .............................................          40,394          324,174
   Other related party liabilities ....................................................         214,078             --
   Note payable to related party ......................................................       2,656,338        1,166,608
   Customer advances ..................................................................            --             25,000
                                                                                            -----------      -----------
Total current liabilities .............................................................       2,924,523        1,648,356

   Deferred rent ......................................................................            --             14,670

Stockholders' deficit:
 Preferred stock (authorized 22,000,000 shares):
  Series A convertible preferred stock:
     ($0.0001 par value; 2,000,000 issued and
      outstanding and liquidation preference of
     $1,000,000 at September 28, 2002,
     and September 29, 2001) ..........................................................             200              200
  Common stock:
    ($0.0001 par value; authorized 50,000,000 shares;
    issued and outstanding;
    September 28, 2002--6,092,104;
    September 29, 2001--6,311,428) ...................................................              235              139
 Equity funding from a related party,
     see Note 13 ......................................................................           1,815             --
  Additional paid-in capital ..........................................................       2,943,118        1,098,500
  Deferred stock-based compensation ...................................................         (48,765)         (32,515)
  Deficit accumulated during the development stage ....................................      (5,811,930)      (1,680,501)
                                                                                            -----------      -----------
Total stockholders' deficit ...........................................................      (2,915,327)        (614,177)
                                                                                            -----------      -----------
                                                                                            $     9,196      $ 1,048,849
                                                                                            ===========      ===========
</TABLE>
See accompanying notes.


                                       34
<PAGE>

OpticNet, Inc.
(a development stage company)
Statements of Operations

<TABLE>
<CAPTION>
                                                                                      Period from          Period from
                                                                                   February 23, 2000    February 23, 2000
                                                Year Ended           Year Ended      (inception) to      (inception) to
                                                September 28,      September 29,     September 30,        September 28,
                                                    2002               2001               2000                2002
                                                -----------         -----------         ---------          -----------
<S>                                             <C>                 <C>                 <C>                <C>
Revenues .................................      $   112,500         $   499,000         $    --            $   611,500
Cost of revenues .........................           83,801             259,640              --                343,441
                                                -----------         -----------         ---------          -----------
Gross profit .............................           28,699             239,360              --                268,059

Operating expenses:
  Selling, general
  and administrative .....................        1,279,239             868,769            15,000            2,163,008
  Research and
  development ............................        2,759,323             971,952           101,564            3,832,839
                                                -----------         -----------         ---------          -----------
Total operating
   expenses ..............................        4,038,562           1,840,721           116,564            5,995,847
                                                -----------         -----------         ---------          -----------
Loss from operations .....................       (4,009,863)         (1,601,361)         (116,564)          (5,727,788)

Other income (expense):
Other income .............................            3,897              50,458            10,818               65,173
Interest expense .........................         (125,463)            (23,852)             --               (149,315)
                                                -----------         -----------         ---------          -----------
Other income
   (expense), net ........................         (121,566)             26,606            10,818              (84,142)
                                                -----------         -----------         ---------          -----------
Net loss accumulated
   in the development
   stage .................................      $(4,131,429)        $(1,574,755)        $(105,746)         $(5,811,930)
                                                ===========         ===========         =========          ===========
Basic and diluted net
loss per share ...........................      $     (0.74)        $     (0.32)        $   (0.15)         $     (1.36)
                                                ===========         ===========         =========          ===========
Weighted average shares
   used in computation of
   basic and diluted loss
   per share .............................        5,586,971           4,989,132           683,765            4,266,774
                                                ===========         ===========         =========          ===========
</TABLE>


See accompanying notes.


                                       35
<PAGE>

 OpticNet, Inc.
(a development stage company)
 Statements of Stockholders' Deficit

<TABLE>
<CAPTION>
                                                                                                                   Equity
                                                                                                                   Funding
                                                                                                                   from a
                                                        Preferred                                    Treasury      Related
                                                          Stock                 Common Stock          Stock         Party
                                                    --------------------------------------------------------------------------
                                                    Shares      Amount       Shares       Amount      Shares
                                                    --------------------------------------------------------------------------
<S>                                              <C>             <C>       <C>              <C>      <C>          <C>
Balance at February 23, 2000 (inception) ..           --        $ --            --         $ --        --         $ --
 Net loss for the  period
  ending September 30,
  2000 ....................................
 Issuance of restricted
  Nonvoting common
  Stock in exchange for
  cash in June 2000 at
  $0.035 per share ........................                                1,285,712        129
 Issuance of restricted
  Nonvoting common
  Stock in June 2000 at
  $0.035 per share
  (subject to repurchase
  right by the company,
  lapsing in exchange
  for continued service) ..................                                1,652,572
 Issuance of convertible
  preferred stock for
  cash to BEI
  Technologies in
  July 2000 at $0.50 per
  Share ...................................      2,000,000       200
 Amortization of
  Deferred stock
  Compensation ............................
                                                 ---------      ----      ----------       ----      -------      ------
Balance at September
  30, 2000 ................................      2,000,000       200       2,938,284        129         --          --

 Net loss .................................
 Issuance of voting
  Common stock to BEI
  Technologies in Nov-
  ember 2000 for intel-
  lectual property rights
  and technology ..........................                                3,616,000
 Repurchase of restric-
  ted common stock in
 January 2001 .............................                                 (342,856)
 Issuance of restricted
   nonvoting common
  stock in exchange for
  cash in February 2001
  at $0.08 per share ......................                                  100,000         10
 Amortization of defer-
  red stock compensa-
  tion ....................................
                                                 ---------      ----      ----------       ----      -------      ------
Balance at September
  29, 2001 ................................      2,000,000       200       6,311,428        139         --          --

 Net loss .................................
 Equity funding from a
  related party, see Note 13 ..............                                                                        1,815
 Treasury stock ...........................                                 (967,056)                967,056
 Issuance of restricted
  nonvoting common stock in
  August/September 2002 at
  $0.04 per share .........................                                  930,000         93
 Repurchase of restrict-
  ed common stock .........................                                 (205,954)
 Stock options exercised ..................                                   23,686          3
 Amortization of defer-
  red stock compensation ..................
                                                 ---------      ----      ----------       ----      -------      ------
Balance at September
  28, 2002 ................................      2,000,000      $200       6,092,104       $235      967,056      $1,815
                                                 =========      ====       =========       ====      =======      ======
</TABLE>
See accompanying notes

                                       36

<PAGE>


 OpticNet, Inc.
(a development stage company)
 Statements of Stockholders' Deficit (Cont.)

<TABLE>
<CAPTION>
                                                                                       Deficit
                                                                                      Accumulated
                                                      Additional      Deferred        During the          Total
                                                       Paid-In       Stock-Based      Development      Stockholders'
                                                       Capital       Compensation        Stage           Deficit
                                                ---------------------------------------------------------------------

                                                ---------------------------------------------------------------------
<S>                                              <C>             <C>       <C>              <C>      <C>          <C>
Balance at February 23, 2000 (inception) ..        $        --       $     --       $        --       $        --
 Net loss for the  period
  ending September 30,
  2000 ....................................                                            (105,746)         (105,746)
 Issuance of restricted
  Nonvoting common
  Stock in exchange for
  cash in June 2000 at
  $0.035 per share ........................             44,870                                             44,999
 Issuance of restricted
  Nonvoting common
  Stock in June 2000 at
  $0.035 per share
  (subject to repurchase
  right by the company,
  lapsing in exchange
  for continued service) ..................             57,840        (57,840)
 Issuance of convertible
  preferred stock for
  cash to BEI
  Technologies in
  July 2000 at $0.50 per
  Share ...................................            999,800                                          1,000,000
 Amortization of
  Deferred stock
  Compensation ............................                             4,820                               4,820
                                                   -----------       --------       -----------       -----------
Balance at September
  30, 2000 ................................          1,102,510        (53,020)         (105,746)           44,073

 Net loss .................................                                          (1,574,755)       (1,574,755)
 Issuance of voting
  Common stock to BEI
  Technologies in Nov-
  ember 2000 for intel-
  lectual property rights
  and technology ..........................
 Repurchase of restric-
  ted common stock in
 January 2001 .............................            (12,000)        12,000
 Issuance of restricted
   nonvoting common
  stock in exchange for
  cash in February 2001
  at $0.08 per share ......................              7,990                                              8,000
 Amortization of defer-
  red stock compensa-
  tion ....................................                             8,505                               8,505
                                                   -----------       --------       -----------       -----------
Balance at September
  29, 2001 ................................          1,098,500        (32,515)       (1,680,501)         (614,177)

 Net loss .................................                                          (4,131,429)       (4,131,429)
 Equity funding from a
  related party, see Note 13 ..............          1,812,827                                          1,814,642
 Treasury stock ...........................
 Issuance of restricted
  nonvoting common stock in
  August/September 2002 at
  $0.04 per share .........................             37,107        (37,200)
 Repurchase of restricted
  common stock ............................             (7,208)         7,208
 Stock options exercised ..................              1,892                                              1,895
 Amortization of deferred
  stock compensation ......................                            13,742                              13,742
                                                   -----------       --------       -----------       -----------
Balance at September
  28, 2002 ................................        $ 2,943,118       $(48,765)      $(5,811,930)      $(2,915,327)
                                                   ===========       ========       ===========       ===========
</TABLE>


See accompanying notes.

                                       37
<PAGE>

 OpticNet, Inc.
(a development stage company)
Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                     Period from            Period from
                                                                                  February 23, 2000      February 23, 2000
                                       Year Ended              Year Ended           (inception) to        (inception) to
                                      September 28,           September 29,          September 30,         September 28,
                                          2002                    2001                   2000                  2002
                                      -----------             ------------            ----------            ------------
<S>                                   <C>                     <C>                     <C>                   <C>
Operating activities:
Net loss .................            $(4,131,429)            $(1,574,755)            $(105,746)            $(5,811,930)
Adjustments to reconcile
     net loss to net cash
     used in operating
     activities:
  Depreciation ...........                 21,228                   3,264                  --                    24,492
  Amortization ...........                 13,742                   8,505                 4,820                  27,067
  Net changes in operating
   assets and liabilities:
   Trade receivables .....                 99,720                 (99,720)                 --                      --
   Prepaid expenses ......                 15,265                 (18,528)                 --                    (3,263)
   Other current assets ..                 61,779                 (62,103)                 --                      (324)
   Accounts payable ......               (118,861)                131,492                 1,082                  13,713
   Accrued and other
        liabilities ......               (283,780)                319,432                 4,742                  40,394
   Customer advances .....                (25,000)                (25,000)               50,000                    --
   Deferred rent .........                (14,670)                 14,670                  --                      --
   Other related party
       liabilities .......                214,078                    --                    --                   214,078
   Note payable to related
        party ............                   --                   (12,906)               12,906                    --
                                      -----------             -----------             ---------             -----------
Net cash used in
operating activities .....             (4,147,928)             (1,315,649)              (32,196)             (5,495,773)

Investing activities:
  Purchases of property
   and equipment .........                 (3,244)                (21,248)                 --                   (24,492)
  Deposits ...............                 21,297                 (22,025)                 --                      (728)
                                      -----------             -----------             ---------             -----------
Net cash provided by
(used in) investing
activities ...............                 18,053                 (43,273)                 --                   (25,220)
</TABLE>

See accompanying notes.


                                       38
<PAGE>

OpticNet, Inc.
(a development stage company)
Statements of Cash Flows (cont.)

<TABLE>
<CAPTION>
                                                                                     Period from           Period from
                                                                                  February 23, 2000     February 23, 2000
                                       Year Ended              Year Ended           (inception) to        (inception) to
                                      September 28,          September 29,          September 30,         September 28,
                                         2002                    2001                   2000                   2002
                                      -----------             -----------             ----------            -----------
<S>                                   <C>                     <C>                     <C>                   <C>
Financing activities:
Proceeds from
  borrowing on line of
  credit from related
  party ..................            $ 1,489,730             $ 1,330,601             $     --              $ 2,820,331
Principal payments
   on line of credit
   from related party ....                   --                  (163,993)                  --                 (163,993)
Proceeds from issuance
   of preferred
   stock, net ............                   --                      --                1,000,000              1,000,000
Proceeds from equity
   funding from a
   related party .........              1,814,642                    --                     --                1,814,642
Issuance of common
   stock .................                  1,895                   8,000                 44,999                 54,894
                                      -----------             -----------             ----------            -----------
Net cash provided by
  financing activities ...              3,306,267               1,174,608              1,044,999              5,525,874
                                      -----------             -----------             ----------            -----------
Net increase (decrease)
   in cash and cash
   equivalents ...........               (823,608)               (184,314)             1,012,803                  4,881

Cash and cash
    equivalents at
 beginning of period .....                828,489               1,012,803                   --                     --
                                      -----------             -----------             ----------            -----------
Cash and cash
   equivalents at end
   of period .............            $     4,881             $   828,489             $1,012,803            $     4,881
                                      ===========             ===========             ==========            ===========
Supplemental Disclosure
of Non Cash Items:
Grants of restricted stock            $    37,200             $      --               $   57,840            $    95,040
Contribution of treasury
stock ....................                 14,720                    --                     --                   14,720
Repurchase of restricted
stock ....................            $     7,208             $    12,000             $     --              $    19,208
</TABLE>

See accompanying notes.


                                       39
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements
September 28, 2002

1. Organization and Summary of Significant Accounting Policies

Organization and Basis of Presentation

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

As of October 30, 2000, BEI  Technologies  distributed  3,578,387  shares to BEI
Technologies stockholders  ("Distribution"),  substantially all of the Company's
voting common stock held by BEI Technologies.  In the Distribution,  each holder
of record of BEI  Technologies  common stock as of October 30, 2000 received one
share of OpticNet common stock for every two shares of BEI  Technologies  common
stock held, and cash in lieu of any fractional  share of OpticNet  common stock.
After the  Distribution,  BEI  Technologies  continued to hold securities of the
Company in the form of convertible  preferred and common stock,  representing an
aggregate ownership interest of approximately 25% in the Company.

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

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

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

These  financial  statements  have been prepared  assuming that the Company will
continue as a going concern. Since its inception,  the Company has had recurring
operating  losses and negative cash flows from operations and has an accumulated
deficit  of  $5.8  million  at  September  28,  2002.   These  conditions  raise
substantial doubt about the Company's ability to continue as a going concern.

During  fiscal 2002,  the Company  continued to be  unsuccessful  in  attracting
outside financing  despite  management's  efforts and continued  operations on a
reduced basis.  Management and the Company's board of directors decided in March
2002 to reduce the level of  incremental  spending for research and  development
and to  reduce  operations  to a level  that will  solely  support  the  current
customer  base.  Management's  plan to enable the Company to continue as a going
concern  calls for the  Company's  operations  to be frozen at a minimal  level,
sufficient to support current product delivery commitments.  The Company reduced
its fixed cost base to an absolute minimum and no longer maintains any employees
of its own. The majority of  operating  costs are paid by a related  party which
shares the Hayward  facility and from whom  engineering  and other  services are
rented on an  as-required  basis.  The cash outlay for the Company's  portion of
these costs are recorded as additional  investment in the Company by the related
party.  Future  operating  expenses  are  expected  to be funded by product  and
prototype  revenue  under  existing  contracts.  In addition,  new  prototype or
product  contracts  will not be initiated  if these  contracts  cannot  generate
positive  cash  flows  within  the  next 12  months.  Management  believes  that
additional funding of less then $1.0 million will enable the Company to continue
on a reduced basis as a going concern  through  September 30, 2003 and that such
funding  will be  available  from the related  party,  if  required.  Management
continues to seek additional  equity  financing from new and existing sources on
an opportunistic and as-available basis. Management plans to defer substantially
all  research  and  development  activity  in the absence of  additional  equity
financing.  Although  management is confident in its ability to execute its plan
to enable the Company to continue as a going concern there is no assurance  that
the Company will be able to reduce  expenditures  sufficiently,  estimate future
contract  costs  accurately,  or secure  the  necessary  financing,  in order to
continue operations.


                                       40
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

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

During the third and fourth quarters of fiscal 2002, BEI  Technologies  provided
the Company with  approximately  $1.8 million in  financing,  which was advanced
with the  understanding  that  such  amount  would be  converted  into a form of
nonvoting equity in the Company.

Effective  September 28, 2002, the Company and BEI  Technologies  had determined
the Company would authorize and issue to BEI  Technologies a series of nonvoting
preferred  stock.  In November  2002,  the Company  issued a total of 18,146,420
shares of the Company's newly  authorized  nonvoting Series B Preferred Stock to
BEI Technologies, in consideration of the approximately $1.8 advanced.

Fiscal Year

The  Company's  fiscal year ends on the Saturday  nearest  September  30. Fiscal
years 2002 and 2001 each  contained 52 weeks.  The period from February 23, 2000
(inception) to September 30, 2000 contained 32 weeks.

Use of Estimates

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

Cash and Cash Equivalents

The Company  considers all highly liquid  investments  with a maturity period of
three months or less when purchased to be cash equivalents.

Concentrations of Credit Risk

The Company's  engineering  agreements have been with three customers located in
the United  States.  Historically,  there have been no credit  losses with these
customers.  In addition,  as the Company primarily deals with start-up companies
in relation to delivery of prototype units,  there may be disputes regarding the
performance of the prototypes and payment not received.

Financial  instruments that potentially subject the Company to concentrations of
credit  risk  consist  primarily  of cash  and cash  equivalents.  Cash and cash
equivalents  are held by various  domestic  financial  institutions  with a high
credit standing.  The Company has not experienced any losses on its cash or cash
equivalents.

Property and Equipment

Property and  equipment  are stated at cost less  accumulated  depreciation  and
amortization.  Depreciation and amortization are provided in amounts  sufficient
to amortize the cost of such assets over their  estimated  useful  lives,  which
range from three to five years,  using the  straight-line  method for structures
and accelerated or straight-line methods for equipment.  Leasehold  improvements
are  amortized  over the  shorter  of the lease term or their  estimated  useful
lives.

Long-Lived Assets

The  Company  recognizes  impairment  losses  in  accordance  with FAS No.  121,
"Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets to be
Disposed  of".  Long-lived  assets,  including  property and equipment and other
assets, are reviewed and impairment recognized when indicators of impairment are
present and  undiscounted  cash flows  estimated to be generated by those assets
are less than the carrying amounts of the assets.  Indicators of impairment were
present during the periods  presented.  Total net  realizable  fair value of all


                                       41
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

long-lived assets at September 28, 2002 was $728.

Revenue Recognition

To date, the Company has not recognized revenue related to non-prototype product
offerings.  All  revenue  recognized  to  date  consisted  of  engineering  work
performed under engineering agreements with unaffiliated customers.  Revenue for
such  engineering  work  is  recognized  based  on  customer  acceptance  of the
achievement of milestones in the engineering agreement.

Research and Development Expense

The Company's  products are highly technical in nature and require a significant
level of research and development  effort.  Research and  development  costs are
charged to expense as incurred in  accordance  with FAS No. 2,  "Accounting  for
Research  and  Development  Costs."  Payments  and  receivables   recorded  from
customers  for the delivery  under  contracts  of  prototype  units of $187,000,
$210,000,  and $397,000 were offset against research and development  expense in
the  statements of operations  for fiscal years 2002 and 2001 and from inception
through fiscal 2002, respectively.

Net Loss Per Share

Basic and diluted loss per share is computed  using the weighted  average number
of shares outstanding. The effect of convertible preferred stock, unvested stock
and outstanding stock options is antidilutive and, accordingly, is excluded from
diluted loss per share.

Recent Accounting Pronouncements

 In July 2001,  the FASB  issued FAS No. 142 ("FAS  142"),  "Goodwill  and Other
Intangible  Assets."  FAS  142  changes  the  accounting  for  goodwill  from an
amortization  method  to  an  impairment-only  approach.  Thus  amortization  of
goodwill,  including  goodwill  recorded in past  transactions,  will cease upon
adoption of this  statement.  FAS 142 is effective  for fiscal  years  beginning
after December 15, 2001, with early adoption  permitted for entities with fiscal
years beginning after March 15, 2001. The Company chose to adopt FAS 142 for its
fiscal year beginning  September 30, 2001. The adoption of this standard did not
have a significant impact on the Company as it has no goodwill.

In October 2001,  the FASB issued FAS No. 144 ("FAS 144"),  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets",  which is effective  for fiscal
periods  beginning after December 15, 2001. FAS 144 provides a single accounting
model for, and supersedes previous guidance on, accounting and reporting for the
impairment/disposal  of  long-lived  assets.  FAS 144 sets new  criteria for the
classification of assets held-for-sale and changes the reporting of discontinued
operations.  The Company does not believe that the adoption of FAS 144 will have
a significant impact on its financial statements.

In June 2002,  the FASB  issued FAS No. 146 ("FAS  146")  "Accounting  for Costs
Associated with Exit or Disposal  Activities."  FAS 146 is effective for exit or
disposal  activities  that are initiated  after December 31, 2002. This standard
addresses  financial  accounting and reporting for costs associated with exit or
disposal activities and replaces EITF Issue No. 94-3, "Liability Recognition for
Certain  Employee  Termination  Benefits  and  Other  Costs to Exit an  Activity
(including Certain Costs Incurred in a Restructuring)."  FAS 146 requires that a
liability for a cost associated with an exit or disposal  activity be recognized
when the liability is incurred.  FAS 146 also requires that liabilities recorded
in connection with exit plans be initially  measured at fair value.  The Company
does not believe the adoption of FAS No. 146 will have a material  impact on its
financial statements.

2. Transactions with Related Parties

On October 6, 2000, the Company and BEI  Technologies  entered into a Technology
Transfer and Distribution  Agreement (the "Distribution  Agreement") whereby BEI
Technologies contributed to the Company certain assets and intellectual property
related to the fiber optic components  technology  developed by BEI Technologies
and


                                       42
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

BEI Technologies'  majority-owned subsidiary,  SiTek, Inc. ("SiTek") in exchange
for 3,616,000  shares of the  Company's  common stock.  BEI  Technologies  later
distributed  3,578,387 of these shares to its  stockholders on November 21, 2000
in connection with the Company's separation from BEI Technologies.

In connection with the Distribution  Agreement,  on October 6, 2000, the Company
and SiTek  entered into a License and  Technical  Assistance  Agreement  whereby
Sitek agreed to license certain technology to the Company, assist the Company in
certain  research and development  efforts  following the  Distribution and also
fabricate and supply  certain  components  utilized in the  Company's  products.
Further,  Sitek  granted to the Company a perpetual,  royalty  free,  worldwide,
exclusive  license to develop,  make, use and sell products  within the field of
telecommunications data transmission utilizing technology now possessed or later
developed  by  SiTek,  and the  Company  has  granted  to SiTek a  corresponding
perpetual, royalty free, worldwide,  exclusive license to develop, make, use and
sell products outside of the Company's  defined market utilizing  technology now
possessed or later  developed by the Company.  This agreement  shall continue in
effect  for five  years  and  automatically  renew  thereafter  for  consecutive
one-year terms unless either party gives written notice of termination.

On  October  27,  2000,  the  Company  and  BEI  Technologies  entered  into  an
InterCompany   Services  Agreement  (the  "Services   Agreement")   whereby  BEI
Technologies agreed to make available to the Company certain office and facility
space, personnel support and supervision, financial and administrative services,
record-keeping  functions  and other  assistance,  with BEI  Technologies  being
reimbursed for the costs and expenses  incurred in connection with the provision
of these services to OpticNet.  Charges for these services were allocated to the
Company based upon usage,  headcount and other methods that management  believes
to be  reasonable.  These  allocations  totaled  $50,000 for fiscal 2002. In the
fiscal quarter ended June 29, 2002, BEI  Technologies  agreed to suspend charges
for the third and fourth  quarters of fiscal 2002 and future  quarters'  service
charges, due to the Company's inability to obtain significant strategic partners
or third party financing and reduced services to a minimal level.

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

On  September  28, 2001 the Company  entered into a general  equipment  sublease
agreement with BEI Technologies as the lessor,  which is subordinate to a master
lease agreement entered into by BEI Technologies as the lessee. On September 28,
2001, December 20, 2001 and March 28, 2002, the Company executed equipment lease
schedules under the general equipment sublease with BEI Technologies.  The total
value of the scheduled  equipment under the sublease agreement was approximately
$7.0 million,  with an initial lease term of 36 months.  Rental payments are due
on a quarterly  basis and the amount  determined by the Company's level of usage
of the equipment,  the cost of the equipment and applicable  interest.  Payments
due for fiscal 2002 were  approximately  $660,000.  Due to reduced  usage of the
equipment during the last 6 months of fiscal 2002, and expected reduced usage in
the future, past payments may not be indicative of expected future payments.

The Company  originally  entered into a sublease  agreement in October 2001 with
BEI Technologies for a 15,571 square feet facility for administration,  research
and development and manufacturing  activities in Hayward,  California,  expiring
December  2005.  As of March  30,  2002,  the  Company,  in  recognition  of its
inability to obtain  significant  strategic  partners or third party  financing,
concluded it was necessary to reduce operating costs. The


                                       43
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

Company agreed with BEI  Technologies  that this  reduction in operations  would
lower usage of the  equipment  and the  subleased  facilities  described  above.
Accordingly,  the annual lease payments to BEI  Technologies  have been prorated
beginning  March 31, 2002,  based on the portion of the  facilities  the Company
requires to support its current customers.

In the six months  ended  September  28,  2002,  BEI  Technologies  advanced  an
additional  $1.8  million to the Company.  Effective  September  28,  2002,  the
Company and BEI  Technologies  had  determined  the Company would  authorize and
issue to BEI  Technologies a series of nonvoting  preferred  stock.  In November
2002,  the Company  issued a total of 18,146,420  shares of the Company's  newly
authorized   nonvoting  Series  B  Preferred  Stock  to  BEI  Technologies,   in
consideration of the approximately $1.8 advanced noted above. See Note 13.

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

3. Property and Equipment

Property and equipment consists of the following:

                                                    September 28,  September 29,
                                                         2002          2001
                                                        -------       -------
Machinery and equipment ...........................     $14,561       $13,403
Leasehold improvements ............................       9,931         7,845
                                                        -------       -------
                                                         24,492        21,248
Less accumulated depreciation and amortization ....      24,492         3,264
                                                        -------       -------
Property and equipment, net .......................     $  --         $17,984
                                                        =======       =======




No equipment  was  capitalized  under  capital  leases at September 28, 2002 and
September 29, 2001.

4. Accrued Expenses and Other Liabilities


                                                  September 28,   September 29,
                                                       2002            2001
                                                  ------------    -------------
Employee compensation ...........................   $  --          $140,815
Vacation ........................................      --            56,542
Accrued professional fees .......................    40,394         103,861
Interest ........................................      --            21,852
Other ...........................................      --             1,104
                                                    -------        --------
Total accrued expenses and other liabilities ....   $40,394        $324,174
                                                    =======        ========

5. Leasing Arrangements

The Company leases its facility and certain property and equipment under related
party  leasing  arrangements,  see  Note 2,  that  have  been  accounted  for as
operating  leases in the  accompanying  financial  statements,  according to the
terms of such arrangements. As of March 30, 2002, the Company, in recognition of
its inability to obtain significant strategic partners or third party financing,
concluded it was necessary to reduce operating costs. The


                                       44
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

Company  agreed with its lessor that this  reduction in  operations  would lower
usage  of  the  equipment  and  the  subleased   facilities   described   above.
Accordingly,  the annual lease payments have been prorated  beginning  March 31,
2002, based on the portion of the facilities the Company requires to support its
current customers.

The Company  recognized  rent expense under  operating  leases of  approximately
$129,000 and $328,000 for the year ended  September 28, 2002 and the period from
February 23, 2000 (inception) to September 28, 2002, respectively. Additionally,
the Company  recognized  rent expense under  operating  leases of  approximately
$199,000 for the year ended September 29, 2001.

On  September  28,  2001,  December  20, 2001  and March  28, 2002  the  Company
entered into equipment sublease  agreements with BEI  Technologies, as described
in Note 2.

The  Company  rents  office  space  used  for  administrative  purposes  in  San
Francisco,  California  from  BEI  Technologies  under  the  Company's  Services
Agreement described in Note 2. The monthly rental payments associated with these
facility  rental  arrangements  are subsumed  into the  Company's  total monthly
payment  under the  Services  Agreement.  The Company also leases space used for
research and development  and  manufacturing  activities in Hayward,  California
from  BEI  Technologies  under a  sublease  agreement  described  in Note 2. The
average  annual  rental  payment under the sublease  agreement is  approximately
$11,000.

6. Note Payable to Related Party

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

                                                   September 28,   September 29,
                                                       2002            2002
                                                    ----------     -----------
Unsecured  revolving  promissory note from
BEI Technologies  due 12/31/02,  at a
rate of prime plus 1.5% (6.25% and 7.5% in
fiscal 2002 and 2001, respectively) ...........     $2,656,338     $1,166,608
                                                    ----------     -----------
                                                    $2,656,338     $1,166,608
                                                    ==========     ===========

No interest was paid during fiscal year 2002,  fiscal year 2001 or in the period
from  February 23, 2000  (inception)  to September  30, 2000.  Accrued  interest
expense  was  approximately  $149,000  and  $24,000 at  September  28,  2002 and
September 29, 2001, respectively. The interest payable of approximately $149,000
at September 28, 2002 was recorded as an other related party liability.

7. Contingencies

The Company has pending  various legal  actions  arising in the normal course of
business.  Management believes that none of these legal actions, individually or
in the aggregate, will have a material impact on the Company's


                                       45
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

business, financial condition or operating results. The Company is a codefendant
in a dispute  with a former  employee,  which at September  28, 2002,  cannot be
reasonably  estimated to the future financial impact.  The Company believes this
claim has no merit and is rigorously defending the allegation.

8. Stockholders' Equity Deficit

Series A Convertible Preferred Stock

As of  September  28, 2002 and  September  29, 2001,  the Company had  2,000,000
shares  of  Series A  convertible  preferred  stock  ("Series  A"),  issued  and
outstanding, all of which shares are held by BEI Technologies.

Voting

Holders of the  Company's  Series A preferred  stock vote on an  as-if-converted
basis  together with the voting common stock on all matters  except as otherwise
provided by law or in the Company's Certificate of Incorporation.

Liquidation Rights

In the event of any  liquidation  or  winding  up of the  Company,  including  a
merger,  consolidation  or  reorganization  in  which  the  Company  is not  the
surviving entity or a sale of  substantially  all of the Company's  assets,  the
holders of Series A are entitled to  liquidation  preferences of $0.50 per share
plus any declared  and unpaid  dividends.  Upon  satisfaction  of the  preferred
liquidation preference,  any remaining assets will be distributed to the holders
of common stock on a pro rata basis.

Dividends

The holders of the Series A preferred are entitled to receive dividends when and
if declared by the Board of  Directors.  The dividends are payable in preference
and  priority to any payment of any dividend on the common stock of the Company.
Such dividends are not cumulative, and no right accrues to the holders of Series
A. No dividends have been declared through September 28, 2002.

Conversion

The Series A  preferred  stock is  convertible  at any time at the option of the
holder into shares of the Company's  voting common stock on a one for one basis.
Each share of Series A shall  automatically  be converted  into shares of voting
common  stock at any time upon the  affirmative  vote of the holders of at least
seventy-five percent of the Series A preferred shares then outstanding.

Series B Nonconvertible Preferred Stock

Effective  September 28, 2002, the Company and BEI  Technologies  had determined
the Company would authorize and issue to BEI  Technologies a series of nonvoting
preferred  stock.  In November  2002,  the Company  issued a total of 18,146,420
shares of nonvoting Series B Preferred Stock ("Series B") to BEI Technologies in
consideration  of $1.8  million  advanced  to the  Company  during the third and
fourth  quarters of fiscal 2002.  See Note 13 for a further  description  of the
Series B preferred stock.

Common Stock

As of September 28, 2002 and  September 29, 2001,  the Company had 3,093,202 and
3,616,000 shares of voting common stock issued and outstanding and 2,998,902 and
2,695,428 shares of nonvoting common stock issued and outstanding, respectively.
Shares of the Company's  nonvoting  common stock are convertible  into shares of
the Company's  voting common stock on a one-for-one  basis only by action of the
Company's Board of Directors.

Voting and nonvoting

The  preferences,  privileges,  restrictions  and other matters  relating to the
Company's  voting  common stock and  nonvoting  common stock are in all respects
identical, except as otherwise required by law, as expressly provided


                                       46
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

in the Company's certificate of incorporation and, specifically, with respect to
voting rights. Shares of the Company's voting common stock entitle the holder to
vote on all matters that holders of common stock are generally  entitled to vote
by applicable law and as provided in the Company's  certificate of incorporation
and bylaws.  Except as provided by the  Delaware  General  Corporation  Law, the
holders of the Company's  nonvoting  common stock are not entitled to vote their
shares on any matter on which the holders of the  Company's  voting common stock
are generally entitled to vote their shares.

The holders of the  Company's  voting  common stock are entitled to one vote for
each share on all  matters  voted on by  stockholders,  including  elections  of
directors,  and,  except  as  otherwise  required  by  law  or  provided  in any
resolution  adopted  by the board with  respect  to any series of the  Company's
preferred stock, the holders of such shares exclusively possess all voting power
(provided that the holders of the Company's  preferred  stock vote together with
the Company's voting common stock on an as if converted  basis).  Subject to the
preferential  rights of the Company's  preferred stock as described above and in
the Company's certificate of incorporation,  the holders of the Company's common
stock are entitled to such dividends as may be declared from time to time by the
board from available funds, and upon liquidation will be entitled to receive pro
rata all assets of the company available for distribution to such holders.

Transfer Restrictions

There  is not  currently  a  public  market  for  any  class  of  the  Company's
securities,  nor does the Company  intend to create a public  market any time in
the near  future.  Until and unless the  Company  decides to list  shares of its
common  stock for trading with a nationally  recognized  securities  exchange or
automated  quotation  system,  the  Company's  common  stock  will be subject to
significant  restrictions on transfer as set forth in the Company's  bylaws.  In
particular,  apart from limitations on transfer created by applicable securities
laws, the bylaws  expressly  forbid  holders of the Company's  common stock from
assigning,  hypothecating,  donating,  encumbering or otherwise disposing of any
beneficial  interest in their shares until the  Company's  common stock has been
listed for trading with a nationally recognized securities exchange or automated
quotation system. Accordingly,  the Company's transfer agent has been instructed
to stop any  attempted  transfer  of  beneficial  ownership  by a holder  of the
Company's common stock prior to the listing of the Company's common stock.

Shares subject to Right of Reacquisition

As of September  28, 2002 and  September  29,  2001,  a total of  1,240,496  and
942,096, respectively, shares of the Company's nonvoting common stock held by 17
individuals and 10 individuals,  respectively, are subject to a repurchase right
by the Company if the  individual's  employment with the Company,  or employment
with a related party,  should terminate prior to full lapsing of such repurchase
right. At September 28, 2002, shares of the Company's nonvoting common stock not
yet vested to the holder and subject to a right of  reacquisition by the Company
provided for continued  monthly pro-rata lapsing of the Company's  reacquisition
right so long as the  individual  remains in the Company's  employ or that of an
affiliate until the right of reacquisition lapses in full in September 2007.

Effective upon  termination of all of the Company's  employees in July 2002, and
change in status to consultants,  all remaining  shares subject to reacquisition
are accounted for under EITF 96-18,  "Accounting for Equity Instruments That Are
Issued to Other Than  Employees for  Acquiring,  or in Conjuction  with Selling,
Goods or Services".  Pursuant to the applicable  guidance,  compensation cost is
determined  as the shares  vest on the basis of fair  value.  During  August and
September 2002 the Company granted 930,000  restricted  shares to  non-employees
for ongoing services provided to the Company. The Company recorded  compensation
expense of $5,574  related to  non-employee  restricted  stock awards during the
year ended September 28, 2002.

Stock Split

On October 20, 2000,  the Company's  Board of Directors  approved a four-for-one
stock split in respect of the Company's  common and preferred stock. All amounts
reported in the Company's financial statements have been adjusted to reflect the
split as of the beginning of the period reported on.

Equity Incentive Plan

The Company's 2000 Equity Incentive Plan  ("Incentive  Plan") was adopted by the
Board of  Directors in  September  2000.  The  Incentive  Plan  provides for the
granting of incentive stock options to employees and nonstatutory stock options,
restricted  stock purchase awards,  and stock bonuses to consultants,  employees
and directors  (collectively,  "Stock Awards").  The Company reserved  1,000,000
shares of common stock for Stock


                                       47
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

Awards under the Incentive Plan and shares  totaling  830,481 and 657,000 remain
available  for grant  thereunder  at September  28, 2002 and September 29, 2001,
respectively.  Incentive  stock options  granted  under the  Incentive  Plan are
intended to qualify as "incentive  stock options"  within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended,  and may be granted solely
to employees.

Stock  options  are  granted  pursuant to stock  option  agreements  between the
Company and the  recipient  of the award.  The  exercise  price for an incentive
stock  option  cannot be less than 100% of the fair  market  value of the common
stock on the date of grant.  The exercise price for a nonstatutory  stock option
cannot be less than 85% of the fair market value of the common stock on the date
of grant. Options granted under the Incentive Plan vest at the rate specified in
a grantee's option grant notice and option agreement.

Shares  subject to stock  options  granted  under the  Incentive  Plan that have
expired or otherwise terminated without having been exercised in full once again
become  available  for the grant of awards under the Incentive  Plan.  Likewise,
shares of  restricted  stock  awarded under this plan that have not become fully
vested will again become available for the grant of awards.  Shares issued under
the Incentive Plan may be previously unissued shares or reacquired shares bought
on the market or otherwise.

The term of incentive  stock options  granted  under the Incentive  Plan may not
exceed 10  years.  Unless  the terms of an  optionee's  stock  option  agreement
provide for earlier termination, in the event an optionee's service relationship
with the Company,  or any affiliate of the Company's,  ceases due to disability,
the optionee may exercise any vested options up to 12 months after the date such
service  relationship  ends.  In the  case of the  optionee's  death,  absent  a
provision stating otherwise in the stock option agreement,  a beneficiary of the
optionee  may  exercise  any vested  options up to 18 months  after the date the
service  relationship  ends.  An optionee  may not transfer a stock option other
than by will or intestate law of descent and distribution  upon death.  However,
an optionee may  designate a beneficiary  who may exercise the option  following
the optionee's  death. If an optionee's  relationship  with the Company,  or any
affiliate  of the  Company's,  ceases for any reason  other than  disability  or
death, absent a provision for earlier termination in the stock option agreement,
the optionee may exercise any vested  options up to three months from  cessation
of service.  However,  in no circumstances  may an option be exercised after the
expiration  of its term.  Acceptable  consideration  for the  purchase of common
stock issued under the  Incentive  Plan is  determined by the board of directors
and may include cash, common stock previously owned by the optionee,  a deferred
payment  arrangement  and other  legal  consideration  approved  by the board of
directors.

The Company has adopted the disclosure only alternative for its equity incentive
plan as described in FAS No. 123, "Accounting for Stock Based Compensation" (FAS
123). The Company  accounts for employee stock awards using the intrinsic  value
method  in  accordance  with  Accounting   Principals   Board  Opinion  No.  25,
"Accounting  for  Stock  Issued  to  Employees"  (APB  25).

Effective upon the termination of all the Company's  employees in July 2002, and
change in status to consultants, all outstanding options are accounted for under
EITF 96-18,  "Accounting  for Equity  Instruments  That Are Issued to Other Than
Employees for  Acquiring,  or in Conjunction  with Selling,  Goods or Services".
Pursuant to the  applicable  guidance,  compensation  cost is  determined as the
options  vest on the basis of fair value.  In August 2002,  the Company  granted
16,000  shares to an employee of an affiliate for ongoing  services  provided to
the Company.  The value on  non-employee  options  vesting during the year ended
September 28, 2002 was deemed to be immaterial.


                                       48
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

A summary of the stock option activity under the Incentive Plan is as follows:

                                                                   Weighted
                                                Number of       average exercise
                                              common shares      price per share
                                              -------------      ---------------

Options outstanding at February 23,
    2000 (inception) ...............                --              $ --
Granted ............................                --                --
Exercised ..........................                --                --
Terminated .........................                --                --
                                                --------             -----
Options outstanding at September 30,
     2000 ..........................                --                --
Granted ............................             343,000             0.08
Exercised ..........................                --                --
Terminated .........................                --                --
                                                --------             -----
Options outstanding at September 29,
     2001 ..........................             343,000             0.08
Granted ............................             182,000             0.09
Exercised ..........................             (23,686)            0.08
Terminated .........................            (355,481)            0.08
                                                --------             -----
Options outstanding at September 28,
2002 ...............................             145,833            $0.09
                                                ========             =====

As of September 28, 2002,  options for 8,333 shares were vested and  exercisable
at a weighted average exercise price of $0.08. Additionally, options for 145,833
shares were outstanding with a weighted  average  remaining  contractual life of
9.1 years and a weighted  average exercise price of $0.09 per share at September
28, 2002.

As of September 29, 2001, no options were vested and exercisable and options for
343,000 shares were outstanding with a weighted  average  remaining  contractual
life of 9.54 years and a weighted average exercise price of $0.08 per share.

Compensation expense of approximately  $14,000,  $8,000, $5,000, and $26,000 for
the  amortization  of stock  subject to a  repurchase  right by the  Company was
recorded  during the years ended  September 28, 2002 and September 29, 2001, and
the periods  from  February 23, 2000  (inception)  to  September  30, 2000,  and
February 23, 2000 (inception) to September 28, 2002, respectively.

The Company  computed the pro forma  disclosures  required under FAS No. 123 for
options granted during the years ended September 28, 2002 and September 29, 2001
using the Black-Scholes  option pricing model and the following  assumptions:  a
risk-free interest rate of 4.13% and 6.0%, respectively;  and a weighted average
expected life of 10 years; a volatility  rate of 100%; and no dividend yield for
both  fiscal  2002 and fiscal  2001.  There were no options  granted  during the
period from February 23, 2000  (inception)  to September 30, 2000. The impact on
the  calculation  of pro forma  results of  operations  and  earnings  per share
required by FAS 123 was  determined to be  immaterial  for fiscal years 2002 and
2001, and the period from inception to September 28, 2002.


                                       49
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options. The effects of applying
FAS 123 in the pro forma  disclosures may not be indicative of future amounts as
additional  awards in future years are anticipated and because the Black-Scholes
option pricing model  involves  subjective  assumptions  which may be materially
different than actual amounts.

9. Income Taxes

The Company accounts for income taxes under FAS No. 109,  "Accounting for Income
Taxes." Under this method,  deferred tax assets and  liabilities  are recognized
for the expected future tax  consequences of temporary  differences  between the
carrying  amounts  and the tax bases of assets  and  liabilities.  Deferred  tax
assets and liabilities are determined based on the differences between financial
reporting and the tax basis of assets and liabilities and are measured using the
enacted  tax rates and laws  known at this time and that will be in effect  when
the differences are expected to reverse.

The reconciliation of income tax attributable to continuing  operations computed
at the U.S. federal statutory tax rates to income tax expense is:


                                                   September 28,   September 29,
                                                       2002             2001
                                                   -----------        ---------
Tax at U.S. statutory rate ....................    $(1,408,747)       $(535,417)
State income taxes, net of federal benefit ....       (248,230)         (94,485)
Change in valuation allowance .................      1,591,972          598,113
Unrealizable net operating losses .............           --             31,789
Other .........................................         65,005             --
                                                   -----------        ---------
Total income taxes ............................    $      --          $    --
                                                   ===========        =========


                                       50
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

Significant  components of the Company's net deferred tax assets and liabilities
are as follows:

                                               September 28,    September 29,
                                                    2002           2001
                                                 -----------      ---------
 Deferred tax assets:
 Accruals and reserves ......................    $    11,569      $    --
 Net operating loss carryforwards ...........      1,998,671        556,113
 Fixed asset and intangibles ................         67,724         42,000
 Credits ....................................         34,338           --
 Other ......................................         98,787           --
                                                 -----------      ---------
                                                 $ 2,211,089      $ 598,113
 Valuation allowance ........................     (2,190,085)      (598,113)
                                                 -----------      ---------
                                                 $    21,004      $    --
                                                 ===========      =========
 Deferred tax liabilities:
 Fixed asset and intangibles ................    $   (21,004)     $    --
                                                 -----------      ---------
 Net deferred tax asset (liability) .........    $      --        $    --
                                                 ===========      =========

FAS 109 requires the  establishment of a valuation  allowance against a deferred
tax asset if, based on the weight of available evidence,  it is more likely than
not that some portion or all of the deferred tax asset will not be realized. The
deferred  tax  assets  have been fully  reserved  due to the  Company's  (i) net
operating  losses since  inception  and (ii) present  inability to recognize the
potential  benefits of its net operating loss  carryforwards.  Accordingly,  the
valuation  allowance increased by $1,591,972 and $598,113 during the years ended
September 28, 2002 and September 29, 2001, respectively.

As of September 28, 2002, the Company had net operating loss  carryforwards  for
federal income tax purposes of  approximately  $5,266,500 which expire beginning
in the year 2021.  The Company also has net  operating  loss  carryforwards  for
state income tax purposes of approximately  $2,895,100 which expire beginning in
the year 2013.  Total tax  credits  are  approximately  $34,338,  which begin to
expire in the year 2021.

Utilization of the Company's net operating loss carryforwards and credits may be
subject  to  a  substantial  annual  limitation  due  to  the  ownership  change
limitations  included in the  Internal  Revenue  Code of 1986,  as amended,  and
similar state provisions. This annual limitation may result in the expiration of
net operating losses and credits before utilization.

10. Employee Benefit Plan

The Company currently  participates in the defined contribution  retirement plan
of BEI Technologies,  which is a multi-employer  401(k) plan. The multi-employer
plan permits  matching  contributions  by the Company on behalf of its employees
who participate in the plan. Matching non-discretionary  contributions are based
on a  percentage  of employee  contributions.  Contributions  to the plan by the
Company for the benefit of its employees were approximately  $35,000 and $27,000
during the years ended September 28, 2002 and September 29, 2001,  respectively.
From February 23, 2000  (inception)  to September  30, 2000,  the Company had no
employees,  thus the Company made no  contributions to the plan during that time
period.


                                       51
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

11. Reduction in Force

In April  2002,  the  Company  underwent a  reduction  in force  resulting  in 8
individuals  departing  employment  with  the  Company,  including  engineering,
manufacturing  and marketing  personnel.  Severance pay for affected persons was
per Company policy,  including cash payment and the  acceleration of the vesting
of options for certain  affected  individuals.  Total cash costs  related to the
reduction in force of  approximately  $86,000 was recorded in the fiscal quarter
ending June 29, 2002 within research and development expenses.

To further reduce costs for the Company in the near term,  during July 2002, all
of the Company's remaining 15 employees were released from their employment with
the Company and accepted  employment with a subsidiary of BEI  Technologies,  as
agreed to by both  companies,  but still  perform  services  for  OpticNet.  The
Company's newly appointed President and Chief Technical Officer have also become
employees of this same subsidiary of BEI Technologies,  but continue to serve as
executive  officers of the  Company.  The  services of certain key  individuals,
including the Company's newly appointed  President and Chief Technical  Officer,
are expected to continue to be  available to the Company on an as needed  basis,
with  reimbursement  by the Company to their present employer for the time value
of their services.

12. Loss Per Share

The  following  table sets forth the  computation  of basic and diluted loss per
common share from operations:

<TABLE>
<CAPTION>
                                                                          Period from          Period from
                                      Year  ended      Year  ended      February 23, 2000    February 23, 2000
                                     September 28,     September 29,     (inception) to       (inception) to
                                         2002              2001         September 30, 2000   September 28, 2002
                                    ---------------------------------------------------------------------------
<S>                                  <C>               <C>                 <C>                  <C>
                   Numerator
                   ---------
Loss from                            $(4,131,429)      $(1,574,755)        $(105,746)           $(5,811,930)
operations

                   Denominator
                   -----------
Weighted average
shares
                                       5,586,971         4,989,132           683,765              4,266,774
</TABLE>


If the Company had  reported  net income,  the  calculation  of diluted loss per
share would have included the shares used in the  computation  of historical net
loss per  share as well as an  additional  2,939,840  common  equivalent  shares
related to outstanding stock options and nonvested  restricted stock (determined
using the treasury stock method) for the year ended September 28, 2002.

13. Subsequent Event

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

Voting

Holders of the  Company's  Series B preferred  stock are not entitled to vote on
any  matter  that the  holders of  OpticNet's  preferred  stock or common  stock
generally are entitled to vote.


                                       52
<PAGE>

OpticNet, Inc.
(a development stage company)
Notes to Financial Statements --(Continued)

Liquidation Rights

In the event of any  liquidation,  dissolution  or  winding  up of the  Company,
including a merger,  consolidation  or  reorganization  resulting in a change in
control of the Company or a sale, lease or other disposal of  substantially  all
of the  Company's  assets,  the  holders of Series B are  entitled to receive an
amount equal to the original issuance price plus all accrued and unpaid Series B
dividends as of such date, which shall be paid prior to and in preference to any
payment made or any assets  distributed to the holders of any class or series of
the common stock or other series of preferred stock of the Company.

Dividends

The holders of the Series B preferred are entitled to receive  dividends on each
share at the rate of 6% per year,  calculated  on the original  issuance  price,
payable  annually  and  cumulative  to the  extent  not  paid,  with  additional
dividends payable thereon.  The dividends are payable in preference and priority
to any  payment  of any  dividend  on the  common  stock or any other  series of
preferred stock of the Company.

Conversion

The Series B preferred stock is not convertible into any other form of equity of
the Company.


                                       53
<PAGE>

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors
OpticNet, Inc. (a development stage company)

We have audited the accompanying balance sheets of OpticNet, Inc. (a development
stage  company) as of September 28, 2002 and September 29, 2001, and the related
statements  of  operations,  stockholders'  deficit and cash flows for the years
ended  September  28, 2002 and  September 29, 2001 and the periods from February
23,  2000  (inception)  to  September  30,  2000  and  from  February  23,  2000
(inception)  to  September  28,  2002.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of OpticNet,  Inc. (a development
stage  company) at September 28, 2002 and September 29, 2001, and the results of
its  operations  and its cash flows for the years ended  September  28, 2002 and
September  29, 2001 and the  periods  from  February  23,  2000  (inception)  to
September 30, 2000 and from February 23, 2000  (inception) to September 28, 2002
in  conformity  with  accounting  principles  generally  accepted  in the United
States.

The accompanying financial statements have been prepared assuming that OpticNet,
Inc. will continue as a going  concern.  As more fully  described in Note 1, the
Company has incurred  recurring  operating  losses and negative  cash flows from
operations  since its inception,  which  resulted in an  accumulated  deficit of
approximately  $5.8 million as of September  28, 2002.  These  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to these matters are also described in Note 1. The
financial  statements  do not include any  adjustments  to reflect the  possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.

San Francisco, CA
November 20, 2002


                                       54
<PAGE>

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Certain information with respect to directors and executive officers is
         set forth in Part I of this Report.  Additional information required by
         this Item is incorporated  herein by reference to the section  entitled
         "Compliance  with Section 16(a) of the  Securities  and Exchange Act of
         1934" of the Proxy  Statement  related  to the  Company's  2003  Annual
         Meeting of  Stockholders to be filed by the Company with the Securities
         and Exchange Commission (the "Definitive Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

         The  information  required  by this  Item  is  incorporated  herein  by
         reference  to  the  sections  entitled  "Executive   Compensation"  and
         "Certain Transactions" of the Definitive Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Certain information with respect to securities  authorized for issuance
         under equity compensation plans is set forth in Part II, Item 5 of this
         Report.  Additional  information  required by this Item is incorporated
         herein by  reference  to the section  entitled  "Security  Ownership of
         Certain  Beneficial  Owners and  Management"  of the  Definitive  Proxy
         Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required  by this  Item  is  incorporated  herein  by
         reference  to  the  sections   entitled   "Certain   Transactions"  and
         "Compensation  Committee  Interlocks and Insider  Participation" of the
         Definitive Proxy Statement.


                                     PART IV

ITEM 14. CONTROLS AND PROCEDURES

         The Company's  management,  including the President and Chief Financial
         Officer, has conducted an evaluation of the effectiveness of disclosure
         controls and procedures  pursuant to Exchange Act Rule 13a-15 within 90
         days of the  filing  of this  report.  Based  on that  evaluation,  the
         President and Chief  Financial  Officer  concluded  that the disclosure
         controls and  procedures  are  effective in ensuring  that all material
         information  required to be filed in this  annual  report has been made
         known to them in a  timely  fashion.  There  have  been no  significant
         changes in internal  controls,  or in factors that could  significantly
         affect  internal  controls,  subsequent  to the date the  President and
         Chief Financial Officer completed their evaluation.


                                       55
<PAGE>

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The following documents are filed as part of this Form 10-K.

<TABLE>
<CAPTION>
                                                                                                  Form 10-K Page
                                                                                                      Number
<S>                                                                                                    <C>
(a)(1)    Index to Financial Statements

          The following Financial Statements of OpticNet, Inc. are filed as part
          of this Form 10-K:

          Report of Ernst & Young LLP, Independent Auditors                                            54

          Balance Sheets -
          September 28, 2002 and September 29, 2001                                                    33

          Statements of Operations -
          Years ended  September 28, 2002 and  September 29, 2001 and the period
          from  February  23, 2000  (inception)  to  September  30, 2000 and the
          period from  February 23, 2000  (inception)  to September  28, 2002                          35

          Statement of  Stockholders'  Deficit -
          Years ended September 28, 2002, September 29, 2001 and the period from
          February 23, 2000  (inception) to September 30, 2000                                         36

          Statements of Cash Flows -
          Years ended September 28, 2002, September 29, 2001 and the period from
          February 23, 2000  (inception)  to  September  30, 2000 and the period
          from February 23, 2000 (inception) to September 28, 2002                                     38

          Notes to Financial Statements -
          September 28, 2002                                                                           40

(a)(2)    Index to Financial Statement Schedule

          The following Financial Statement Schedule of OpticNet,  Inc. for each
          of the years in the period  ended  September  28,  2002 and the period
          from  February  23, 2000  (inception)  to  September  30, 2000 and the
          period from  February 23, 2000  (inception)  to September  28, 2002 is
          filed as part of this Form 10-K:


Schedule II
                      Valuation and Qualifying Account                                                S-1

                      Report of Ernst & Young LLP, Independent Auditors as to
                      Schedule                                                                        S-2
</TABLE>


Schedules not listed above have been omitted  because they are not applicable or
are not required or the information required to be set forth therein is included
in the Financial Statements or Notes thereto.


                                       56
<PAGE>
(a)(3) Listing of Exhibits
<TABLE>
<CAPTION>
             Exhibit   Description                                                    Footnote
             -------   -----------                                                    --------
             Numbers
             -------
<S>          <C>                                                                           <C>

             2.1       Technology  Transfer and Distribution  Agreement  between
                       BEI Technologies, Inc. and the registrant                            i

             3.1       Amended and Restated Certificate of Incorporation                   ii

             3.2       Bylaws                                                               i

             3.3       Certificate  of  Designation of  Powers,  Preferences and
                       Rights of Series B Preferred Stock

             4.1       Specimen Voting Common Stock certificate                             i

             4.2       Bylaws (see Exhibit 3.2)                                             i

             4.3       Amendment to Preferred Stock Purchase  Agreement  between
                       BEI Technologies, Inc. and the registrant                            i

             10.1      InterCompany  Agreement  between BEI  Technologies,  Inc.
                       and the registrant                                                   i

             10.2      License  and   Technical   Assistance  Agreement  between
                       BEI Technologies, Inc. and the registrant                            i

             10.3      Sublease  Agreement  between BEI  Technologies,  Inc. and
                       the registrant                                                      ii

             10.4      Equipment  Sublease  Agreement  between BEI Technologies,
                       Inc. and the registrant                                              i

             10.5      Amended  and  Restated  2000  Equity  Incentive  Plan  of
                       the registrant                                                       i

             10.6      Form of option agreement under 2000 Equity Incentive Plan            i

             10.7      Form  of  Leave  of  Absence   Agreements   between   BEI
                       Technologies, Inc. and Certain Named  Executive  Officers
                       of the registrant                                                    i

             10.8      Revolving  Line of Credit Note executed by the registrant
                       in favor of BEI Technologies, Inc.                                   i

             10.9      Form of Indemnity Agreement to be  entered  into  by  the
                       registrant  with  each  of  its  directors  and executive
                       officers                                                            ii

             10.10     Consulting Agreement  between  Danforth  Joslyn  and  the
                       registrant                                                          ii
</TABLE>

                                       57
<PAGE>
<TABLE>
<CAPTION>
<S>          <C>                                                                           <C>
             10.11     Consulting  Agreement between  Gary  D.  Wrench  and  BEI
                       Technologies, Inc.                                                  iii

             10.12     Amendment No. 1  to  License  and   Technical  Assistance
                       Agreement between the registrant and SiTek, Inc.                    iii

             99.1      Preliminary  Information  Statement of BEI  Technologies,
                       Inc. dated September 30, 2000                                         i

             99.2      Final  Information  Statement of  BEI  Technologies, Inc.
                       dated November 17, 2000                                               i

             99.3      President Certification Pursuant to 18 U.S.C. as  adopted
                       Pursuant  to  Section  906 of  the  Sarbanes - Oxley  Act
                       of 2002

             99.4      CFO  Certification  Pursuant  to  18  U.S.C.  as  adopted
                       Pursuant  to  Section 906 of  the Sarbanes - Oxley Act of
                       2002
</TABLE>

             (i)    Incorporated  by  reference.  Previously filed as an exhibit
                    to the  Registrant's  Information Statement on Form 10 (file
                    no. 0-31162) as filed on January 25, 2002.

             (ii)   Incorporated  by reference.  Previously  filed as an exhibit
                    to  Amendment   No.  1  to  the   Registrant's   Information
                    Statement  on  Form 10 (file no.  0-31162) as filed on March
                    22, 2002.

             (iii)  Incorporated  by reference.  Previously  filed as an exhibit
                    to   Amendment  No.  2  to  the   Registrant's   Information
                    Statement  on  Form 10 (file no.  0-31162) as filed on April
                    25, 2002.



                    (b) Reports on Form 8-K

                        No  reports  on  Form  8-K were  filed  by  the  Company
                        during fiscal 2002


                                       58
<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the registrant has duly caused this periodic report to be signed on
its behalf by the undersigned, thereunto duly authorized.

OpticNet, Inc.
<TABLE>
<CAPTION>

Signature                                     Title                                             Date
---------                                     -----                                             ----

<S>                                           <C>                                               <C>
/s/ Charles Crocker                           Director                                          January 7, 2003
---------------------------------------                                                         ------------------------------
Charles Crocker


/s/ Danforth Joslyn                           Director                                          January 7, 2003
---------------------------------------                                                         ------------------------------
Danforth Joslyn


/s/ Dr. James W. Seeser                       Director                                          January 7, 2003
---------------------------------------                                                         ------------------------------
Dr. James W. Seeser


/s/ Dr. Lawrence A. Wan                       Chairman of the Board of Directors                January 7, 2003
---------------------------------------                                                         ------------------------------
Dr. Lawrence A. Wan


/s/ Gary D. Wrench                            Director and Chief Financial Officer              January 7, 2003
---------------------------------------                                                         ------------------------------
Gary D. Wrench


/s/ Robert R. Corr                            Secretary and Treasurer (Chief                    January 7, 2003
---------------------------------------       Accounting Officer)                               ------------------------------
Robert R. Corr
</TABLE>


                                       59
<PAGE>

                                CERTIFICATION OF
                                    PRESIDENT


I, Gerald D. Brasuell, certify that:

1.     I have reviewed this annual report on Form 10-K of OpticNet, Inc.;

2.     Based on my  knowledge,  this  annual  report does not contain any untrue
       statement of a material fact or omit to state a material  fact  necessary
       to make the statements  made, in light of the  circumstances  under which
       such  statements  were made,  not  misleading  with respect to the period
       covered by this annual report;

3.     Based on my knowledge,  the  financial  statements,  and other  financial
       information  included  in  this  annual  report,  fairly  present  in all
       material respects the financial condition, results of operations and cash
       flows of the  registrant  as of, and for,  the periods  presented in this
       annual report;

4.     The  registrant's  other  certifying  officers and I are  responsible for
       establishing  and  maintaining  disclosure  controls and  procedures  (as
       defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant  and
       have:

       a)    designed  such  disclosure  controls and  procedures to ensure that
             material  information  relating to the  registrant,  including  its
             consolidated  subsidiaries,  is made  known to us by others  within
             those entities, particularly during the period in which this annual
             report is being prepared;

       b)    evaluated the effectiveness of the registrant's disclosure controls
             and  procedures  as of a date with 90 days prior to the filing date
             of this annual report (the "Evaluation Date"); and

       c)    presented in this annual report our conclusions about effectiveness
             of the disclosure  controls and procedures  based on our evaluation
             as of the Evaluation Date;

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

       a)    all significant deficiencies in the design or operation of internal
             controls which could adversely affect the  registrant's  ability to
             record,  process,  summarize  and  report  financial  data and have
             identified for the registrant's  auditors and material  weakness in
             internal controls; and

       b)    any fraud,  whether or not material,  that  involves  management or
             other  employees  who have a significant  role in the  registrant's
             internal controls; and


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

Dated    January 7, 2003
     -----------------------------


  /s/ Gerald D. Brasuell
--------------------------------
Gerald D. Brasuell
President


                                       60
<PAGE>

                                CERTIFICATION OF
                             CHIEF FINANCIAL OFFICER


I, Gary D. Wrench, certify that:

1.     I have reviewed this annual report on Form 10-K of OpticNet, Inc.;

2.     Based on my  knowledge,  this  annual  report does not contain any untrue
       statement of a material fact or omit to state a material  fact  necessary
       to make the statements  made, in light of the  circumstances  under which
       such  statements  were made,  not  misleading  with respect to the period
       covered by this annual report;

3.     Based on my knowledge,  the  financial  statements,  and other  financial
       information  included  in  this  annual  report,  fairly  present  in all
       material respects the financial condition, results of operations and cash
       flows of the  registrant  as of, and for,  the periods  presented in this
       annual report;

4.     The  registrant's  other  certifying  officers and I are  responsible for
       establishing  and  maintaining  disclosure  controls and  procedures  (as
       defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant  and
       have:

       a)    designed  such  disclosure  controls and  procedures to ensure that
             material  information  relating to the  registrant,  including  its
             consolidated  subsidiaries,  is made  known to us by others  within
             those entities, particularly during the period in which this annual
             report is being prepared;

       b)    evaluated the effectiveness of the registrant's disclosure controls
             and  procedures  as of a date with 90 days prior to the filing date
             of this annual report (the "Evaluation Date"); and

       c)    presented in this annual report our conclusions about effectiveness
             of the disclosure  controls and procedures  based on our evaluation
             as of the Evaluation Date;

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

       a)    all significant deficiencies in the design or operation of internal
             controls which could adversely affect the  registrant's  ability to
             record,  process,  summarize  and  report  financial  data and have
             identified for the registrant's  auditors and material  weakness in
             internal controls; and

       b)    any fraud,  whether or not material,  that  involves  management or
             other  employees  who have a significant  role in the  registrant's
             internal controls; and


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

Dated   January 7, 2003
     ----------------------------

   /s/ Gary D. Wrench
---------------------------------
Gary D. Wrench
Chief Financial Officer


                                       61
<PAGE>

                                                                     SCHEDULE II

                                 OPTICNET, INC.

                        VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
                                                                       Additions
                                                                       ---------
                                                 Balance at  Charged to                                      Balance at
                                                 Beginning    Costs and         Charged to                      End of
                     Description                 of Period    Expenses       Other Accounts    Deductions       Period
                     -----------                 ---------    --------       --------------    ----------       ------
                                                                             (in thousands)

<S>                                                 <C>         <C>                <C>             <C>          <C>
Year ended September 28, 2002:
Deducted from asset accounts:
     Allowance for doubtful accounts .......        $--         $57,080            $--             $--          $57,080


Year ended September 29, 2001:
Deducted from asset accounts:
     Allowance for doubtful accounts .......        $--         $  --              $--             $--          $  --


Period from February 23, 2000 (inception) to
September 30, 2000:
Deducted from asset accounts:
     Allowance for doubtful accounts .......        $--         $  --              $--             $--          $  --
</TABLE>


                                       62
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, AS TO SCHEDULE II


The Board of Directors and Shareholders
OpticNet, Inc.

We have audited the financial  statements of OpticNet,  Inc. as of September 28,
2002 and  September  29, 2001,  and for the years ended  September  28, 2002 and
September  29,  2001,  and the period  from  February  23, 2000  (inception)  to
September 30, 2000 and from February 23, 2000 (inception) to September 28, 2002,
and have issued our report  thereon  dated  November 20,  2002.  Our audits also
included  the  financial  statement  schedule  listed in Item 15(a) of this Form
10-K.  This  schedule is the  responsibility  of the Company's  management.  Our
responsibility is to express an opinion based on our audits.

In our  opinion,  the  financial  statement  schedule  referred  to above,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects, the information set forth therein.




                                                               Ernst & Young LLP


San Francisco, California
Date  November 20, 2002
    ---------------------


                                       63
<PAGE>

INDEX TO EXHIBITS
-----------------


Exhibit
Number      Description
------      -----------

3.3         Certificate  of  Designation  of Powers,  Preferences  and Rights of
            Series B Preferred Stock

99.3        President  Certification Pursuant to 18 U.S.C as adopted Pursuant to
            Section 906 of the Sarbanes-Oxley Act of 2002

99.4        CFO  Certification  Pursuant  to 18 U.S.C.  as adopted  Pursuant  to
            Section 906 of the Sarbanes-Oxley Act of 2002