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

                                   FORM 10-K/A

                                 AMENDMENT NO. 1

[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

                         Commission file number 0-22799

                     B E I   T E C H N O L O G I E S, I N C.
             (Exact name of Registrant as specified in its charter)

          Delaware                                        94-3274498
------------------------------              ------------------------------------
State or other jurisdiction of              (I.R.S. Employer Identification No.)
incorporation or organization

                           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, $.001 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.
[ ]

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates of the Registrant as of December 11, 2002 was $160,941,014(A). As
of December  11,  2002,  14,597,591  shares of  Registrant's  Common  Stock were
outstanding.

(A) Based upon the closing  sale price of the Common  Stock on December 11, 2002
as reported on the NASDAQ National Market System.  Excludes  3,436,633 shares of
Common  Stock held by  directors,  executive  officers  and  stockholders  whose
ownership  exceeds ten percent of Common Stock outstanding on December 11, 2002.
Exclusion of shares held by any person  should not be construed to indicate that
such person  possesses  the power,  direct or  indirect,  to direct or cause the
direction of the  management or policies of  Registrant,  or that such person is
controlled by or under common control with Registrant.


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.


<PAGE>

EXPLANATORY NOTE TO AMENDMENT NO. 1

Amendment  No. 1 is filed  only to amend  Item  15(d)  to  provide  the  audited
financial statements of OpticNet, Inc. ("OpticNet"), as required by Item 3-09 of
Regulation  S-X  promulgated  by the  Securities  and Exchange  Commission  (the
"SEC").  OpticNet's  financial  statements  were filed  pursuant to an extension
available under Rule 12b-25  promulgated by the SEC under the 1934 Exchange Act,
as  amended.  Except for such  audited  financial  statements,  all  information
contained in the original Report on Form 10-K filed on December 23, 2002 has not
been updated or amended by this Amendment No. 1.


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

The following documents are filed as part of this Form 10-K/A.
<TABLE>
<CAPTION>
                                                                                                       Form 10-K
                                                                                                      Page Number
                                                                                                      -----------
<S>                                                                                                        <C>
(a)(1)      Index to Consolidated Financial Statements
            ------------------------------------------

            The following Consolidated Financial Statements of BEI Technologies, Inc.
            and its Subsidiaries are filed as part of this Form 10-K/A:

            Report of Ernst & Young LLP, Independent Auditors                                              49

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

            Consolidated Statements of Operations - Years ended September 28, 2002,
               September 29, 2001 and September 29, 2000                                                   31


            Consolidated Statements of Cash Flows - Years ended September 28, 2002,
               September 29, 2001 and September 30, 2000                                                   32

            Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
               Income (Loss) - Years ended September 28, 2002, September 29, 2001 and
               September 30, 2000                                                                          34

            Notes to Consolidated Financial Statements - September 28, 2002                                35

Page references  refer to the page number in the  Registrant's  Annual Report on
Form 10-K filed on December 23, 2002.

(a)(2)   Index to Financial Statement Schedule

         The  following   Consolidated   Financial  Statement  Schedule  of  BEI
         Technologies,  Inc. for each of the years in the period ended September
         28, 2002 is filed as part of this Form 10-K/A:

         Schedule II    Valuation and Qualifying Accounts                                                 S-1

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

                                       2
<PAGE>

Page references above refer to the page number in the Registrant's Annual Report
on Form 10-K filed on December  23, 2002.  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  Consolidated  Financial
Statements or Notes thereto.

(a)(3)      Listing of Exhibits

Exhibit
Numbers               Description                                      Footnote
-------               -----------                                      --------
 2.1     Distribution  Agreement  between  BEI  Electronics,
         Inc. and BEI Technologies, Inc.                                  i

 2.2     Corporate    Services    Agreement    between   BEI
         Technologies, Inc. and BEI Electronics, Inc.                     i

 2.3     Tax Allocation and Indemnity  Agreement between BEI
         Electronics, Inc. and BEI Technologies, Inc.                     i

 2.4     Assumption of Liabilities  and Indemnity  Agreement
         between BEI Electronics, Inc. and BEI Technologies,
         Inc.                                                             i

 2.5     Technology  Transfer  and License  Agreement by and
         between BEI Electronics, Inc. and BEI Technologies,
         Inc.                                                             i

 2.6     Trademark  Assignment and Consent  Agreement by and
         between BEI Electronics, Inc. and BEI Technologies,
         Inc.                                                             i

 2.7     Agreement  Regarding  Certain  Representations  and
         Covenants by and between BEI Electronics,  Inc. and
         BEI Technologies, Inc.                                           i

 3.1     Certificate of Incorporation  of BEI  Technologies,
         Inc.                                                             i

 3.2     Bylaws of BEI Technologies, Inc.                                 i

 3.3     Registrant's Certificate of Designation of Series A
         Junior  Participating  Preferred  Stock  (filed  as
         Exhibit 99.3 hereto)                                             i

 4.1     Specimen Common Share Certificate                                i

 4.2     Certificate of Incorporation  of BEI  Technologies,
         Inc. (filed as Exhibit 3.1 hereto)                               i

 4.3     Bylaws of BEI Technologies,  Inc. (filed as Exhibit
         3.2 hereto)                                                      i

 4.4     Registrant's Certificate of Designation of Series A
         Junior  Participating  Preferred  Stock  (filed  as
         Exhibit 99.3 hereto)                                             i

                             3
<PAGE>

 4.5     Form of Rights  Certificate  (filed as Exhibit 99.4
         hereto)                                                          i

10.1 *   Registrant's 1997 Equity Incentive Plan and forms
         of related agreements                                            i

10.2 *   Executive  Change in Control  Benefits  Agreement
         between BEI  Technologies,  Inc. and Certain  Named
         Executive Officers                                               i

10.5     Note Purchase  Agreement dated November 16, 1998 by
         and between BEI  Technologies,  Inc., BEI Sensors &
         Systems  Company,  Inc.,  Connecticut  General Life
         Insurance   Company  and  Allstate  Life  Insurance
         Company                                                         ii

10.6     Amendment to Tax Allocation and Indemnity Agreement
         between BEI Electronics, Inc. and BEI Technologies,
         Inc.                                                            ii

10.9     Development and Supply  Agreement,  dated April 26,
         2001,  by  and  between   Systron  Donner  Inertial
         Division and Continental Teves AG & Co.                         iv

10.10    Amendment to Note Purchase  Agreement as amended as
         of March 30, 2002, by and between BEI Technologies,
         Inc.,   BEI  Sensors  &  Systems   Company,   Inc.,
         Connecticut  General  Life  Insurance  Company  and
         Allstate Life Insurance Company                                  v

10.11    Credit  Agreement  dated  August 14,  2002,  by and
         between  BEI  Technologies,  Inc.,  BEI  Sensors  &
         Systems Company,  Inc. and Union Bank of California             vi

10.12    Second  Amendment to Note  Purchase  Agreement  and
         Waiver dated  December 20, 2002, by and between BEI
         Technologies,  Inc., BEI Sensors & Systems Company,
         Inc.,  Connecticut  General Life Insurance  Company
         and Allstate Life Insurance Company.                            vi

21.1     Subsidiaries of the Registrant                                  ii

23.1     Consent of Ernst & Young LLP, Independent Auditors

99.1     BEI Technologies,  Inc. Information Statement dated
         September 24, 1997                                              ii

99.2     Rights  Agreement  dated as of  September  11, 1997
         among  BEI   Technologies,   Inc.  and  ChaseMellon
         Shareholder Services, L.L.C.                                     i

                             4
<PAGE>

99.3     Registrant's Certificate of Designation of Series A
         Junior Participating Preferred Stock                             i

99.4     Form of Rights Certificate                                       i

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

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

(i)      Incorporated  by  reference.  Previously  filed  as an  exhibit  to the
         Registrant's  Information  Statement  on Form 10 (File No.  0-22799) as
         filed on September 22, 1997.

(ii)     Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-K (File No. 0-22799) as filed on December 30, 1998.

(iii)    Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-Q (File No. 000-22799) as filed on February 13, 2001.

(iv)     Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-Q (File No. 000-22799) as filed on August 14, 2001.

(v)      Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-Q (File No. 000-22799) as filed on May 13, 2002.

(vi)     Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-K (File No. 000-22799) as filed on December 23, 2002.

*        Items  which  are  management   contracts  or  compensatory   plans  or
         arrangements  required to be filed as an exhibit pursuant to Item 15(c)
         of Form 10-K.

(b)      No reports on Form 8-K were filed by the Company during fiscal 2002.

(c)      Index to financial statement schedules for the financial  statements of
         subsidiaries not consolidated and fifty-percent-or-less-owned persons:

         The following Financial  Statement Schedule of OpticNet,  Inc. for each
         of the years in the period ended September 28, 2002 is filed as part of
         this Form 10-K/A:

         Schedule III   Financial Statements of OpticNet, Inc.          S-3

                                       5
<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 Report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                          BEI TECHNOLOGIES, INC.
                                          By: /s/ Robert R. Corr
                                              ----------------------------------
                                          Robert R. Corr
                                          Vice President, Secretary, Treasurer
                                          and Controller
                                          Date February 7, 2003
                                               ----------------

                                       6
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
Signature                                     Title                                             Date
---------                                     -----                                             ----
<S>                                           <C>                                               <C>
/s/ Charles Crocker                           Chief Executive Officer and Chairman of
---------------------------------------       the Board Of Directors                            February 7, 2003
Charles Crocker                               (Principal Executive Officer)                     ------------------------------


           *                                  President, Chief Operating Officer                February 7, 2003
---------------------------------------       and Director                                      ------------------------------
Dr. Asad M. Madni


/s/ John LaBoskey                             Senior Vice President and Chief                   February 7, 2003
---------------------------------------       Financial Officer                                 ------------------------------
John LaBoskey


/s/ Robert R. Corr                            Vice President, Secretary, Treasurer and          February 7, 2003
---------------------------------------       Controller (Principal Accounting Officer)         ------------------------------
Robert R. Corr


           *                                  Director                                          February 7, 2003
---------------------------------------                                                         ------------------------------
Richard M. Brooks


           *                                  Director                                          February 7, 2003
---------------------------------------                                                         ------------------------------
George S. Brown


           *                                  Director                                          February 7, 2003
---------------------------------------                                                         ------------------------------
C. Joseph Giroir, Jr.


           *                                  Director                                          February 7, 2003
---------------------------------------                                                         ------------------------------
Dr. William G. Howard


           *                                  Director                                          February 7, 2003
---------------------------------------                                                         ------------------------------
Gary D. Wrench

*By: /s/ Charles Crocker                      Attorney-in-Fact                                  February 7, 2003
---------------------------------------       (Signing under the authority of a                 ------------------------------
Charles Crocker                               Power of Attorney previously filed
                                              with the Securities and Exchange
                                              Commission)



</TABLE>

                                       7
<PAGE>

                                CERTIFICATION OF
                             CHIEF EXECUTIVE OFFICER

I, Charles Crocker, certify that:

1.       I have reviewed this annual report on Form 10-K/A of BEI  Technologies,
         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 within 90 days prior to
                  the filing date of this amended 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 February 7, 2003
      -----------------------------


/s/ Charles Crocker
-----------------------------------
Charles Crocker
Chief Executive Officer and Chairman of the Board of Directors

                                       8
<PAGE>

                                CERTIFICATION OF
                             CHIEF FINANCIAL OFFICER

I, John LaBoskey, certify that:

1.       I have reviewed this annual report on Form 10-K/A of BEI  Technologies,
         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 within 90 days prior to
                  the filing date of this amended 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 February 7, 2003
      -----------------------------


/s/ John LaBoskey
-----------------------------------
John LaBoskey
Senior Vice President and Chief Financial Officer

                                       9
<PAGE>

                                                                    SCHEDULE III

OpticNet, Inc.
(a development stage company)
Balance Sheets

                                                   September 28,   September 29,
                                                       2002           2001
                                                    ----------     ----------
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
                                                    ==========     ==========

See accompanying notes.

                                       10
<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.

                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                 Period from           Period from
                                                                                                February 23,           February 23,
                                                                                                    2000                  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.

                                       12
<PAGE>

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

<TABLE>
<CAPTION>
                                                                Preferred
                                                                   Stock                        Common Stock          Treasury Stock
                                                         ---------------------------      --------------------------  --------------
                                                           Shares           Amount          Shares          Amount         Shares
                                                         ----------       ----------      ----------      ----------      ----------
<S>                                                       <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
  November 2000 for
  intellectual property
  rights and technology ...........................                                        3,616,000
 Repurchase of restricted
  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 deferred stock
  compensation ....................................
                                                         ----------       ----------      ----------      ----------      ----------
Balance at September 29, 2001 .....................       2,000,000              200       6,311,428             139            --

 Net loss .........................................
 Equity funding from a
  related party, see Note 13 ......................
 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 restricted
  common stock ....................................                                         (205,954)
 Stock options exercised ..........................                                           23,686               3
 Amortization of deferred stock
  compensation ....................................
                                                         ----------       ----------      ----------      ----------      ----------
Balance at September 28, 2002 .....................       2,000,000       $      200       6,092,104      $      235         967,056
                                                         ==========       ==========      ==========      ==========      ==========
</TABLE>

See accompanying notes.


<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        Deficit
                                                      Equity                                          Accumulated
                                                   Funding from     Additional        Deferred         During the          Total
                                                     a Related        Paid-In        Stock-Based       Development     Stockholders'
                                                       Party          Capital        Compensation         Stage           Deficit
                                                    -----------      -----------      -----------      -----------      -----------
<S>                                                 <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
    November 2000 for intellectual
    property rights and technology ............
 Repurchase of restricted
   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 deferred
   stock compensation .........................                                             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 ..................           1,815        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 .................     $     1,815      $ 2,943,118      $   (48,765)     $(5,811,930)     $(2,915,327)
                                                    ===========      ===========      ===========      ===========      ===========
</TABLE>

See accompanying notes.


                                       13
<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.

                                       14
<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.

                                       15
<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

                                       16
<PAGE>

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

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 costs accurately, or secure
the necessary financing, in order to continue operations.

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 million 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.

                                       17
<PAGE>


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

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
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.

                                       18
<PAGE>

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

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 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.

                                       19
<PAGE>

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

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 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 million 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.

                                       20
<PAGE>

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

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 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:

                                       21
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 September 28, September 29,
                                                                                    2002           2001
                                                                                 ----------     ----------
<S>                                                                              <C>            <C>
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
                                                                                 ==========     ==========
</TABLE>

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  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

                                       22
<PAGE>

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

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 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

                                       23
<PAGE>

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

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 Conjunction  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  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

                                       24
<PAGE>

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

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 of 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 of  non-employee  options vesting during the
year ended September 28, 2002 was deemed to be immaterial.

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

<TABLE>
<CAPTION>
                                                                          Weighted
                                                         Number of     average exercise
                                                       common shares   price per share
                                                       -------------   ---------------
<S>                                                       <C>              <C>
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
                                                         ========          =====
</TABLE>

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.

                                       25
<PAGE>

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

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.

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 ...........................     $      --        $      --
                                                   ===========      ===========

                                       26
<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.

                                       27
<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
                                                                                           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>                   <C>
                         Numerator
                         ---------
Loss from operations                                $(4,131,429)        $(1,574,755)            $(105,746)            $(5,811,930)

                         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.

                                       28
<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.

                                       29
<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

                                       30
<PAGE>

Exhibit
Number                  Description
------                  -----------
23.1                    Consent of Ernst & Young LLP Independent Auditors

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

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

                                       31