1122668--12/20/2006--OPTICAL_COMMUNICATION_PRODUCTS

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{product, market, service}

{stock, price, operating}

{acquisition, growth, future}

{operation, international, foreign}

{property, intellectual, protect}

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{product, candidate, development}

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Our continued success in generating revenue depends on growth in construction of fiber optic MAN, LAN and FTTH networks and our ability to compete in the markets for those networks. We derive a significant portion of our total revenue from a few significant customers, and our total revenue may decline significantly if any of these customers cancels, reduces or delays purchases of our products or extracts price concessions from us. If we do not develop and introduce new products with higher average selling prices in a timely manner, the overall average selling prices of our products will decrease. Our markets are highly competitive, some of our customers are also our competitors, and our other customers may choose to purchase our competitors products rather than our products or develop internal capabilities to produce their own fiber optic modules. Our sales cycle runs from our customers initial design to production for commercial sale. This cycle is long and unpredictable and may cause our revenue and operating results to vary from our forecasts. The market for our products is characterized by rapid technological changes and evolving industry standards. If we do not respond to the changes in a timely manner, our products likely will not achieve market acceptance. Our products may have defects that are not detected until full deployment of a customer s system. Any of these defects could result in a loss of customers, damage to our reputation and substantial costs. Our products and the systems into which our products are incorporated must comply with domestic and international governmental regulations, and if our products do not meet these regulations, our ability to sell our products will be restricted. If we are unable to generate adequate additional revenue as a result of the expansion of our sales operations, our competitive position may be harmed and our revenue or margins may decline. If our customers do not approve our manufacturing processes and qualify our products, we will lose significant customer sales and opportunities. If we fail to predict our manufacturing requirements accurately, we could incur additional carrying costs and have excess and obsolete inventory or we could experience manufacturing delays, which could cause us to lose orders or customers. If we do not achieve acceptable manufacturing yields in a cost-effective manner, or if we are required to develop new manufacturing processes to improve our yields, our operating results would be impaired. We are dependent on a limited number of suppliers for most of our key components. If these suppliers are unable or unwilling to meet our manufacturing requirements, if they raise prices of their products, or if they discontinue key components, we may experience production delays leading to delays in shipments, increased costs and cancellation of orders for our products. We are moving certain manufacturing operations to a sub-contractor in China, which exposes us to risks inherent in doing business in China. Disruption to our operations at either our California or Taiwan manufacturing facilities could require us to lease alternative manufacturing facilities or limit our manufacturing operations. Uncertainties arising out of terrorist activities, resulting military actions and other factors could adversely affect our business and operating results. We could be subjected to litigation regarding intellectual property rights, which may divert management attention, cause us to incur significant costs or prevent us from selling our products. If we are unable to protect our proprietary technology, others could misappropriate this technology, which would make it difficult for us to compete in our industry. We are subject to environmental laws and other legal requirements that have the potential to subject us to substantial liability and increase our cost of doing business. We face risks associated with our international operations that could prevent us from marketing and distributing our products internationally. Our future operating results may be subject to volatility as a result of exposure to fluctuation in foreign currency exchange risks. Our limited experience in acquiring other businesses, product lines and technologies may make it difficult for us to overcome problems encountered in connection with any acquisition we may undertake. Our recent acquisition could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results. Charges to earnings resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock. We may incur additional charges beyond that originally anticipated in the transition of certain manufacturing operations from California and Taiwan to SAE in China. Our future operating results are likely to fluctuate from quarter to quarter, and if we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly. Our stock price is likely to be volatile and could drop unexpectedly. Sales of substantial amounts of our shares by selling stockholders could cause the market price of our shares to decline. We may not be able to maintain our listing on the NASDAQ Global Market and, if we fail to do so, the price and liquidity of our Class A common stock may decline. Our success depends on our key personnel, including our executive officers, the loss of any of whom could harm our business. We have potential business conflicts of interest with Furukawa, the resolution of which may not be as favorable to us as if we were dealing with an unaffiliated third party. Furukawa will control the outcome of stockholder voting and there may be an adverse affect on the price of our Class A common stock due to disparate voting rights of our Class A common stock and our Class B common stock. Our exploration of strategic alternatives may not be successful.

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1122668--12/20/2006--OPTICAL_COMMUNICATION_PRODUCTS_INC