EPITAXX INC, S-1/A, 1998-05-13

EPITAXX INC
S-1/A, 1998-05-13
SEMICONDUCTORS & RELATED DEVICES

Previous: LEEDS FEDERAL BANKSHARES, 10QSB, 1998-05-13

Next: AMERICAN RESIDENTIAL EAGLE INC, S-3/A, 1998-05-13

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1998
REGISTRATION NO. 333-44843
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EPITAXX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3674 22-2497461
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification No.)
jurisdiction of
incorporation or
organization)
7 GRAPHICS DRIVE
WEST TRENTON, NEW JERSEY 08628
(609) 538-1800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

NOBORU HIRAGURI
CHIEF EXECUTIVE OFFICER AND VICE CHAIRMAN
EPITAXX, INC.
7 GRAPHICS DRIVE
WEST TRENTON, NEW JERSEY 08628
(609) 538-1800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
COPIES TO:
THOMAS J. KELLY, ESQ. JULIE M. ALLEN, ESQ.
MINTZ, LEVIN, COHN, FERRIS,
GLOVSKY AND POPEO, P.C. O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
ONE FINANCIAL CENTER NEW YORK, NY 10112
BOSTON, MA 02111 (212) 408-2400
(617) 542-6000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)

Dated May 13, 1998 2,150,000 SHARES

[LOGO OF EPITAXX APPEARS HERE]
CLASS A COMMON STOCK

------------

All of the shares of Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), offered hereby are being sold by EPITAXX, Inc.
("EPITAXX" or the "Company"). NSG Holding USA, Inc. ("NSG Holding"), a wholly
owned subsidiary of Nippon Sheet Glass Co., Ltd. ("NSG"), is the holder of all
of the 5,088,000 outstanding shares of the Company's Class B Common Stock, $.01
par value per share (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock"). See "Relationship Between the Company and
NSG." Upon the completion of the offering, the Class B Common Stock will
represent 70.05% of the total outstanding Common Stock on an as-converted basis
and 87.53% of the total voting power of the outstanding Common Stock. The
Company anticipates using approximately $10.3 million of the net proceeds from
the offering to repay amounts owed to the stockholders of record on December
11, 1997, including NSG Holding, pursuant to a dividend declared by the Company
and approximately $4.2 million to repay the outstanding balance of a line of
credit with NSG. See "Use of Proceeds."

The rights, preferences and privileges of each class of Common Stock are
identical in all respects except for voting rights. Each share of Class A
Common Stock entitles its holder to one vote and each share of Class B Common
Stock entitles its holder to three votes for each share of Class A Common Stock
into which the Class B Common Stock is convertible. The Class B Common Stock is
convertible into Class A Common Stock on a share-for-share basis, subject to
adjustment for stock dividends, stock splits, subdivisions or combinations. See
"Description of Capital Stock."

Prior to the offering, there has been no public market for any class of the
Company's capital stock. The Company does not believe that there will ever be a
public market for the Class B Common Stock. It is currently anticipated that
the initial public offering price of the Class A Common Stock will be between
$9.00 and $11.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price of the Class
A Common Stock. The Class A Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "EPXX."
------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.

------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and NSG have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."

(2) Before deducting expenses paid and payable by the Company, estimated to be
$800,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase an aggregate of up to 322,500
additional shares of Class A Common Stock at the Price to Public less
Underwriting Discounts and Commissions to cover over-allotments, if any. If
all such additional shares are purchased, the Price to Public, the
Underwriting Discounts and Commissions and the Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

------------
The Class A Common Stock is offered by the several Underwriters named herein
when, as and if received and accepted by them, and subject to their right to
reject orders in whole or in part and certain other conditions. It is expected
that delivery of certificates for the shares will be made at the offices of
Cowen & Company, New York, New York on or about , 1998.

------------
COWEN & COMPANY
CIBC OPPENHEIMER
DAIWA SECURITIES AMERICA INC.

, 1998
<PAGE>

[Inside front cover contains graphics of the EPITAXX logo and three
photographs of representative products under the following categories of
products offered by the Company: (a) long-haul transmission; (b) cable
television, and test and measurement; and (c) digital access and both high speed
computer networking. In addition, the following text appears above the images:
Optical detectors and receivers for fiber optics communications.]

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including the Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Prospectus.
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed herein under the caption "Risk Factors" and
elsewhere in this Prospectus. Unless otherwise indicated, all information
presented in this Prospectus (i) gives effect to the amendment and restatement
of the Company's Restated Certificate of Incorporation filed on January 23,
1998, pursuant to which (a) the shares of capital stock held by NSG Holding
were converted into 5,088,000 shares of Class B Common Stock, (b) all of the
shares of capital stock that were not held by NSG Holding were converted into
an equal number of shares of Class A Common Stock and (c) an aggregate of
12,500,000 shares of Class A Common Stock was authorized (the
"Recapitalization") and (ii) assumes no exercise of the Underwriters' over-
allotment option.

THE COMPANY

The Company designs, manufactures and markets semiconductor optical detectors
and receivers for fiber optics communications. By virtue of its specialization
in optical detector and receiver products, the Company is able to serve many
different markets in the fiber optics communications industry. The Company's
products are integral to the development and implementation of fiber optics
systems for applications such as high capacity, long-haul terrestrial and
undersea transmission; digital local loop and access networks; multi-channel
cable television ("CATV") distribution; high-speed computer networking; and
test and measurement equipment.

EPITAXX believes that its expertise in Indium Gallium Arsenide ("InGaAs")
semiconductor material and optical detector device engineering, precision opto-
mechanical assembly processes and high-performance digital and analog receiver
circuits enables the Company to provide a broad range of high-performance
optical detector products that can be quickly and cost-effectively adapted to a
variety of customer needs and technologies. Further, because of its focus on
detectors, EPITAXX is able to respond quickly to evolving technologies and
increasingly complex applications.

The global communications industry has undergone significant transformation
and growth since the mid-1980s as a result of increased demand for
communications services and applications, as well as advances in technology and
changes in public policy. Communications service providers continue to increase
the capacity of their networks and build new networks to meet the demand for
high-bandwidth applications, which in turn has significantly increased the use
of fiber optics equipment.

The Company is an independent supplier and counts among its customers many of
the leading fiber optics communications equipment manufacturers, including such
companies as CIENA Corporation, Finisar Corporation, Harmonic Lightwaves, Inc.,
Hewlett-Packard Company, Inc., JDS FITEL, Inc., Lucent Technologies, Inc.,
Philips Broadband Networks, Inc., Philips N.V., Pirelli SpA and Siemens AG.

The Company was founded in 1984 and purchased in 1990 by NSG. NSG, which is
listed on the Tokyo Stock Exchange, is one of Japan's largest manufacturers of
flat glass products for the construction and automotive industries. NSG is also
one of the world's leading suppliers of specialty graded-index lenses and
associated products for the fiber optics industry. The Company's executive
offices are located at 7 Graphics Drive, West Trenton, New Jersey 08628 and its
telephone number is (609) 538-1800.

3
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Class A Common Stock offered by the Company....... 2,150,000 shares
Common Stock to be outstanding after the offering:
Class A Common Stock........................... 2,175,200 shares
Class B Common Stock........................... 5,088,000 shares
----------------
Total...................................... 7,263,200 shares(1)
Use of proceeds................................... For the repayment of
approximately $14.5 million
principal amount of
indebtedness, including
interest thereon, to
stockholders and general
corporate purposes,
including working capital.
See "Use of Proceeds."
Nasdaq National Market Symbol..................... EPXX
</TABLE>
- --------

(1) Based on 5,113,200 shares of capital stock outstanding on the date hereof.
Excludes 574,800 shares of Class A Common Stock reserved for issuance under
the Company's Amended and Restated 1996 Employee, Director and Consultant
Stock Option Plan (the "Stock Option Plan"), of which options to purchase
an aggregate of 168,072 shares were outstanding on the date hereof at a
weighted average exercise price of $3.93 per share. Included in total
outstanding options are options to purchase 15,000 shares of Class A Common
Stock exercisable at the initial public offering price (assumed to be
$10.00 per share), 5,000 of which become exercisable upon consummation of
the offering. See "Management--Benefit Plans--Amended and Restated 1996
Employee, Director and Consultant Stock Option Plan."

RELATIONSHIP WITH NSG

In December 1997, the Company declared a $10,049,528 cash dividend to the
stockholders of record on December 11, 1997, of which $10.0 million is payable
to NSG Holding. The purpose of the dividend was to implement general financial
planning policies within the NSG global organization, which contemplate
distribution of assets of international affiliates to the ultimate parent where
appropriate and consistent with the financial needs and objectives of such
affiliates. The dividend is evidenced by promissory notes dated February 9,
1998, bearing interest at a rate of 6.02% per annum, payable semi-annually (the
"Dividend Notes"). The principal amount of the Dividend Notes is payable on the
earlier of (i) the date the Company's total stockholders' equity first equals
or exceeds $15.0 million and (ii) February 9, 2001, provided that on such date
the Company's total stockholders' equity equals or exceeds $15.0 million. The
sale of Class A Common Stock offered hereby will cause the Company's total
stockholders' equity to exceed $15.0 million. As a result, the Company will use
approximately $10.3 million of the net proceeds from the offering to repay the
principal amount of the Dividend Notes, including interest thereon. The Company
will also use approximately $4.2 million of the net proceeds of the offering to
repay short-term borrowings, including interest thereon, from NSG Holding under
a line of credit. See "Use of Proceeds."

Prior to the offering, NSG Holding owned 99.51% of the outstanding shares of
the Company's capital stock. Upon the completion of the offering, NSG Holding
will own no shares of Class A Common Stock and all of the 5,088,000 outstanding
shares of Class B Common Stock. Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to three
votes for each share of Class A Common Stock into which the Class B Common
Stock is convertible. The Class B Common Stock is convertible into Class A
Common Stock on a share-for-share basis, subject to adjustment for stock
dividends, stock splits, subdivisions or combinations. See "Description of
Capital Stock." The Class B Common Stock will represent 70.05% of the total
outstanding Common Stock on an as-converted basis and 87.53% of the total
voting power of the outstanding Common Stock upon completion of the offering
(85.94% if the Underwriters' over-allotment option is exercised in full).
Accordingly, NSG Holding will be able to control the vote on all matters
submitted to stockholders, including the election of directors and the approval
of extraordinary corporate transactions. The Company and NSG or NSG Holding
have entered into a number of agreements for the purpose of defining their
ongoing relationship. While NSG will continue to provide the Company with
certain services pursuant to these agreements, the Company is only entitled to
the ongoing assistance of NSG for a limited time and it may not receive such
services beyond the terms of the agreements. See "Risk Factors--Control by and
Relationship with NSG" and "Relationship Between the Company and NSG."

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenue......................... $12,342 $15,622 $19,762 $21,209 $25,255
Gross profit......................... 5,168 5,674 8,886 7,231 10,687
Income from operations ............... 1,560 1,456 3,249 1,503 3,789
Net income............................ 1,071 1,469 1,855 638 2,164
======= ======= ======= ======= =======
Net income per share(1)
Basic............................... $ 0.21 $ 0.29 $ 0.36 $ 0.12 $ 0.42
Diluted............................. $ 0.21 $ 0.29 $ 0.36 $ 0.12 $ 0.41
Shares used in per share calcula-
tion(1)
Basic............................... 5,113 5,113 5,113 5,113 5,113
Diluted............................. 5,113 5,113 5,113 5,135 5,225
Pro forma net income per share(2)
Basic............................... $ 0.35
Diluted............................. $ 0.35
Shares used in pro forma net income
per share calculation(2)
Basic............................... 6,118
Diluted............................. 6,230
OTHER FINANCIAL DATA:
Capital expenditures.................. $ 973 $ 908 $ 2,061 $ 2,418 $ 2,353
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, MARCH 31, 1998
------------------------------- -----------------------
1994 1995 1996 1997 ACTUAL AS ADJUSTED(3)
------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash.................... $ 14 $ 59 $ 91 $ 109 $ 968 $ 6,768
Working capital (defi-
cit)................... 816 2,460 2,852 1,395 (7,946) 11,640
Total assets............ 11,482 12,884 16,771 16,977 20,197 25,375
Short-term borrowings
from affiliate under
line of credit ........ 2,250 2,050 2,700 3,400 3,650 --
Promissory notes issued
for dividend
declared............... -- -- -- -- 10,050 --
Long-term obligations,
net of current
portion................ 5,000 5,000 5,000 5,133 5,011 5,011
Stockholders' equity
(deficit).............. 2,143 3,613 4,967 4,730 (3,156) 15,808
</TABLE>
- --------

(1) See Note 3 to the Consolidated Financial Statements for an explanation of
the determination of shares used to compute net income per share.

(2) Pro forma basic and diluted net income per share were calculated in a
manner consistent with basic and diluted net income per share except that
the weighted average number of shares was adjusted to include the number of
shares that would be required to be sold to fund the repayment of the
Dividend Notes (using an assumed initial public offering price of $10.00
per share).

(3) Adjusted to give effect to the sale of 2,150,000 shares of Class A Common
Stock offered by the Company, assuming an initial public offering price of
$10.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses paid and payable by the Company and the
application of the net proceeds thereof to repay the Dividend Notes and
short-term borrowings from NSG Holding. See "Use of Proceeds."

5
<PAGE>

RISK FACTORS

In addition to other information contained in this Prospectus, prospective
investors should carefully consider the following factors in evaluating the
Company and its business before purchasing shares of Class A Common Stock
offered hereby.

FLUCTUATIONS IN OPERATING RESULTS

The Company's operating results have fluctuated significantly in the past
and may fluctuate in the future on a quarterly and annual basis as a result of
a number of factors, many of which are beyond the Company's control. Sales for
a given quarter may depend to a significant degree upon product shipments to a
limited number of customers. Sales to individual large customers are often
related to the customer's specific equipment deployment projects, the timing
of which is subject to change on limited notice. The Company has experienced
both acceleration and slowdown in orders related to such projects, causing
changes in the sales level of a given quarter relative to both the preceding
and subsequent quarters. Since most of the Company's sales are in the form of
large orders with short delivery times to a limited number of customers, the
Company's ability to predict revenues is difficult. In addition, announcements
by the Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products. In the event
that anticipated orders from major customers fail to materialize, or delivery
schedules are deferred or canceled, the Company's business, financial
condition and operating results could be materially adversely affected. As a
result, the Company believes that period-to-period comparisons of its
operating results are not meaningful and should not be relied upon as
indicative of future performance.

The Company's gross margin is affected by a number of factors, including
product mix, product pricing, cost of materials and manufacturing costs. For
example, a price reduction of a particular product in response to competitive
pressure which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and could have a material adverse effect on the Company's
business, financial condition and operating results. The Company's anticipated
increase in overall spending in future periods in order to pursue new market
opportunities may also affect operating margins. The Company establishes
product development costs and other operating expenses based on projected
sales levels and margins because expenses are relatively fixed in the short
term. Accordingly, if sales are below expectations in any given short-term
period, the Company may be unable to adjust spending during such period to
compensate for the revenue shortfall.

Operating results in any period could also be affected by changes in market
demand, competitive market conditions, market acceptance of new or existing
products, the cost and availability of components, the composition of the
Company's customer base and sales channels, the mix of products sold,
marketing activities, the Company's ability to attract and retain key
technical and managerial employees and general economic conditions. In the
event that the Company's financial performance fails to meet the expectations
of public market analysts and investors, the price of the Class A Common Stock
could be materially adversely affected. See""--Dependence on Availability of
Materials and Key Suppliers" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

VOLATILITY OF MARKETS SERVED

Certain markets served by the Company are affected by capital expenditure
cycles. These cycles can precipitate pricing pressures on and decreased demand
for the Company's products. The Company's current optical detector and
receiver products serve applications in the following markets: high capacity,
long-haul terrestrial and undersea transmission; digital local loop and access
networks; multi-channel CATV distribution; high-speed computer networking; and
test and measurement equipment. In many cases, the Company's products are used
by customers who have not yet completed development of their own products. In
addition, the Company and certain of its customers are currently in the
process of developing new products which are in various stages of development,
testing and qualification, and are sometimes in emerging applications or new
markets. No assurances can be given that the Company or its customers will
continue their existing product development

6
<PAGE>

efforts, or, if continued, that such efforts will be successful, that markets
will continue to develop for any of the Company's new products, that the
Company's technology or pricing will enable such markets to develop or that
the Company's products will not be superseded by other technology or products.
See "Business--Research and Product Development."

CONTROL BY AND RELATIONSHIP WITH NSG

The Company's capital stock consists of Class A Common Stock and Class B
Common Stock. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to three votes for each
share of Class A Common Stock into which Class B Common Stock is convertible.
The Class B Common Stock is convertible into Class A Common Stock on a share-
for-share basis, subject to adjustment for stock dividends, stock splits,
subdivisions or combinations. Upon the completion of the offering, NSG Holding
will own no shares of Class A Common Stock and all of the 5,088,000
outstanding shares of Class B Common Stock. The Class B Common Stock will
represent 70.05% of the total outstanding Common Stock on an as-converted
basis and 87.53% (85.94% if the Underwriters' over-allotment option is
exercised in full) of the total voting power of the outstanding Common Stock
upon completion of the offering. Accordingly, NSG Holding will be able to
control the vote on all matters submitted to stockholders, including the
election of directors and the approval of extraordinary corporate
transactions. Such control may have the effect of limiting the manner in which
the Company conducts its business, discouraging certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of Class A Common Stock might otherwise
receive a premium for their shares over the then-current market price, or
generally restricting the price that investors might be willing to pay for
shares of Class A Common Stock.

Historically, the Company has derived certain benefits from being a
subsidiary of NSG. The relationship between the Company and NSG is defined
pursuant to several agreements. Because of the nature of the various
agreements between the Company and NSG and NSG Holding's ownership of Class B
Common Stock, there can be no assurance that such agreements, or the
transactions provided for therein, will be effected on terms at least as
favorable to the Company as could have been obtained from unaffiliated third
parties. While these agreements will continue to provide the Company with
certain benefits, the Company is only entitled to the ongoing assistance of
NSG for the term of the agreements and it may not enjoy benefits from its
relationship with NSG after the term of the agreements, including benefits
derived from NSG's reputation and credit support in the form of a line of
credit. Several of these agreements initially terminate on March 31, 2000, and
automatically renew for successive three-year periods unless either party
gives written termination notice to the other party at least 30 days prior to
the expiration of the then-current term. The remaining agreements will be
terminated on a specific date or upon written notice terminating such
agreement. There can be no assurance that the Company, upon termination of
such assistance from NSG, will be able to develop such services internally or
obtain arrangements from third parties to replace such services on favorable
terms, if at all; however, the Company does not believe that the loss of
credit support from NSG Holding would have a material adverse effect on the
Company's business, financial condition and operating results. See
"Relationship Between the Company and NSG."

The offering will provide substantial benefits to NSG Holding. The Company
will use approximately $4.2 million of the net proceeds from the offering to
repay short-term borrowings, including interest, to NSG Holding, in addition
to the amount owed to NSG Holding pursuant to the Dividend Notes. After the
consummation of the offering, NSG Holding will also benefit from the creation
of a public market for the Class A Common Stock into which its Class B Common
Stock is convertible. Upon the consummation of the offering, the shares of
Class A Common Stock into which the Class B Common Stock then held by NSG
Holding would be convertible, will have an aggregate market value of
approximately $50.9 million (assuming an initial public offering price of
$10.00 per share).

Given that NSG is a Japanese corporation with the majority of its assets and
operations located outside of the United States, investors may not be able to
enforce United States judgments against NSG, including judgments predicated
upon the civil liability provisions of United States federal and state
securities laws. In addition, certain directors and officers of NSG and
certain of the directors of the Company are residents of Japan, and all or
substantially all of the assets of such persons are or may be located outside
the United States. As a result, investors may not be able to effect service of
process within the United States upon such persons, or to

7
<PAGE>

enforce against them judgments obtained in United States courts, including
judgments predicated upon the civil liability provisions of United States
federal and state securities laws. See "Description of Capital Stock" and
"Relationship Between the Company and NSG."

DEPENDENCE ON AVAILABILITY OF MATERIALS AND KEY SUPPLIERS

On-time delivery of the Company's products depends upon the availability of
materials used in its products. The Company depends upon its suppliers to
produce materials in a timely and satisfactory manner. Certain materials
necessary for the manufacture of the Company's products are obtained from a
sole supplier or a small group of suppliers. In particular, the Company
presently obtains a key material, the epitaxial wafers of InGaAs used to
manufacture the Company's products, from one primary vendor. Although the
Company has identified and qualified several alternative sources for the
epitaxial wafers, as well as other materials currently obtained from single
sources, should the Company need to turn to alternative sources of materials,
there is no assurance that such materials could be made available at
competitive prices, at acceptable reliability standards or in a timely fashion
to respond to customer needs. Further, an inability by present or alternative
suppliers to meet the Company's demand, a prolonged interruption in supply or
a significant price increase of one or more materials could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company generally does not have any long-term contracts with
suppliers. While the quality, yield and timeliness of supply deliveries to
date have been acceptable, there can be no assurance that these suppliers will
continue to be able and willing to meet the Company's requirements or that
problems will not occur in the future. Any significant interruption in the
supply or degradation in the quality of any raw materials could have a
material adverse effect on the Company's business, financial condition and
operating results. Purchase orders from the Company's customers frequently
require delivery shortly after placement of the order. The Company maintains a
supply of finished goods inventories at its manufacturing facility, as well as
safety stocks of critical materials, in order to respond quickly to customer
needs. However, there can be no assurance that interrupted or delayed supplies
of key materials will not occur. Such interruption or delay could have a
material adverse effect on the Company's business, financial condition and
operating results. See "--Fluctuations in Operating Results," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Manufacturing and Facilities."

COMPETITION

The markets in which the Company sells optical detectors and receivers are
highly competitive, rapidly changing and significantly affected by new product
introductions and other market activities of industry participants. Some of
the Company's customers are both primary customers for certain of the
Company's products and competitors in the optical detector market. The
Company's business, financial condition and operating results could be
materially adversely affected if these customer relationships were to decline
or otherwise change in any manner which is detrimental to the Company. In
addition, the Company's ability to continue to develop, market and sell new
products or enhancements of existing products may require significant
additional research and development expenditures. Many of the Company's
current and potential competitors have larger research and development
departments, larger sales organizations and substantially greater financial
resources than does the Company. These competitors include Fujitsu Ltd.,
Lucent Technologies, Inc., Mitsubishi Electric Corp. and Siemens AG. Other
companies, not always addressing the same markets as EPITAXX, have competitive
offerings in some of the Company's product areas. Companies in this category
include Hamamatsu Photonics KK, Mitel Corporation and Ortel Corporation. There
can be no assurance that competitors will not develop products that are
superior to the Company's products or that achieve greater market acceptance.
The introduction by competitors of new products, or the reduction in price of
competitive products, could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--
Competition."

EVOLVING MARKETS AND RAPID TECHNOLOGICAL CHANGE; NEW PRODUCTS

The Company expects that new technologies will emerge as competition in the
fiber optics communications industry increases and the need for higher and
more cost efficient bandwidth expands. The Company's ability to

8
<PAGE>

anticipate changes in technology, industry standards, customer requirements
and product offerings, as well as its proficiency at developing new and
advanced products, will be significant factors in maintaining its competitive
advantage as a leading independent supplier to the fiber optics communications
industry. To remain competitive, the Company must timely select, develop and
market new products and enhancements on a cost-effective basis. There can be
no assurance that the Company will be successful in selecting, developing and
marketing such new products and enhancements.

The fiber optics communications markets are characterized by continuing
technological advancement. This constant development of technology increases
the risk that current or new competitors could develop products that would
reduce the competitiveness of the Company's products. To compete successfully,
the Company must design, develop, manufacture and sell new products that
provide increasingly higher levels of performance and reliability. The
Company's success in designing, developing, manufacturing and selling such new
products will depend on a variety of factors, including, without limitation,
the identification of market demand for new products, product selection, the
timely implementation of product design and development, product performance,
effective manufacturing processes and sales and marketing. There can be no
assurance that the technologies and applications under development by the
Company will be successfully developed, that the Company will successfully
develop new products or that new products developed by the Company will
achieve market acceptance. The Company is currently devoting substantial
resources toward the development of the avalanche photodetector ("APD") which
is designed to provide sensitivity at higher data transmission speeds and
greater bandwidth. The APD was commercially introduced in the fourth quarter
of fiscal 1998; however, the Company has received only limited orders for the
APD to date and there can be no assurance that it will achieve commercial
acceptance. See "Business--Technology," "--Products" and "--Research and
Product Development."

DEVELOPMENT OF COMPETING TECHNOLOGIES

The markets for the Company's products continue to develop and change,
making it difficult to accurately predict each market's future growth rate,
size and technological direction. In view of the evolving nature of the
various markets utilizing fiber optics technology, there can be no assurance
that providers of telecommunications services will not decide to adopt
alternative architectures or technologies that are incompatible with the
Company's products. Such alternative architectures or technologies would have
a material adverse effect on the Company's business, financial condition and
operating results.

In the video market, direct broadcast satellite and wireless cable delivery
systems compete with CATV operators utilizing fiber optics systems. In
telephone networks, asymmetrical digital subscriber line technology enables
digitally compressed video signals to be transmitted through existing
telephone lines to the home, thereby increasing capacity without the need for
installation of new fiber optics transmission systems. In the event that any
competing architecture or technology were to limit or supplant fiber optics
technology, the Company's business, financial condition and operating results
would be materially adversely affected. See "Business--Technology."

DEPENDENCE ON KEY PERSONNEL

The Company's future success is highly dependent on the continued services
of its executive officers and key management, sales and technical personnel,
and its ability to attract and retain additional key employees. Competition
for such personnel in the fiber optics communications industry is intense, and
there can be no assurance that the Company will be successful in attracting
and retaining such personnel. While the Company does not believe it is
dependent on any one individual, the loss of the services of one or more of
the Company's executive officers or key personnel, including Noboru Hiraguri,
Vice Chairman and Chief Executive Officer, Yves Dzialowski, President and
Chief Operating Officer, and James Coleman, Vice President and Chief Financial
Officer, could have a material adverse effect on the Company's business,
financial condition and operating results. The Company does not maintain key-
man life insurance for any of its employees. All executive employees have
executed non-competition agreements and all employees are required to sign
non-disclosure

9
<PAGE>

agreements. Such agreements do not, however, ensure the continued services of
such employees. See "Business--Employees" and "Management."

MANAGEMENT OF EXPANDING OPERATIONS

The growth in the Company's business has placed a significant strain on the
Company's personnel, management and other resources, and is expected to
continue to do so. In order to manage any future expansion effectively, the
Company must successfully attract, train, motivate, manage and retain new
employees, integrate such employees into its overall operations and continue
to improve its operational, financial and management systems. Availability of
qualified sales and technical personnel is limited. Moreover, the Company
expects to increase significantly the size of its domestic and international
sales support staff and expand the scope of its sales and marketing
activities. The Company's failure to manage any expansion effectively could
have a material adverse effect on the Company's business, financial condition
and operating results. See "--Dependence on Key Personnel" and "Business--The
EPITAXX Strategy."

MANUFACTURING RISKS

The Company relies exclusively on its own production capability in wafer
processing, chip fabrication, device packaging, final assembly and testing of
products. Because the Company manufactures, packages and tests these
components at its own facility, and because the Company only has a single
facility, any interruption in manufacturing resulting from fire, natural
disaster, equipment failures or otherwise could have a material adverse effect
on the Company's business, financial condition and operating results. Although
the Company maintains business interruption insurance, such insurance would be
insufficient to guarantee the Company's continued profitability. See
"Business--Manufacturing and Facilities."

LIMITED PROTECTION OF INTELLECTUAL PROPERTY; PROPRIETARY INFORMATION

The Company relies upon a combination of trade secrets, contractual
restrictions, copyrights, trademark laws and patents to establish and protect
proprietary rights in its products and technologies. Although the Company has
been issued one United States patent to date, much of the Company's
proprietary information and technology is not patented and may not be
patentable. The Company believes that the success of its business depends
primarily on its proprietary technology, information and processes and know-
how, rather than patents. There can be no assurance that the Company will be
able to independently protect its technology or that competitors will not be
able to develop similar technology. The Company has entered into
confidentiality and invention assignment agreements with all of its employees,
and enters into non-disclosure agreements with its suppliers, distributors and
appropriate customers so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company's
business, financial condition and operating results could be materially
adversely affected. See "Business--Proprietary Rights."

RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT

The fiber optics communications industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies that are important to the Company. In addition, since patent
applications in the United States are not publicly disclosed until the patent
is issued, applications may have been filed by competitors of the Company that
could relate to the Company's products. Although no claim has ever been
asserted against the Company with respect to infringement, the Company may
receive communications from third parties in the future asserting that the
Company's products infringe or may infringe on the proprietary rights of such
third parties. In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In the
event of litigation to determine the

10
<PAGE>

validity of any third-party claims, such litigation, whether or not determined
in favor of the Company, could result in significant expense to the Company
and divert the efforts of the Company's technical and management personnel. In
the event of an adverse ruling in such litigation, the Company might be
required to discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
from third parties. There can be no assurance that licenses from third parties
would be available on acceptable terms, if at all. A successful claim against
the Company and the failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Proprietary Rights."

ENVIRONMENTAL REGULATION

The Company is subject to a variety of local, state and federal government
regulations relating to air and water emissions from its manufacturing
facility and to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture the Company's products. Although the Company believes that it is
in compliance with current environmental regulations, the failure to comply
with current or future regulations could result in substantial fines or
liabilities being imposed on the Company, suspension of production, alteration
of its manufacturing process or cessation of operations. Such regulations
could require the Company to acquire expensive remediation or abatement
equipment or to incur substantial expenses to comply with environmental
regulations. Any failure by the Company to control the use, disposal or
storage of, or adequately restrict the discharge of, hazardous or toxic
substances could subject the Company to significant liabilities or
obligations.

RISKS ASSOCIATED WITH SALES TO INTERNATIONAL MARKETS

Although the Company has been selling internationally since its inception
and has had substantial experience and success with its products in the
international marketplace, the conduct of business outside the United States
is subject to certain risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, currency fluctuations, expropriation and potentially adverse tax
consequences. For the fiscal year ended March 31, 1998, approximately 44% of
the Company's revenues were generated from international sales. Although less
than 4% of the Company's revenue is derived from direct sales to Asia
(excluding Japan), certain of the Company's customers may sell products into
Asian markets. Recent adverse economic developments in Asia could affect sales
by certain of the Company's customers into this region, which may, in turn,
have a material adverse effect on the Company's business, financial condition
and operating results. In addition, in order to sell its products
internationally, the Company must meet standards established by
telecommunications authorities in various countries, as well as
recommendations of the International Telecommunications Union. A delay in
obtaining, or the failure to obtain, certification of its products in
countries outside the United States could frustrate or impede the Company's
efforts to increase its market share in such countries, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--The EPITAXX Strategy" and "--Marketing and
Sales."

NO PRIOR MARKET; STOCK PRICE VOLATILITY

Prior to the offering, there has been no public market for the Company's
capital stock. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
There can be no assurance that an active public market for the Class A Common
Stock will develop or be sustained after the offering or that the market price
of the Class A Common Stock will not decline below the initial public offering
price. The trading price of the Class A Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or
proprietary rights, general conditions in the data and telecommunications
industries, changes in earnings estimates by analysts or other events or
factors. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices of many
technology companies and have

11
<PAGE>

often been unrelated to the operating performances of such companies. The
Company's revenues or operating results in future quarters may be below the
expectations of public market securities analysts and investors. In such
event, the price of the Class A Common Stock would likely decline, perhaps
substantially. These Company-specific factors or broad market fluctuations may
materially adversely affect the market price of the Class A Common Stock. See
"--Fluctuations in Quarterly Operating Results" and "Underwriting."

CERTAIN ANTI-TAKEOVER EFFECTS

The Company's Board of Directors is divided into three classes, each of
which is elected to serve staggered three-year terms. The Board of Directors
is authorized, without further action by the stockholders, to provide for the
issuance of preferred stock in one or more series (the "Preferred Stock") and
to fix the designations, preferences, powers and relative, participating,
optional or other rights and restrictions thereof. Accordingly, the Company
may issue a series of Preferred Stock in the future that has preferences over
the Class A Common Stock with respect to the payment of dividends and upon
liquidation, dissolution or winding up of the Company, or which could
otherwise adversely affect holders of Class A Common Stock, or which could
discourage or make difficult any attempt to obtain control of the Company. In
addition, voting control by NSG Holding may discourage certain types of
transactions involving an actual or potential change of control of the
Company. See "--Control by and Relationship with NSG," "Relationship Between
the Company and NSG," "Description of Capital Stock--Preferred Stock" and "--
Anti-Takeover Effects of Restated Certificate of Incorporation and Amended and
Restated Bylaws."

MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS

The Company has designated only limited specific uses for the net proceeds
from the offering. After repayment of indebtedness, an aggregate of
approximately $5.3 million of net proceeds will be available for general
corporate purposes, including working capital and capital expenditures.
Consequently, the Board of Directors and management of the Company will have
broad discretion in the use of a significant portion of the net proceeds from
the offering. See "Use of Proceeds."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Class A Common Stock (including shares
issuable upon conversion of outstanding Class B Common Stock) in the public
market after the offering may materially adversely affect prevailing market
prices for the Class A Common Stock and could impair the Company's ability to
raise capital in the future through the sale of its equity securities. Upon
the consummation of the offering, the Company will have 2,175,200 shares of
Class A Common Stock and 5,088,000 shares of Class B Common Stock outstanding.
Of these shares of Common Stock, 2,150,000 shares of Class A Common Stock
offered hereby will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
25,200 shares of Class A Common Stock and all of the shares of Class B Common
Stock will be "restricted securities" within the meaning of the Securities Act
(the "Restricted Shares") and will be eligible for sale in the public market
beginning 180 days after the date of this Prospectus, pursuant to Rule 144
promulgated under the Securities Act ("Rule 144") and the expiration of
certain lock-up agreements entered into between the Underwriters and the
holders of such Restricted Shares. In addition, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act ("Form S-8") after
the effective date of the offering to register 574,800 shares of Class A
Common Stock issuable upon the exercise of stock options granted under the
Stock Option Plan. Such shares of Class A Common Stock issued pursuant to the
Stock Option Plan, after the effective date of the Form S-8, will be available
for sale in the public market, subject to the expiration of certain lock-up
agreements with the Underwriters.

DILUTION TO PURCHASERS IN OFFERING

Purchasers of Class A Common Stock will experience immediate and substantial
dilution in net tangible book value per share of the Class A Common Stock from
the initial public offering price per share. After giving

12
<PAGE>

effect to the sale by the Company of 2,150,000 shares of Class A Common Stock
offered hereby, assuming an initial public offering price of $10.00 per share
and after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, the Company's pro forma net tangible
book value as of March 31, 1998 would have been $16.3 million, or $2.24 per
share of Common Stock. This represents an immediate dilution in net tangible
book value of $7.76 per share to new investors purchasing shares in the
offering. See "Dilution."

USE OF PROCEEDS

The net proceeds from the sale of the Class A Common Stock offered hereby,
assuming an initial public offering price of $10.00 per share and after
deducting underwriting discounts and commissions and the remaining portion of
the estimated offering expenses of $800,000 payable by the Company (after
$622,000 of offering expenses previously paid by the Company), are
approximately $19.8 million (approximately $22.8 million if the Underwriters'
over-allotment option is exercised in full).

The Company will use approximately $14.5 million of such proceeds (i) to
repay principal indebtedness of $10,049,528 and estimated interest of $273,000
thereon owed on the Dividend Notes, which bear interest at 6.02% per annum,
issued in February 1998 in connection with a cash dividend the Company
declared to the stockholders of record on December 11, 1997 and (ii) to pay
down the full balance on the Company's line of credit from NSG Holding of $4.2
million, including $500,000 drawn under the line of credit since March 31,
1998, and estimated interest of $44,000 accrued thereon. See "Relationship
Between the Company and NSG--Agreement for Line of Credit." The balance of the
net proceeds will be used for general corporate purposes, including working
capital and capital expenditures. Pending such uses, the Company intends to
invest the proceeds in short-term, investment-grade, interest-bearing
securities. See "Risk Factors--Management's Discretion as to Use of
Unallocated Net Proceeds" and "Relationship Between the Company and NSG."

DIVIDEND POLICY

The Company previously declared a $10,049,528 cash dividend to the
stockholders of record on December 11, 1997, of which $10.0 million is payable
to NSG Holding. The Company also declared and paid dividends of $927,000 and
$500,000 to NSG Holding with respect to the fiscal years 1997 and 1996,
respectively. In order to retain earnings to finance future growth, the
Company does not intend to pay any further cash dividends in the foreseeable
future. The declaration and payment of dividends, if any, will be subject to
the discretion of the Company's Board of Directors and will depend on the
Company's earnings, capital requirements, financial condition, statutory
restrictions and other factors deemed to be relevant by the Board of
Directors.

13
<PAGE>

CAPITALIZATION

The following table sets forth certain short-term obligations and
capitalization of the Company as of March 31, 1998 (i) on an actual basis
after giving effect to the Recapitalization and (ii) as adjusted to reflect
the issuance and sale by the Company of 2,150,000 shares of Class A Common
Stock offered hereby, assuming an initial public offering price of $10.00 per
share and after deducting underwriting discounts and commissions and estimated
expenses payable by the Company, and the application of the estimated net
proceeds thereof to repay the Dividend Notes and short-term borrowings from
NSG Holding. The following table should be read in conjunction with "Use of
Proceeds," "Selected Consolidated Financial Data" and the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings from affiliate under line of cred-
it(1).................................................... $ 3,650 --
Promissory notes issued for dividend declared............. 10,050 --
------- -------
$13,700 --
======= =======
Long-term obligations, net of current portion(2).......... $ 5,011 $ 5,011
------- -------
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Class A Common Stock, $0.01 par value; 12,500,000 shares
authorized;
25,200 shares issued and outstanding, actual; and
2,175,200 shares issued and outstanding, as
adjusted(3)............................................ -- 22
Class B Common Stock, convertible, $0.01 par value;
7,500,000 shares authorized;
5,088,000 shares issued and outstanding, actual; and
5,088,000 shares issued and outstanding, as adjusted... 51 51
Additional paid-in capital.............................. 12,185 31,358
Accumulated deficit..................................... (15,392) (15,623)
------- -------
Total stockholders' equity (deficit).................. (3,156) 15,808
------- -------
Total capitalization................................ $ 1,855 $20,819
======= =======
</TABLE>
- --------

(1) Does not include $500,000 drawn on the line of credit since March 31,
1998, which will be repaid with the net proceeds from the offering. See
"Use of Proceeds."

(2) See Notes 6 and 13 to the Consolidated Financial Statements.

(3) Excludes 574,800 shares of Class A Common Stock reserved for issuance
under the Stock Option Plan, of which options to purchase an aggregate of
168,072 shares were outstanding on the date hereof at a weighted average
exercise price of $3.93. Included in total outstanding options are options
to purchase 15,000 shares of Class A Common Stock exercisable at the
intial public offering price (assumed to be $10.00 per share), 5,000 of
which become exercisable upon consummation of the offering. See
"Management--Benefit Plans--Amended and Restated 1996 Employee, Director
and Consultant Stock Option Plan."

14
<PAGE>

DILUTION

As of March 31, 1998, the net tangible book value (deficit) of the Company
was $(3.6) million, and the net tangible book value per share of Common Stock
was $(0.70), after giving effect to the Recapitalization. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities of the Company, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,150,000
shares of Class A Common Stock in the offering, assuming an initial public
offering price of $10.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company, the
pro forma net tangible book value of the Company as of March 31, 1998 would
have been $16.3 million or $2.24 per share of Common Stock. This represents an
immediate dilution in net tangible book value of $7.76 per share to new
investors purchasing shares in the offering. The following table illustrates
such per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $10.00
Net tangible book value per share before the offering...... $(0.70)
Increase per share attributable to new investors........... 2.94
------
Pro forma net tangible book value per share after the offer-
ing......................................................... 2.24
------
Dilution per share to new investors.......................... $ 7.76
======
</TABLE>

The following table sets forth, as of March 31, 1998, the number of shares
of Common Stock purchased from the Company, the total consideration paid and
the average price per share paid by existing stockholders and by new investors
purchasing shares of Class A Common Stock offered by the Company hereby,
assuming an initial public offering price of $10.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(1)................. 5,113,200 70.4% $12,184,735 36.2% $ 2.38
New investors........... 2,150,000 29.6 21,500,000 63.8 $10.00
--------- ----- ----------- -----
Total................. 7,263,200 100.0% $33,684,735 100.0%
========= ===== =========== =====
</TABLE>
- --------

(1) Includes $12,184,525 paid by NSG Holding for its acquisition of the
Company in 1990 and the amount paid by existing stockholders other than
NSG Holding. See "Relationship Between the Company and NSG."

The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock. As of the date hereof, there were outstanding options
to purchase 168,072 shares of Class A Common Stock at a weighted average
exercise price of $3.93 per share. Included in total outstanding options are
options to purchase 15,000 shares of Class A Common Stock exercisable at the
initial public offering price (assumed to be $10.00 per share), 5,000 of which
become exercisable upon consummation of the offering. If all outstanding
options as of March 31, 1998 were included above, the pro forma net tangible
book value per share at March 31, 1998, after giving effect to the offering,
would have been $2.27 and the dilution per share to new investors would have
been $7.73. See "Capitalization," "Management--Benefit Plans--Amended and
Restated 1996 Employee, Director and Consultant Stock Option Plan" and
"Description of Capital Stock."

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The selected consolidated financial data set forth below as
of March 31, 1997 and 1998 and for each of the years ended March 31, 1996,
1997 and 1998 are derived from the Company's Consolidated Financial Statements
including the Notes thereto included in this Prospectus, which have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
The selected consolidated financial data as of March 31, 1994, 1995 and 1996
and for each of the years ended March 31, 1994 and 1995 are derived from
audited Consolidated Financial Statements not included in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OP-
ERATIONS DATA:
Total revenues............... $12,342 $15,622 $19,762 $21,209 $25,255
Cost of revenue.............. 7,175 9,948 10,876 13,978 14,568
------- ------- ------- ------- -------
Gross profit.............. 5,167 5,674 8,886 7,231 10,687
------- ------- ------- ------- -------
Operating expenses:
Research and development
expense.................... 711 1,513 2,082 2,541 2,958
Selling, general and admin-
istrative expense.......... 2,949 2,705 3,555 3,187 3,940
------- ------- ------- ------- -------
Total operating expenses.. 3,660 4,218 5,637 5,728 6,898
------- ------- ------- ------- -------
Income from operations....... 1,507 1,456 3,249 1,503 3,789
Other income (expense)....... (378) (447) (458) (456) (561)
Income before income tax
expense (benefit)........... 1,129 1,009 2,791 1,047 3,228
Income tax expense (bene-
fit)........................ 58 (460) 936 409 1,064
------- ------- ------- ------- -------
Net income................... $ 1,071 $ 1,469 $ 1,855 $ 638 $ 2,164
======= ======= ======= ======= =======
Net income per share(1):
Basic ...................... $ 0.21 $ 0.29 $ 0.36 $ 0.12 $ 0.42
Diluted..................... $ 0.21 $ 0.29 $ 0.36 $ 0.12 $ 0.41
Shares used in per share cal-
culation(1):
Basic....................... 5,113 5,113 5,113 5,113 5,113
Diluted..................... 5,113 5,113 5,113 5,135 5,225
Pro forma net income per
share(2):
Basic ...................... $ 0.35
Diluted..................... $ 0.35
Shares used in pro forma net
income per share
calculation(2):
Basic....................... 6,118
Diluted..................... 6,230
OTHER FINANCIAL DATA:
Capital expenditures......... $ 973 $ 908 $ 2,061 $ 2,418 $ 2,353
Cash dividends declared...... -- -- 500 927 10,050
CONSOLIDATED BALANCE SHEET
DATA (AT YEAR END):
Cash......................... $ 14 $ 59 $ 91 $ 109 $ 968
Working capital (deficit).... 816 2,460 2,852 1,395 (7,946)
Total assets................. 11,482 12,884 16,771 16,977 20,197
Long-term obligations, net of
current portion............. 5,000 5,000 5,000 5,133 5,011
Stockholders' equity (defi-
cit)........................ 2,143 3,613 4,967 4,730 (3,156)
</TABLE>
- --------

(1) See Note 3 to the Consolidated Financial Statements for an explanation of
the determination of shares used to compute net income per share.

(2) Pro forma basic and diluted net income per share were calculated in a
manner consistent with basic and diluted net income per share except that
the weighted average number of shares was adjusted to include the number
of shares that would be required to be sold to fund the repayment of the
Dividend Notes (using an assumed initial public offering price of $10.00
per share).

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company designs, manufactures and markets semiconductor optical
detectors and receivers for fiber optics communications. By virtue of its
specialization, the Company is able to serve many different markets in the
fiber optics communications industry. The Company's products are integral to
the development and implementation of fiber optics systems for applications
such as high capacity, long-haul terrestrial and undersea transmission;
digital local loop and access networks; multi-channel CATV distribution; high-
speed computer networking; and test and measurement equipment. Each sector of
the fiber optics market requires a degree of specialization which differs from
that of the others. The growth or decline in one sector does not necessarily
affect the other sectors. Profitability varies from product to product and
trends in profitability from the different sectors are not necessarily linked.

The Company derives nearly all of its sales from the production and sale of
optical detectors and receivers used in the fiber optics industry. A small
percentage of sales is derived from contracts for research and development of
products for government agencies and private concerns. The Company has grown
in revenue over the period from March 31, 1994 through March 31, 1998 at a
compounded annual growth rate of 20%, and has been profitable in all five
years. Income has increased as a percentage of revenue over this time, with
the exception of fiscal year 1997, when the Company was exposed to decreasing
margins in the high-speed computer networking sector due to inventory
obsolescence. As the Company has grown, however, the rate of new product
introductions has increased, the mix of product revenue has changed and the
customer base has broadened. In the past, certain significant customers'
purchase patterns have materially affected the Company's operating results.
While the Company did not have any customers whose sales represented more than
10% of the Company's revenue in the year ended March 31, 1998, one customer,
CIENA Corporation, accounted for nearly 10% of revenue for the year. The
Company has historically had customers accounting for more than 10% of
revenue, including Siemens AG in fiscal year 1996 and NSG in fiscal year 1997.
Additionally, in the future, the Company anticipates having customers,
including CIENA Corporation, who will account for more than 10% of the
Company's revenue in a single fiscal year.

The Company recognizes revenue upon shipment, passage of title and when all
significant obligations of the Company have been fully satisfied. Some
international sales are secured by letters of credit. Reserves for estimated
warranty and bad debts are maintained. Revenue from research and development
contracts is recognized based upon the percentage of completion method and, in
some instances, based upon specified contract milestones. Revenue from
achievement of milestone events is recognized when all parties concur that the
scientific results and/or milestones stipulated in the agreement have been
met. In fiscal years 1996, 1997 and 1998, revenue from research and
development contracts included in total revenue was $0.8 million, $0.6 million
and $0, respectively.

The Company sells its products worldwide and generates a significant portion
of its sales outside North America, including Europe, Canada, Japan, China and
Israel. All sales are quoted and delivered in U.S. dollars, which prevents
currency risk; however, the Company competes with international suppliers with
price structures affected by currency fluctuations. The percentage of revenue
by geographic region in fiscal years 1996, 1997 and 1998 was approximately:
40%, 51% and 56% from North America, respectively; 44%, 21% and 35% from
Europe, respectively; and 16%, 28% and 9% from Asia and other countries,
respectively.

The Company has entered into a Distribution Agreement with NSG pursuant to
which NSG acts as the exclusive distributor of all the Company's products in
Japan. In fiscal years 1996, 1997 and 1998, revenue from NSG pursuant to the
Distribution Agreement was $1.9 million, $2.5 million and $1.3 million,
respectively.

17
<PAGE>

Over the past several years, EPITAXX has consistently increased its research
and development spending as it strives to introduce new products as quickly as
possible. The Company allocates a significant percentage of revenue toward
research and development. The Company anticipates that research and
development expenses will increase in dollar amount in fiscal year 1998, but
only commensurate with corresponding increases in revenue. New products are
seen as a key factor in maintaining continued growth in sales and
profitability. Spending for research and development in fiscal years 1996,
1997, 1998 was $2.1 million, $2.5 million and $3.0 million, respectively
(10.6%, 12.0% and 11.7% of total revenue, respectively).

As of March 31, 1998, the Company had an order backlog of $7.3 million
compared to a backlog of $4.6 million a year earlier. Backlog consists only of
customer orders that the Company has accepted and are deliverable within one
year.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the results of
operations expressed as a percentage of the Company's total revenue.

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------
YEAR ENDED
MARCH 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenue........................................... 90.3% 88.2% 94.7%
Revenue from affiliate............................ 9.7 11.8 5.3
------- ------- -------
Total revenue................................... 100.0 100.0 100.0
Cost of revenue................................... 55.0 65.9 57.7
------- ------- -------
Gross profit.................................... 45.0 34.1 42.3
Operating expenses:
Research and development........................ 10.6 12.0 11.7
Selling, general and administrative............. 18.0 15.0 15.6
------- ------- -------
Total operating expenses.......................... 28.6 27.0 27.3
------- ------- -------
Income from operations............................ 16.4 7.1 15.0
Other income (expense)............................ (2.3) (2.2) (2.2)
Income tax expense (benefit)...................... 4.7 1.9 4.2
------- ------- -------
Net income........................................ 9.4% 3.0% 8.6%
======= ======= =======
</TABLE>

Year Ended March 31, 1998 Compared to Year Ended March 31, 1997

Revenue. Revenue for the year ended March 31, 1998 increased 19.1% to $25.3
million from $21.2 million for the year ended March 31, 1997. The Company
increased its sales of products for long-haul transmission, CATV and test and
measurement equipment applications. The Company intentionally reduced its
sales of products for computer networking because products in this market had
suffered from price erosion. In addition, the Company introduced new products
for the long-haul transmission market. Although unit volume decreased by
approximately 3.6%, the average unit selling price increased by approximately
27.3%.

Gross Profit. Gross profit for the year ended March 31, 1998 increased by
47.8% to $10.7 million from $7.2 million for the year ended March 31, 1997.
Gross profit as a percentage of revenue increased to 42.3% from 34.1%. This
improvement in profitability was mainly due to a change in product mix
reflecting the Company's decision to decrease sales of computer networking
products.

Research and Development Expenses. Research and development expenses for the
year ended March 31, 1998 increased by 16.4% to $3.0 million from $2.5 million
for the year ended March 31, 1997. Research and development expenses as a
percentage of revenue decreased to 11.7% from 12.0%. Research and development
expenses consist primarily of employee compensation and costs related to new
product prototyping.

18
<PAGE>

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 1998 increased 23.7% to
$3.9 million from $3.2 million for the year ended March 31, 1997. Selling,
general and administrative expenses as a percentage of revenue increased to
15.6% from 15.0%. These expenses consist primarily of salaries and benefits,
sales commissions and travel. The increase in this period was the result of
the hiring of additional staff for the marketing department and higher
commissions paid on additional sales.

Other Income (Expense). Other income (expense) increased by $105,000 to
($561,000) for the year ended March 31, 1998 compared to ($456,000) for the
year ended March 31, 1997. Interest on the Dividend Notes began to accrue on
February 9, 1998 and represents the majority of the increase. Other expense,
consisting primarily of interest expense, as a percentage of revenue remained
the same in 1998 and 1997 at 2.2%.

Income Tax Expense (Benefit). Income tax expense for the year ended March
31, 1998 was $1.1 million compared to $409,000 for the year ended March 31,
1997. Income tax expense was incurred at an effective rate of 33.0% for the
year ended March 31, 1998, compared to 39.1% for the year ended March 31,
1997, reflecting higher research and development credits and preferred tax
treatment from the Company's subsidiary, a foreign sales corporation formed in
St. Thomas, U.S. Virgin Islands, in the third quarter of the 1997 fiscal year.

Year Ended March 31, 1997, Compared to Year Ended March 31, 1996

Revenue. Revenue for the year ended March 31, 1997 increased 7.3% to $21.2
million from $19.8 million for the year ended March 31, 1996. Sales in the
transmission, access and CATV markets increased by approximately 20.0%. This
increase was partially offset by pricing pressure and subsequent decreased
sales in the computer networking market such that overall volume increased by
approximately 10.7% and the average unit selling price decreased by
approximately 2.0%. Pricing pressure in the computer networking market was
generated primarily from those vertically integrated customers for which the
Company is a second source. The Company no longer pursues business of this
type, which is based solely on price. In addition, the Company completed the
sales of custom products for a defense application and saw a reduction in
development contracts, both of which totaled approximately $1.0 million. Any
reduction in development contracts for defense and space applications since
fiscal year 1996 has had little impact on continued revenue growth.

Gross Profit. Gross profit for the year ended March 31, 1997 decreased by
18.6% to $7.2 million from $8.9 million for the year ended March 31, 1996.
Gross profit as a percentage of revenue decreased to 34.1% from 45.0%. Such a
decline was due primarily to price erosion in the computer networking product
market. The decline in gross profit was also due to the reduction in special
product sales for defense and space applications. Additionally, inventory was
reduced by 28.1% or $1.4 million, in part to account for product obsolescence
and to reduce work-in-process.

Research and Development Expenses. Research and development expenses for the
year ended March 31, 1997 increased by 22.0% to $2.5 million from $2.1 million
for the year ended March 31, 1996. Research and development expenses as a
percentage of revenue increased to 12.0% in 1997 from 10.6% in 1996. Increased
spending in the development of new CATV and long-haul and access transmission
products, including the APD, was the primary cause of this increase.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 13, 1997 decreased 10.4% to
$3.2 million from $3.6 million for the year ended March 31, 1996. Selling,
general and administrative expenses as a percentage of revenue decreased to
15.0% in 1997 from 18.0% in 1996. Such decrease was due to a normalization of
expenses. In the year ended March 31, 1996, several multi-year management
incentive targets were met, triggering an additional provision for that year.

19
<PAGE>

Other Income (Expense). Other income (expense) remained relatively constant
at ($456,000) for the year ended March 31, 1997 compared to ($458,000) for the
year ended March 31, 1996. Other expense, consisting primarily of interest
expense, as a percentage of revenue, decreased to 2.2% from 2.3%.

Income Tax Expense (Benefit). Income tax expense for the year ended March
31, 1997 was $409,000 in 1997 compared to $936,000 for the year ended March
31, 1996. The effective income tax rate for the year ended March 31, 1997
increased to 39.1% from 33.5% for the year ended March 31, 1996. Included in
the percentage increase is an adjustment of deferred income taxes estimated in
prior years associated with net operating loss carryforwards and depreciation.

Year Ended March 31, 1996, Compared to Year Ended March 31, 1995

Revenue. Revenue for the year ended March 31, 1996 increased 26.5% to $19.8
million from $15.6 million for the year ended March 31, 1995. This increase
resulted mostly from sales of products for digital local loop and access
networks as well as for CATV applications. Sales for CATV applications more
than doubled; at the same time, the Company's new products for digital
applications found commercial acceptance. As a result, the average unit
selling price increased by approximately 16.3% and unit volume increased by
approximately 12.4%.

Gross Profit. Gross profit for the year ended March 31, 1996 increased by
56.6% to $8.9 million from $5.7 million for the year ended March 31, 1995.
Gross profit as a percentage of revenue increased to 45.0% from 36.3%. This
increase resulted primarily from the sale of new products for CATV and digital
local loop applications. Additionally, inventory increased by 65% to $5.1
million in the year ended March 31, 1996, in anticipation of future demand in
the high-speed computer networking market. The absorption of overhead from
this higher level of production helped to reduce the Company's overall cost of
sales.

Research and Development Expenses. Research and development expenses for the
year ended March 31, 1996 increased by 37.6% to $2.1 million from $1.5 million
for the year ended March 31, 1995. Research and development expenses as a
percentage of revenue increased to 10.6% in 1996 from 9.7% in 1995. Increased
spending in the development of products for high-speed data communications and
custom products for the defense industry were the primary causes of the
increase in research and development expenses.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 1996 increased 31.4% to
$3.6 million from $2.7 million for the year ended March 31, 1995. Selling,
general and administrative expenses as a percentage of revenue increased to
18.0% in 1996 from 17.3% in 1995. This increase was due primarily to the
impact of a management incentive program that covered the two prior years.
Several multi-year targets for revenue growth were met in 1996, triggering the
additional provision that year. The charge in 1996 and 1995 for such provision
was $660,000 and $337,000, respectively.

Other Income (Expense). Other income (expense) remained relatively constant
at ($458,000) for the year ended March 31, 1996 compared to ($447,000) for the
year ended March 31, 1995. Other expense, consisting primarily of interest
expense, as a percentage of revenue decreased to 2.3% from 2.9%.

Income Tax Expense (Benefit). Income tax expense for the year ended March
31, 1996 was $936,000 compared to ($460,000) benefit for the year ended March
31, 1995. The effective income tax rate for the year ended March 31, 1996
increased to 33.5% from (45.6)% for the year ended March 31, 1995. The change
in the effective tax rate is due primarily to the utilization of net operating
loss and tax credit carryforwards by NSG Holding for which the Company
received a benefit under a tax sharing agreement entered into by the Company
and NSG Holding. The tax sharing agreement became effective for the year ended
March 31, 1994 and the Company realized the benefit in the year ended March
31, 1995 upon NSG Holding filing, for the first time, a consolidated United
States Federal corporation income tax return for the year ended March 31, 1994
utilizing the Company's net operating loss and tax credit carryforwards. The
Company's results of operations have been included in NSG Holding's
consolidated income tax return since 1994.

20
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following tables present the Company's unaudited quarterly consolidated
financial information, expressed in dollars and as a percentage of total
revenue, for the eight most recent fiscal quarters. The Company believes that
all necessary adjustments have been included in the amounts below to present
the selected quarterly information fairly when read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. These quarterly operating results are not necessarily
indicative of results that may be expected for any full fiscal year or any
subsequent periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 28, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED RESULTS OF
OPERATIONS:
Total revenue........... $5,400 $5,165 $4,922 $5,722 $6,120 $5,887 $6,341 $6,907
Cost of revenue......... 3,525 3,809 2,907 3,737 3,565 3,501 3,654 3,848
------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 1,875 1,356 2,015 1,985 2,555 2,386 2,687 3,059
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and develop-
ment.................. 713 675 594 559 697 671 790 800
Selling, general and
administrative........ 765 668 829 925 889 919 986 1,146
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses
....................... 1,478 1,343 1,423 1,484 1,586 1,590 1,776 1,946
------ ------ ------ ------ ------ ------ ------ ------
Income from operations.. 397 13 592 501 969 796 911 1,113
Other income (expense).. (113) (125) (122) (96) (133) (190) (34) (204)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before in-
come tax expense (bene-
fit)................... 284 (112) 470 405 836 606 877 909
Income tax expense (ben-
efit).................. 111 (44) 183 159 275 200 290 299
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 173 $ (68) $ 287 $ 246 $ 561 $ 406 $ 587 $ 610
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 28, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Total revenue........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 65.3 73.7 59.1 65.3 58.3 59.5 57.6 55.7
------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 34.7 26.3 40.9 34.7 41.7 40.5 42.4 44.3
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and develop-
ment.................. 13.2 13.1 12.1 9.8 11.4 11.4 12.5 11.6
Selling, general and
administrative........ 14.2 12.9 16.8 16.1 14.5 15.6 15.5 16.6
------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses................. 27.4 26.0 28.9 25.9 25.9 27.0 28.0 28.2
------ ------ ------ ------ ------ ------ ------ ------
Income from operations.. 7.3 0.3 12.0 8.8 15.8 13.5 14.4 16.1
Other income (expense).. (2.0) (2.4) (2.4) (1.7) (2.1) (3.2) (0.5) (3.0)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before in-
come tax expense (bene-
fit)................... 5.3 (2.1) 9.6 7.1 13.7 10.3 13.9 13.1
Income tax expense (ben-
efit).................. 2.1 (0.9) 3.7 2.8 4.5 3.4 4.6 4.3
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... 3.2% (1.2)% 5.9% 4.3% 9.2% 6.9% 9.3% 8.8%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

21
<PAGE>

Revenue has fluctuated from quarter to quarter. The Company generally
experiences a larger volume of shipments in its fourth quarter. Variation in
sales from quarter to quarter is influenced primarily by increases or
decreases in demand for specific products from large customers.

Gross profit on a quarterly basis has fluctuated due primarily to sales mix.
Other factors, such as obsolete inventory adjustments and factory efficiency,
have had and may continue to have an impact in any given quarter.

The Company's operating expense levels have fluctuated over time. Sales,
general and administrative expenses are typically budgeted in accordance with
anticipated future sales. Fluctuations due to variation in quarterly sales
commission and management bonus accrual can impact the operating expenses
accrued in any quarter. During fiscal year 1996, selling, general and
administrative expenses were accrued at a higher than average rate due to the
payment of multi-year management bonus compensation for meeting performance
targets. Several multi-year targets for revenue growth were met in 1996,
triggering the additional provision that year. The Company anticipates that
such bonuses in the future will be replaced by option grants under the Stock
Option Plan and smaller, short-term bonuses earned and paid on an annual
basis. Quarterly research and development costs are determined on an annual
basis and depend on the development effort required for the products proposed
by the marketing department or customers. Some research and development
projects are funded by customers. During any given period, some effort and
corresponding expenses can be diverted to customer funded research projects.
The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results from quarter to quarter. As a
result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful, and that such comparisons
cannot be relied upon as indicators of future performance. See "Risk Factors--
Fluctuations in Operating Results."

LIQUIDITY AND CAPITAL RESOURCES

Cash provided from operations was approximately $3.1 million for the year
ended March 31, 1998 and $2.7 million for the year ended March 31, 1997.

The Company has financed recent working capital needs and capital
requirements primarily with internally generated funds and a $6.0 million line
of credit from NSG Holding. The line of credit allows the Company to borrow at
LIBOR plus 0.25% with a maturity date of March 31, 1999. See "Relationship
Between the Company and NSG--Agreement for Line of Credit." The outstanding
balance on the line of credit was $3.7 million as of March 31, 1998 and $3.4
million as of March 31, 1997. Since March 31, 1998, the Company has drawn an
additional $500,000 under the line of credit. The Company intends to pay down
the full balance on the line of credit with the net proceeds from the sale of
the Class A Common Stock offered hereby. See "Use of Proceeds."

Capital expenditures were $2.4 million for each of the years ended March 31,
1998 and 1997, respectively. Machinery and equipment additions were $1.3
million and $2.9 million for the years ended March 31, 1998 and 1997,
respectively. Building and improvements accounted for nearly all of the
remaining capital expenditures. The Company plans an addition of approximately
24,000 square feet of office and manufacturing space during fiscal year 1999
at an estimated cost of $2.0 million, however, the Company has not yet entered
into any contracts for construction of this planned addition. Furthermore, the
Company has entered into an Agreement For Sale to acquire an adjacent parcel
of land for $355,000. This land will be available for additional expansion
when and if necessary. The Company currently expects to increase research and
development expenses, but only commensurate with corresponding increases in
revenue.

Working capital (deficit) was ($7.9) million as of March 31, 1998 and $1.4
million at the end of fiscal year 1997. The primary reason for the working
capital deficit as of March 31, 1998 was the $10.0 million cash dividend
declared in December 1997. The dividend is evidenced by the Dividend Notes,
payable upon consummation of the offering.

22
<PAGE>

The Company believes that the net proceeds from the offering, together with
internally generated funds and the line of credit facility, will provide it
with sufficient funds for at least the next 12 months.

RECENT ACCOUNTING PRONOUCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 130 establishes standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS 131
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring segment
performance. SFAS 130 and 131 are effective for the Company's 1999 fiscal
year. Adoption of these standards is expected to result in additional
disclosures, but is not expected to have a material adverse effect on the
Company's business, financial condition or operating results.

23
<PAGE>

BUSINESS

OVERVIEW

The Company designs, manufactures and markets semiconductor optical
detectors and receivers for fiber optics communications. By virtue of its
specialization in optical detector and receiver products, the Company is able
to serve many different markets in the fiber optics communications industry.
The Company's products are integral to the development and implementation of
fiber optics systems for applications such as high capacity, long-haul
terrestrial and undersea transmission; digital local loop and access networks;
multi-channel CATV distribution; high-speed computer networking; and test and
measurement equipment.

The Company believes that its expertise in InGaAs semiconductor material and
optical detector device engineering, precision opto-mechanical assembly
processes and high-performance digital and analog receiver circuits enables
the Company to provide a broad range of high-performance optical detector
products that can be quickly and cost-effectively adapted to a variety of
customer needs and technologies. Further, because of its focus on detectors,
EPITAXX is able to respond quickly to evolving technologies and increasingly
complex applications.

The global communications industry has undergone significant transformation
and growth since the mid-1980s as a result of increased demand for
communications services and applications, as well as advances in technology
and changes in public policy. Communications service providers continue to
increase the capacity of their networks and build new networks to meet the
demand for high-bandwidth applications, which in turn has significantly
increased the use of fiber optics equipment.

The Company is an independent supplier and counts among its customers many
of the leading fiber optics communications equipment manufacturers, including
such companies as CIENA Corporation, Finisar Corporation, Harmonic Lightwaves,
Inc., Hewlett-Packard Company, Inc., JDS FITEL, Inc., Lucent Technologies,
Inc., Philips Broadband Networks, Inc., Philips N.V., Pirelli SpA and Siemens
AG.

INDUSTRY BACKGROUND

Demand for new data services and global communications connectivity is
growing at an unprecedented rate. Facsimile, electronic mail and, more
recently, the increasing demand for access to the World Wide Web have combined
to create a rapidly growing demand for digital data bandwidth. This increasing
volume of data, which by nature is long distance, of longer duration and
higher density, has placed a heightened burden on networks originally designed
only for voice transmission. Industry sources estimate that the transmission
of digital signals will increase the growth in telecommunications network
bandwidth by 35% per year from 1996 through 2006.

Concurrently, the worldwide deregulation of the telecommunications industry
has created significant competition for the provision of voice, video and data
services. In telephony, new inter-exchange carriers are implementing their own
networks in order to avoid dependence on their established competitors in the
long distance transmission market. To meet this competition at the local
level, competitive access providers are building new infrastructure for both
voice and data traffic. In addition, CATV system operators have been
modernizing their networks over the past few years in response to emerging
competition from telecommunications and direct broadcast satellite operators.
Even the traditionally protected market of undersea transoceanic
communications is now open to competition as many current systems reach
capacity.

For high-bandwidth applications, fiber optics systems, as opposed to other
media or technologies, presently provide the greatest transmission capacity
with a high degree of efficiency. Fiber optics systems, limited only by the
speed of electronic switching, are capable of carrying more bandwidth than
competing media due to their ability to carry multiple channels, or
wavelengths, on the same fiber. Fiber optics systems have demonstrated their
value in the long-haul part of the network where high-volume traffic makes
them a lower cost choice. As traffic increases, this cost per bit advantage is
also realized at the network's access level. Moreover, optical fiber allows
longer transmission distances without the need for regenerators, provides
increased reliability and is immune to the electromagnetic interference which
affects conventional copper wire lines.

24
<PAGE>

A typical fiber optics communications link consists of: light sources,
either lasers or light-emitting diodes, which convert electronic signals into
light pulses or modulated beams; the fiber itself, which is the transmission
medium; different passive components to route, insert, or split signals,
depending on the topology of the network; and optical detectors and receivers
which relay or reconvert the optical signal into electronic format for
delivery to a common electronic device such as a telephone, TV or computer.
The optical receiver provides essential performance characteristics to the
optical link. For example, the sensitivity of an optical receiver (i.e., its
ability to detect signals that have been attenuated during transmission)
ultimately sets the maximum length of the optical link at a given data rate.

The transformation from electronic to optical transmission infrastructures
has been made possible in large part by technical breakthroughs in the optical
components that constitute the system fabric. New optical components are
enabling new communications architectures with increased bandwidth and
improved network performance, as well as reduced system implementation and
operation costs. For instance, dense wavelength division multiplexing ("DWDM")
is now creating a major shift in network infrastructure design, which, in
turn, intensifies the need for new components. Increasingly, network
architectures are becoming more complex and suppliers of components are
required to sharpen their specific skills in order to respond to technological
challenges and provide increasingly higher performance and customization to
the specific needs of equipment designers and manufacturers. Additionally, due
to rapid implementation of new transmission technologies, shorter product
development cycles are required.

Historically, the fiber optics equipment industry consisted of vertically
integrated companies that provided entire systems, complete with the internal
capabilities to produce components for use in their own systems. These
companies have been challenged by new system designers focusing on specific
markets within the industry. The increasingly competitive landscape has caused
the vertically integrated companies to seek specialized expertise from
independent, non-competing suppliers, allowing the vertically integrated
companies to focus their resources on their core business at the system level.
At the same time, the new system providers who compete with the vertically
integrated companies lack photonics components technology. As a result, these
new system providers also value independent suppliers of such critical
components.

THE EPITAXX SOLUTION

EPITAXX provides leading telecommunications equipment manufacturers with a
variety of efficient, high-performance optical detectors and receivers for
fiber optics systems. The Company distinguishes itself by focusing on optical
detector and receiver products and believes that this focus gives it both a
technical and a service advantage over companies that make both laser sources
and detectors. The Company's focus on optical detectors and receivers permits
more rapid and accurate responses to the needs of customers developing new
applications. EPITAXX's manufacturing, assembling and testing processes are
designed to satisfy its customers' needs for key engineering and manufacturing
flexibility since they often require customization, small batches and short
lead time. The Company seeks to establish itself as the preferred provider of
optical detector products to the new system providers. Additionally, the
Company's status as an independent supplier creates opportunities to replace
the internal production, or to become an alternate production source, of
certain components at vertically integrated companies wishing to focus on
their core competencies. As a result of the Company's concentration on
detector products and its technological strengths in optical packaging and
electronic interfaces, it is able to offer a very diverse product portfolio of
high-performance products such as: digital optical detectors for short
distance, medium data rate communications in the local loop and access
markets; receivers for transmission at higher data rates from 50 megabits per
second ("Mbps") to 2.5 gigabits per second ("Gbps"); analog detectors and
receivers for CATV applications; high reliability detectors for undersea
communications systems; and detector assemblies for instrumentation and fiber
optics test equipment.

25
<PAGE>

THE EPITAXX STRATEGY

The Company's goal is to become the dominant provider of high-performance
optical detectors. The key elements of the EPITAXX strategy are:

Target New Applications in Rapidly Growing Markets. The Company leverages
its expertise in optical detector products and its technical strengths in
exotic semiconductors, electronic interfaces and optics to develop products
with the highest added value in the markets with high growth potential. For
example, long-haul transmission currently constitutes the fastest growing
segment of the fiber optics component market, including development of DWDM
equipment. EPITAXX has pursued this opportunity since its emergence and as a
result, for the year ended March 31, 1998, the long-haul transmission market
utilizing DWDM represented more than 20.0% of the Company's revenue compared
to approximately 5.0% for the same period a year ago.

Extend Technology Leadership. EPITAXX seeks to build upon its strength in
technology innovation to ensure that its products remain in the forefront of
the fiber optics market. The Company's overall objective is to fulfill its
customers' expectations with more complete solutions through continued
investment in research and development. The rapid advancement of fiber optics
systems is creating the need for many new, more sophisticated optoelectronics
products. EPITAXX is developing advanced components for future customer
applications such as new detector products with increased functionality for
both multi-channel monitoring and signal conversion for DWDM, ultrafast
detectors and receivers for 10 Gbps systems and novel packaging platforms for
distributing fiber closer to the home. See "Risk Factors--Evolving Markets and
Rapid Technological Change; New Products."

Intensify Customer Collaborations. EPITAXX works closely with its key
customers in order to jointly engineer future generations of complex photonic
devices. As a result, the Company's products are tailored for, and often
designed into, its customers' products. The migration toward all-optical
networks requires collaboration with customers at very early stages of
development. By maintaining and further developing this collaborative approach
to the product development cycle, the Company seeks to continue to be designed
into products going into future optical architectures.

Broaden Customer Base. The Company intends to continue to broaden its
customer base by leveraging its expertise in detectors and receivers,
developing new fiber optics products and expanding its market reach. EPITAXX
seeks to build upon its current position as an industry specialist in order to
attract the emerging equipment suppliers in a rapidly growing industry. As a
result of its experience in the development of optical detectors and
receivers, the Company can provide new system suppliers with more rapid access
to the market. The Company also believes that an opportunity exists for it to
sell its products to additional vertically integrated equipment suppliers as
competitive pressures force these suppliers to focus increasingly on system,
rather than component, development.

Continue Commitment to Improve Response Times and Customer Service. EPITAXX
has differentiated itself from its competitors through the quality of its
products and its rapid response time. The Company intends to continue to
reduce its engineering and customization cycles through the development of
flexible product and process platforms. This development will allow the
Company to respond quickly to different market requirements with reliable
products while optimizing engineering and manufacturing resources. Moreover,
the Company will continue the streamlining of its operation in order to reduce
manufacturing cycle times and product costs. Continued attention to the
improvement of the operating process is necessary to advance the Company's
competitive position.

26
<PAGE>

TECHNOLOGY

Fiber optics links contain three basic elements: the transmitter that
converts electrical signal input to optical output; the fiber optic link that
carries the signal; and the receiver, which includes an optical detector, that
converts the optical signal into electrical output. EPITAXX focuses on the
receiver element.

[GRAPH OF FIBER OPTIC LINK APPEARS HERE]

Current telecommunications and CATV transmissions use fiber which carries
signals in the 1.3 micron to 1.5 micron wavelength region. Optical detectors
for signals at such wavelengths are generally made of Indium Gallium Arsenide
("InGaAs"). InGaAs is a compound semiconductor crystal fabricated by growing
successive thin layers of different materials on an Indium Phosphide substrate
through a deposition process known as epitaxy. The resulting material is a
semiconductor material sensitive to light in the 0.8 micron to 1.7 micron
wavelength range. From this material, manufactured in wafer form, the
fabricated semiconductor detector chip is at the core of all optical detector
and receiver products. This chip generates an outgoing electron upon receiving
an incoming photon.

EPITAXX applies its semiconductor materials expertise to design the proper
InGaAs structure which enables the chip to meet required performance
characteristics. Such designs involve precise specifications of materials
composition, doping levels and device geometry to meet a combination of
performance requirements such as signaling speed, noise level, linearity and
sensitivity. The Company recently introduced its InGaAs avalanche
photodetectors ("APDs") which generate multiple electrons for each incoming
photon. Conventional InGaAs photodetectors convert light into electrical
current without signal gain. However, APDs create gain during the conversion
process and consequently amplify the incoming signal. This additional gain
provides flexibility to system designers by allowing transmission over longer
distances, or by saving optical and electrical amplification stages. InGaAs
APDs are designed to use the same compound semiconductor materials as their
conventional counterparts, albeit with a much higher level of complexity in
device structure and fabrication.

[DIAGRAM OF DETECTOR CHIP, DETECTOR MODULE AND
OPTICAL RECEIVER APPEARS HERE]

27
<PAGE>

In most cases, the InGaAs detector chip is attached to a package and
encapsulated. The resulting structure provides an optical interface, such as a
lens or a window, which allows incoming light to be guided to the detector. A
detector module incorporates this assembly with a fiber pigtail or connector
housing and is used by system designers at the board level. Since these high-
speed InGaAs chips range from 10 to 100 microns in diameter for most high
speed products and since these detectors have to collect light coming from a
very narrow fiber aperture, the packaging process requires extreme precision.
The Company conducts rigid assembly of the detectors, optical coupling lenses
and optical fiber, all within tolerances measured in microns.

Receivers incorporate a low-noise optical detector chip with high-
performance front-end amplifier circuitry, for either digital or analog
operation. Receivers provide pre-amplified voltage, rather than electrical
current, to the output interface and drive electronic circuitry within video
or networking equipment. The stringent performance requirements include
operation at very high frequencies up to several gigahertz ("GHz") and low
current (picoampere), both of which are contingent on integrating the detector
and the electronic circuitry in a small package. Receivers for high-speed
digital operation are optimized for low noise and bandwidth. By comparison,
receivers for analog CATV are optimized for low distortion.

In addition to the basic signal reception function, optical detectors and
receivers are used in many other portions of the network. Detectors at various
levels of integration (chip, module) are used throughout the optical network.
For example, laser transmitters incorporate a detector to monitor and
stabilize the laser power. Optical amplifiers include several detector modules
to monitor the input and output signals of the amplifier and to regulate the
pump power of the amplifier. Receivers are ubiquitous in the network. For
instance, receivers are found not only at the end of the transmission line,
but also where signals are dropped or added as well as in switching offices.
Increasingly complex network architectures such as DWDM involve management of
multiple wavelengths. Each wavelength requires a distinct receiver at the end
of the transmission path, therefore the use of DWDM multiplies the number of
receivers used in portions of the network. Furthermore, detectors and
receivers serve new roles in support of the higher precision required to
effect multiple wavelength signaling. Examples of such use include monitors to
adjust wavelength power and signal converters, both used to ensure the signal
integrity for each of the multiple wavelength transmissions.

[GRAPH OF HYBRID FIBER COAX CATV ARCHITECTURE APPEARS HERE]

28
<PAGE>

[GRAPH OF TYPICAL 16 WAVELENGTH DWDM ARCHITECTURE APPEARS HERE]

The increasing use of InGaAs detectors and receivers at all levels of the
network has led to increasing levels of customization; the operational and
packaging requirements diverge depending on the function performed by that
specific component. A significant number of the Company's customers purchase
products specially adapted to certain levels of performance or to specific
operating environments. This customization requires technological expertise in
material or device engineering at the chip level or in submicron or opto-
mechanical assemblies at the packaging level, as well as in preamplifier
circuit design.

PRODUCTS

The Company offers optical detectors and receivers designed to conform to
worldwide digital transmission standards. The synchronous optical network
("SONET"), asynchronous transfer mode ("ATM"), fiber distributed data interface
("FDDI") and other telecommunications and data communications standards specify
operations at data rates from 52 Mbps to 10 Gbps. The Company's optical
detectors are available for manufacturer-specific laser modules, optical
receivers and datalinks for computer networking. EPITAXX's line of
photodetector modules are directed to applications such as low bit-rate
telecommunications for access networks. Optical receivers at 155 and 622 Mbps,
which incorporate an optical detector along with a matched preamplifier set to
the proper data transmission rate, are used mostly in access networks. Higher
capacity transmission and DWDM networks operate at 2.5 Gbps and increasingly at
10 Gbps. The Company offers a line of 2.5 Gbps digital receivers for short-haul
transmission and DWDM. The Company recently introduced an APD-based receiver
operating at 2.5 Gbps for long-haul applications. The Company also offers high-
performance pigtailed detectors for the monitoring of optical amplifiers in
long-distance terrestrial and undersea communications.

In CATV applications, the method of transmission is analog as opposed to
digital. Optical links are used for the transmission of high-bandwidth video
signals from headends to hubs or nodes. At the node, current systems use
coaxial cable for the final connection to the home. Fiber optics systems for
CATV carry multiple television channels at bandwidth from 200 megahertz ("MHz")
to 900 MHz depending on downstream or upstream operation. The CATV industry is
branching out of the traditional video delivery market with new services such
as Internet access through cable modems. The Company offers detector modules as
well as complete receivers for analog applications. These products incorporate
detector chips specially designed to provide increased linearity and electronic
circuitry adapted to CATV specifications.

EPITAXX also offers a line of InGaAs detectors utilized for instrumentation
purposes. Products in this line include a series of detectors with varying
diameters for use in optical power meters or fault detectors. Also included are
arrays of detectors and special assemblies for spectroscopy and wavelength
measurement, environmental detection and military uses.

29
<PAGE>

The following table lists certain of the Company's standard products for
each major application.

<TABLE>
<CAPTION>
PRODUCT APPLICATIONS
- ------------------------------------------------------------------------------
<S> <C>
Detector chip in window or lens
capsule Receiver for FDDI, ATM and other data links
- ------------------------------------------------------------------------------
Detector module in pigtailed or Receiver for short-haul, low bit-rate data
connector receptacle transmission
Optical power monitor for optical amplifier
Wavelength monitor for DWDM
- ------------------------------------------------------------------------------
Linear detector modules Receiver for analog CATV transmission
- ------------------------------------------------------------------------------
52 Mbps receiver Receiver for SONET OC1
- ------------------------------------------------------------------------------
155 Mbps receiver Receiver for SONET OC3 and ATM
- ------------------------------------------------------------------------------
622 Mbps receiver Receiver for SONET OC12 and ATM
- ------------------------------------------------------------------------------
2.5 Gbps receiver Receiver for SONET OC48 and DWDM wavelength
converters
- ------------------------------------------------------------------------------
Avalanche photodetector (APD) Long-haul receiver for SONET OC48 and DWDM
- ------------------------------------------------------------------------------
900 MHz linear receiver Receiver for analog CATV transmission
- ------------------------------------------------------------------------------
Large size detectors (1 to 5mm) Detectors for optical power test and
measurement
- ------------------------------------------------------------------------------
Detector arrays and multi-ele- Detectors for environmental sensing,
ment detectors defense and industrial test and measurement
</TABLE>

RESEARCH AND PRODUCT DEVELOPMENT

EPITAXX's ability to design, develop and introduce new product offerings on
a timely basis to take advantage of market opportunities has been a major
driver in the Company's growth. The Company provides a broad line of products,
supplying varying levels of functionality as well as a variety of packaging
options, based on the Company's core optical detector technology. Many of
these products are jointly developed with customers early in the design phase.
The Company continues to work on delivering products that operate at higher
transmission frequencies and that address customer-specific operational
requirements. Current research programs include: 2.5 Gbps and 10 Gbps APD
receivers, 10 Gbps optical detectors and receivers and new optical platforms
using surface mount technology for future products.

The Company maintains collaborative research efforts with outside
organizations in the areas of materials growth, device engineering and optical
transmission. One such collaborative effort is with NSG Research Laboratory in
Tsukuba Science City, Japan, where NSG maintains active efforts in InGaAs
material growth and processing and in advanced optical products based on its
extensive knowledge of glass. This relationship is managed under a formal
agreement between EPITAXX and NSG. See "Relationship Between the Company and
NSG." The Company is also a member of POEM at Princeton University, a multi-
disciplinary laboratory focusing on photonics and optoelectronic materials.

As of May 1, 1998, the Company had 27 full-time employees engaged in
research and development. There can be no assurance that the Company will
continue to be successful in attracting and retaining key personnel with the
skills and expertise necessary to develop new products in the future.
Expenditures for research and development for fiscal years 1996, 1997 and 1998
were $2.1 million, $2.5 million and $3.0 million, respectively. The Company
currently expects to increase research and development spending as its
revenues increase in order to sustain continuing future product introductions.

The markets for the Company's products are characterized by rapid
technological change, evolving industry needs and product obsolescence. The
Company's success is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. No
assurance can be given that the Company will successfully introduce new
products. See "Risk Factors--Evolving Markets and Rapid Technological Change;
New Products" and "--Development of Competing Technologies."

30
<PAGE>

MARKETING AND SALES

Due to the complex nature of the Company's products and the variety of
applications in which such products are deployed, EPITAXX works closely with
customers to meet their current demands and to build future sales
opportunities by understanding technical and market demands influencing their
customers. Sales efforts are supported by the commitment of management and the
technical staff to maintain and strengthen customer relationships by offering
responsive, reliable service. As of May 1, 1998, the Company had 17 full-time
employees engaged in sales and marketing.

The Company markets its products through a direct sales force based in the
United States, and indirectly through a worldwide network of independent
manufacturer representatives in many countries worldwide. For the year ended
March 31, 1998, 44% of revenue was generated outside North America.

EPITAXX's marketing efforts are focused on positioning and promoting the
Company's products for application in targeted end-markets. The Company's
primary marketing activities include trade show participation and promotion of
the Company's products in trade publications.

CUSTOMERS

The Company's products are used by customers in industries such as
telecommunications, computer networking and CATV. While the Company did not
have any customers whose sales represented more than 10% of the Company's
revenue in the year ended March 31, 1998, one customer, CIENA Corporation,
accounted for nearly 10% of revenue for the year. The Company has historically
had customers that accounted for more than 10% of revenue, including Siemens
AG, in fiscal year 1996 and NSG in fiscal year 1997. Additionally, in the
future, the Company anticipates having customers, including CIENA Corporation,
who will account for more than 10% of the Company's revenue in a single year.
For the year ended March 31, 1998, the Company's largest non-affiliated
customers include:

CIENA Corporation Lucent Technologies, Inc.
Finisar Corporation Philips Broadband Networks, Inc.
Philips, N.V.
Harmonic Lightwaves, Inc.
Hewlett-Packard Company, Inc. Pirelli SpA
JDS FITEL, Inc. Siemens AG

COMPETITION

The Company operates in a highly competitive market. Although the Company
believes that it is the only company specializing solely in optical detectors
and receivers that address multiple markets, it has numerous competitors
worldwide that produce optical detector products in addition to other
products. The Company's ability to continue to develop and introduce new
products or enhancements of existing products may require significant
additional research and development expenditures. Many of the Company's
current and potential competitors have larger research and development
departments, larger sales organizations and substantially greater financial
resources than does the Company. These competitors include Fujitsu Ltd.,
Lucent Technologies, Inc., Mitsubishi Electric Corp. and Siemens AG. Other
companies compete with only a portion of EPITAXX's product line. Companies in
this category include Hamamatsu Photonics KK, Mitel Corporation and Ortel
Corporation. There can be no assurance that competitors will not develop
products that are superior to the Company's products or that achieve greater
market acceptance. In addition, the introduction by competitors of new
products or the reduction in price of competitive products could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company believes that the principal competitive factors
in its markets are product performance, industry expertise, technical
expertise, flexibility, responsiveness to customer needs, quality of service
and perceived value. See "Risk Factors--Competition."

31
<PAGE>

MANUFACTURING AND FACILITIES

The Company owns a 45,000 square foot manufacturing facility on six acres in
West Trenton, New Jersey. Wafer processing, device packaging, hybrid
microelectronics packaging and final assembly and testing are performed in
this facility. Given EPITAXX's strategy to concentrate its resources on
serving markets that value its engineering expertise and ability to quickly
respond to customer demands, the Company's manufacturing operations are
designed for flexibility and short-run batches. The Company plans an addition
of approximately 24,000 square feet of office and manufacturing space during
fiscal year 1999 at an estimated cost of $2.0 million, however, the Company
has not yet entered into any contracts for construction of the planned
addition. Furthermore, on April 6, 1998, the Company entered into an Agreement
For Sale to purchase an additional three acres of land adjacent to the current
facility which will be available for additional expansion when and if
necessary. See "Risk Factors--Manufacturing Risks" and "--Dependence on
Availability of Materials and Key Suppliers."

A number of the processes and techniques used in manufacturing the Company's
products are internally designed or customized. The Company relies exclusively
on its own production capabilities for critical optical detector assemblies
used in its products. These semiconductor devices are manufactured under
cleanroom conditions ranging from class 100 to class 10,000 using two-inch
wafer fabrication technology. The Company's existing facility has
approximately 9,000 square feet of cleanroom space. The Company has begun
construction of approximately 1,000 square feet of additional cleanroom space.
This space will be used to increase the Company's device packaging capacity.
EPITAXX assembles all of its products using techniques including die-
attachment, wirebonding, packaging and coupling of optical fibers. The Company
inspects and tests products throughout the manufacturing cycle using
commercially available test systems as well as EPITAXX-designed, proprietary
test systems and procedures.

The Company's design and manufacturing processes were certified as ISO 9001
compliant in December 1996 and EPITAXX has maintained compliance with this
standard since that time.

PROPRIETARY RIGHTS

Although the Company has been issued one United States patent to date, much
of the Company's proprietary information and technology is not patented and
may not be patentable. The Company believes that the success of its business
depends primarily on its proprietary technology, information and processes and
know-how, rather than patents. There can be no assurance that the Company will
be able to protect its technology or that competitors will not be able to
develop similar technology independently. The Company has entered into
confidentiality and invention assignment agreements with all of its employees,
and enters into non-disclosure agreements with its suppliers, distributors and
appropriate customers so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies.

While the Company's ability to maintain its leadership position in the
optical detector market may be affected by its ability to protect its
proprietary information and technology, the Company believes that, because of
the rapid pace of technological change in the fiber optics communications
markets, its technical expertise and

32
<PAGE>

ability to introduce new products on a timely basis will be more important in
maintaining its competitive position than protection of its intellectual
property. Although the Company continues to implement protective measures and
intends to vigorously defend its intellectual property rights, there can be no
assurance that these measures will be successful.

The Company may receive communications from third parties in the future
asserting that the Company's products infringe on the proprietary rights of
such third parties. In the event of litigation to determine the validity of
any third-party claims, such litigation, whether or not determined in favor of
the Company, could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel. In the event of
an adverse ruling in such litigation, the Company might be required to
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses from third
parties. There can be no assurance that licenses from third parties would be
available on acceptable terms, if at all. A successful claim against the
Company and the failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and operating results. In addition, the laws of certain
countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of misappropriation of the Company's technology and
products more likely.

EMPLOYEES

As of May 1, 1998, the Company employed 210 persons, including 136 in
manufacturing, 27 in research and development, 17 in sales and marketing, 13
in quality control and 17 in a general and administrative capacity. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

33
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ----------------------------------------------------------------
<S> <C> <C>
Noboru Hiraguri......... 59 Chief Executive Officer and Vice Chairman of the Board
Yves Dzialowski......... 45 President, Chief Operating Officer and Director
James D. Coleman........ 47 Vice President, Chief Financial Officer, Treasurer and Secretary
George K. Roshon........ 55 Vice President of Manufacturing
Chen-Show Wang.......... 61 Vice President of Advanced Research
Kenji Fujiwara (1)...... 59 Chairman of the Board
Arnold S. Hoff-
man(1)(2).............. 62 Director
Richard J.
Pinola(1)(2)........... 52 Director
Masahiko Tarumizu....... 63 Director
Naotaka Todoroki........ 49 Director
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.

Noboru Hiraguri has served as the Company's Chief Executive Officer since
October 1994, and Vice Chairman of the Board since December 1996. From October
1994 to December 1996, Mr. Hiraguri, in addition to serving as the Company's
Chief Executive Officer, also served as President and a Director of the
Company. From May 1991 to October 1994, Mr. Hiraguri was Chairman of the
Board. From 1973 to October 1994, Mr. Hiraguri held a variety of management
positions with NSG, most recently as General Manager of its Fiber Optics
Division. Mr. Hiraguri received a B.S. in Industrial Chemistry from Kyoto
University.

Yves Dzialowski has served as the Company's President and Chief Operating
Officer since December 1996, and as a Director since August 1990. From 1985 to
December 1996, Dr. Dzialowski served as the Company's Vice President of Sales
and Marketing and Executive Vice President supervising the Sales and Marketing
and Research and Development Groups. Dr. Dzialowski received a Master's degree
in Physics and a Doctorate in Optics from the University of Paris.

James D. Coleman has served as the Company's Vice President and Chief
Financial Officer since December 1996 and has also served as the Company's
Treasurer and Secretary since April 1987. From 1986 to December 1996, Mr.
Coleman held a variety of management positions with the Company, most recently
as Vice President of Operations. Mr. Coleman received a B.S. in Management and
an M.B.A. from LaSalle University.

George K. Roshon has served as the Company's Vice President of Manufacturing
since April 1995. From November 1992 to April 1995, Mr. Roshon served as the
Company's Director of Manufacturing. Mr. Roshon received a B.S. in Electrical
Engineering from Pennsylvania State University and an M.S.E.E. from Drexel
University.

Chen-Show Wang has served as the Company's Vice President of Advanced
Research since December 1996. From June 1991 to December 1996, Dr. Wang held
several executive and managerial positions with the Company in the technology
area. Dr. Wang received an M.S. in Physics from the University of Iowa and a
Ph.D. in Physics from the University of California at San Diego.

Kenji Fujiwara has served as a Director of the Company since May 1991 and as
Chairman of the Board since October 1994. From May 1991 to October 1994, Mr.
Fujiwara served as the Company's President and Chief Executive Officer. Since
October 1994, Mr. Fujiwara has served as a General Manager of NSG. Mr.
Fujiwara received a B.S. in Industrial Chemistry and an M.S. in Engineering
from Kyoto University.

34
<PAGE>

Arnold S. Hoffman has served as a Director of the Company since December
1997. Mr. Hoffman is currently a Senior Managing Director of Legg Mason Wood
Walker, Incorporated, a financial services and brokerage firm, where he has
been employed since January 1992. From August 1989 to January 1992, Mr.
Hoffman was Chairman of the Middle Market Group, an investment bank affiliated
with Shearson Lehman Brothers Inc. Mr. Hoffman is also currently a Director of
Sunsources, L.P., Intelligent Electronics Incorporated and several privately-
held companies. Mr. Hoffman received a B.A. in Journalism from Pennsylvania
State University.

Richard J. Pinola has served as a Director of the Company since December
1997. Mr. Pinola is currently the Chairman and Chief Executive Officer of
Right Management Consultants, Inc. ("Right Management"), a publicly-held
company specializing in career management and human resource consulting. Mr.
Pinola became Chief Executive Officer of Right Management in July 1992 and
Chairman in January 1994. Mr. Pinola is also currently a Director of K-Tron
International, Inc. and several privately-held companies. Mr. Pinola received
a B.A. in Accounting from King's College.

Masahiko Tarumizu has served as a Director of the Company since June 1994.
Mr. Tarumizu is currently a Senior Managing Director of NSG. Since 1988, Mr.
Tarumizu has held a variety of management positions with NSG. Mr. Tarumizu
received a B.S. in Chemistry from Tokyo University.

Naotaka Todoroki has served as a Director of the Company since June 1996.
Mr. Todoroki is currently a Deputy General Manager of Corporate Planning of
NSG. Since 1987, Mr. Todoroki has held a variety of management positions with
NSG. Mr. Todoroki is also currently a Director of several privately-held
companies. Mr. Todoroki received a B.S. in Economics from Hitotsubashi
University.

The Board of Directors is divided into three classes, as nearly equal in
number as possible, having terms expiring at the annual meeting of the
Company's stockholders in 1998 (comprised of Messrs. Hoffman and Tarumizu),
1999 (comprised of Messrs. Fujiwara, Hiraguri and Pinola) and 2000 (comprised
of Messrs. Dzialowski and Todoroki). At each annual meeting of stockholders,
successors to the class of directors whose term expires at such meeting will
be elected to serve for three-year terms and until their successors are
elected and qualified.

DIRECTOR COMPENSATION

Each director who is not an employee of the Company, NSG or an affiliate of
NSG ("Non-Employee Director") will receive fees of $4,000 per year plus $1,200
for each meeting of the Board of Directors attended. In addition, each Non-
Employee Director who is a member of any committee of the Board of Directors
will receive $600 for each committee meeting attended plus another $600 per
meeting of any committee on which such Non-Employee Director serves as the
Chairperson. Further, each Non-Employee Director, upon his or her election to
the Board of Directors, will receive an option to purchase an aggregate of
7,500 shares of Class A Common Stock. Each Non-Employee Director will also
receive an option to purchase an aggregate of 1,500 shares of Class A Common
Stock on the date of each annual stockholders' meeting. All of the options
described above will be granted under the Stock Option Plan at the fair market
value of the Class A Common Stock on the date of grant and will vest in three
equal annual installments commencing on the date of such grant, with the
exception of Messrs. Hoffman and Pinola, whose vesting schedules will begin
upon the consummation of the offering. See "--Benefit Plans--Amended and
Restated 1996 Employee, Director and Consultant Stock Option Plan."

COMMITTEES OF THE BOARD

The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee oversees the engagement of the Company's
independent accountants, reviews the annual financial statements and the scope
of annual audits and considers matters relating to accounting policy and
internal controls. The members of the Audit Committee are Messrs. Hoffman
(Chairman), Fujiwara and Pinola. The Compensation Committee reviews, approves
and makes recommendations to the Board of Directors concerning the Company's
compensation policies, practices and procedures, as well as reviews and
determines the salaries and bonuses of the Company's executive officers. The
Compensation Committee also administers the Stock Option Plan. The members of
the Compensation Committee are Messrs. Pinola (Chairman) and Hoffman.

35
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to or earned by the
following individuals for services rendered to the Company in all capacities
for the years ended March 31, 1997 and 1998: (i) the Chief Executive Officer
of the Company and (ii) the four additional executive officers of the Company
whose salary and bonus for such fiscal years exceeded $100,000 (collectively,
the "Named Executive Officers").

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION
---------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND POSITIONS YEAR SALARY($) BONUS($)(3) STOCK AWARD ($)(1) OPTIONS (#) COMPENSATION($)(2)
- ------------------------ ---- --------- ----------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Noboru Hiraguri......... 1997 161,133 66,915 17,262 27,600 717
Chief Executive Officer 1998 180,000 102,060 -- -- 9,244
and Vice Chairman
Yves Dzialowski......... 1997 154,133 59,620 17,262 22,800 11,180
President and Chief 1998 165,000 100,589 -- -- 12,636
Operating Officer
James D. Coleman........ 1997 128,600 44,762 17,262 18,000 11,799
Vice President, Chief 1998 135,000 86,918 -- -- 14,941
Financial Officer,
Treasurer and
Secretary
George K. Roshon........ 1997 109,850 39,900 -- 18,000 8,799
Vice President of 1998 117,000 71,362 -- -- 14,008
Manufacturing
Chen-Show Wang.......... 1997 116,641 39,108 -- 13,200 7,390
Vice President of 1998 110,000 64,910 -- -- 12,289
Advanced Research
</TABLE>
- --------

(1) As of March 31, 1997, Messrs. Hiraguri, Dzialowski and Coleman
(collectively, the "Restricted Stockholders") held 8,400 shares of Class A
Common Stock, having a market value of $2.08 per share, based upon the
fair market value of the Class A Common Stock on the date of grant as
determined by the Board of Directors. Pursuant to the terms of Restricted
Stock Agreements, dated January 21, 1997, between the Company and each of
the Restricted Stockholders (the "Restricted Stock Agreements"), all of
the shares are subject to repurchase by the Company at $2.08 per share in
the event such Restricted Stockholder ceases to be an employee of the
Company prior to the date which is six months after the completion of the
offering. There were no awards of restricted stock in the year ended March
31, 1998.

(2) The amounts in this column represent matching contributions made by the
Company to the Named Executive Officer under the Company's 401(k) Profit-
Sharing Plan and for long-term disability and life insurance.

(3) Bonuses represent achievement of annual income targets as well as
achievement of multi-year income targets.

36
<PAGE>

OPTION GRANTS DURING LAST FISCAL YEAR

No options to purchase any class of the Company's capital stock were granted
to the Named Executive Officers during the fiscal year ended March 31, 1998.
However, on January 21, 1997, the Company granted Messrs. Hiraguri,
Dzialowski, Coleman, Roshon and Wang options to purchase a total of 27,600,
22,800, 18,000, 18,000 and 13,200 shares of Class A Common Stock,
respectively, under the Stock Option Plan. Such options were granted at an
exercise price of $3.33 per share and will vest on April 1, 2000.

FISCAL YEAR-END OPTION VALUES

The following table sets forth, for each of the Named Executive Officers,
the fiscal year-end value of all options held as of March 31, 1998 (none of
which were exercisable):

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL YEAR-
AT FISCAL YEAR-END (#): END($)(1):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------- ------------------------- -------------------------
<S> <C> <C>
Noboru Hiraguri............. -- / 27,600 -- / 184,092
Yves Dzialowski............. -- / 22,800 -- / 152,076
James D. Coleman............ -- / 18,000 -- / 120,060
George K. Roshon............ -- / 18,000 -- / 120,060
Chen-Show Wang.............. -- / 13,200 -- / 88,044
</TABLE>
- --------

(1) There was no public trading market for the Class A Common Stock as of
March 31, 1998. Accordingly, these values have been calculated on the
basis of an assumed initial public offering price of $10.00 per share,
less the applicable exercise price of $3.33 per share.

EMPLOYMENT CONTRACTS

The Company has entered into Executive Employment Agreements (the
"Employment Agreements") with each of the Named Executive Officers. The
Employment Agreements are for terms ending March 31, 2000 for each of the
Named Executive Officers, with the exception of Mr. Roshon whose Employment
Agreement expires on April 1, 2001. Each of the Employment Agreements will
automatically renew for three-year periods unless the Company provides the
Named Executive Officer with a written notice of nonrenewal at least 180 days
prior to the expiration of the then-current term of the relevant Employment
Agreement. Such agreements provide for annual base salaries of not less than
$180,000, $165,000, $135,000, $105,000 and $110,000 for Messrs. Hiraguri,
Dzialowski, Coleman, Roshon and Wang, respectively. Such salaries are reviewed
annually by the Board of Directors. In November 1996, Mr. Roshon's base salary
was increased to $117,000. The Employment Agreements also provide each of the
Named Executive Officers with an opportunity for an annual bonus dependent
upon the achievement of certain performance criteria. In addition, Messrs.
Hiraguri, Dzialowski and Coleman each have a total of 8,400 shares of
restricted stock under the Restricted Stock Agreements. In the event that any
Restricted Stockholder ceases to be an employee of the Company prior to the
date which is six months after the completion of this offering, the Company
has the right to repurchase such restricted stock at $2.08 per share. Further,
Messrs. Hiraguri, Dzialowski, Coleman, Roshon and Wang have options to
purchase a total of 27,600, 22,800, 18,000, 18,000 and 13,200 shares of Class
A Common Stock, respectively, under the Stock Option Plan. Such options will
become fully vested on April 1, 2000.

Under the Employment Agreements, in the event a Named Executive Officer is
terminated as a result of the Company undergoing a "Change of Control," or a
Named Executive Officer terminates his employment because of a lessening of
job responsibilities or because the Company's headquarters are moved more than
35 miles, such Named Executive Officer will be able to immediately exercise
all of his shares of restricted stock and stock options, as applicable, shall
receive a lump-sum payment equal to two times the sum of his highest annual
salary

37
<PAGE>

and his highest annual bonus received within the last three years, shall
continue for two years to receive benefits identical to those then currently
received and shall have the opportunity to receive out-placement and career
counseling services at a cost not to exceed 15% of his then-current annual
salary. A "Change of Control" is defined as the acquisition of the beneficial
ownership of a majority of the Company's voting securities or all or
substantially all of the assets of the Company by an unaffiliated person or
group of persons, or the merger, consolidation or combination of the Company
with an unaffiliated corporation in which a change in the majority of the
members of the Board of Directors occurs. If a Named Executive Officer is
terminated without cause during the term of his Employment Agreement, he will
be paid his full salary from the date of notice of termination until 12 months
thereafter and he shall receive benefits identical to those then currently
received for such 12-month period, provided that his continued participation
under the relevant benefit plans is permissible. If a Named Executive Officer
is terminated because of retirement, death, disability, or for cause, then he
will be paid only such salary as is then due him. Should termination occur
because of retirement, death or disability, the Company may elect to pay such
Named Executive Officer or his estate a prorated award under the Company's
annual incentive pay plan, and may elect to accelerate the vesting of his
shares of restricted stock and stock options, as applicable. If a Named
Executive Officer terminates his employment without good reason, as such term
is defined in the Employment Agreements, the Company may elect to continue to
make salary payments for a period of up to 12 months thereafter. During the
term of the Employment Agreement and for one year following its termination, a
Named Executive Officer shall not, either directly or indirectly, compete with
the Company. In addition, a Named Executive Officer is prohibited from
disclosing any material confidential information of the Company during the
term of his employment or at any time thereafter. Mr. Hiraguri is entitled to
a car allowance of $500 per month. Upon the successful completion of the
offering, Messrs. Dzialowski and Coleman each will receive a similar car
allowance.

BENEFIT PLANS

Amended and Restated 1996 Employee, Director and Consultant Stock Option Plan

The Stock Option Plan was initially approved by the Board of Directors and
the stockholder in December 1996. The Board of Directors amended the Stock
Option Plan in December 1997. A total of 574,800 shares of Class A Common
Stock have been reserved for issuance under the Stock Option Plan upon the
exercise of options.

Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
stock options. Incentive stock options may be granted under the Stock Option
Plan only to employees of the Company and its affiliates. Nonqualified stock
options may be granted to consultants, directors, employees or officers of the
Company and its affiliates. The Stock Option Plan provides that each Non-
Employee Director will receive, upon his or her election to the Board of
Directors, an option to purchase an aggregate of 7,500 shares of Class A
Common Stock, and, on the date of each annual stockholders' meeting, an
additional option to purchase an aggregate of 1,500 shares of Class A Common
Stock. Each of the above-mentioned options will vest in three equal annual
installments beginning on the date of grant and will have an exercise price
equal to the fair market value of the Class A Common Stock on the date of
grant. Messrs. Hoffman and Pinola have each received an option to purchase
7,500 shares of Class A Common Stock which will vest in three equal annual
installments beginning upon the consummation of the offering and will have an
exercise price equal to the initial public offering price of the Class A
Common Stock.

The Stock Option Plan is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the Stock Option Plan, the
Compensation Committee has the authority to interpret the provisions of the
Stock Option Plan, and to determine the persons to whom options will be
granted, the number of shares to be covered by each option and the terms and
conditions upon which an option may be granted. The aggregate fair market
value (determined at the time of grant) of shares issuable pursuant to
incentive stock options which become exercisable in any calendar year by any
employee or officer may not exceed $100,000. Incentive stock options granted
under the Stock Option Plan may not be granted at an exercise price less than

38
<PAGE>

fair market value of the Class A Common Stock on the date of grant (or 110% of
the fair market value in the case of employees or officers holding 10% or more
of the voting stock of the Company). Nonqualified stock options granted under
the Stock Option Plan may not be granted at an exercise price less than the
par value of a share of Class A Common Stock. Incentive stock options granted
under the Stock Option Plan expire not more than 10 years from the date of
grant, or not more than five years from the date of grant in the case of
incentive stock options granted to an employee or officer holding 10% or more
of the voting stock of the Company.

An option granted under the Stock Option Plan is exercisable, during the
optionholder's lifetime, only by the optionholder and is not transferable by
him or her except by will or by the laws of descent and distribution. An
incentive stock option granted under the Stock Option Plan may, at the Board
of Directors' discretion, be exercised after the termination of the
optionholder's employment with the Company (other than by reason of death,
disability or termination for cause as defined in the Stock Option Plan) to
the extent exercisable on the date of such termination, for up to 90 days
following such termination, provided that such incentive stock option has not
expired on the date of such exercise. In granting any nonqualified stock
option, the Board of Directors may specify that such nonqualified stock option
shall be subject to such termination or cancellation provisions as the Board
of Directors may specify. In the event of the optionholder's death, both
incentive stock options and nonqualified stock options may be exercised, to
the extent exercisable on the date of death, by the optionholder's survivors
at any time prior to the earlier of the option's specified expiration date or
one year from the date of the optionholder's death.

As of the date hereof, options to purchase an aggregate of 168,072 shares of
Class A Common Stock were outstanding under the Stock Option Plan at a
weighted average exercise price of $3.93 per share. Included in total
outstanding options of 168,072 are options to purchase 15,000 shares of Class
A Common Stock exercisable at the initial public offering price (assumed to be
$10.00 per share), 5,000 of which become exercisable upon consummation of the
offering. All other outstanding options to purchase shares of Class A Common
Stock were granted at a price of $3.33 per share.

401(k) Plan

Employees of the Company who have completed at least six months of service
and who are at least 18 years of age are eligible to participate in the
Company's 401(k) Profit-Sharing Plan, as amended (the "401(k) Plan"). The
401(k) Plan is intended to qualify under Section 401(k) of the Code. Employees
may elect to defer their eligible current compensation up to the statutorily
and 401(k) Plan prescribed limits and have the amount of such deferral
contributed to the 401(k) Plan. A Company match of employee contributions up
to the 401(k) Plan prescribed limit may also be contributed to the 401(k) Plan
and becomes an asset of the employee upon vesting. Contributions to the 401(k)
Plan may be used to purchase units in various investment funds.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee are Messrs. Pinola (Chairman) and
Hoffman. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as members of the Company's Board of Directors or
Compensation Committee.

39
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of the date hereof, and
adjusted to reflect the consummation of the offering by (i) each of the Named
Executive Officers, (ii) each of the Company's directors, (iii) all executive
officers and directors of the Company as a group and (iv) NSG, the only person
known to beneficially own 5% or more of the outstanding shares of either Class
A Common Stock or Class B Common Stock.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)
--------------------------------- ---------------------------------------
NUMBER % OF VOTING NUMBER % OF VOTING
NAME OF SHARES OUTSTANDING(2) POWER(2) OF SHARES OUTSTANDING(2) POWER(2)(3)
- ------------------------ --------- -------------- -------- --------- -------------- -----------
CLASS A COMMON STOCK(4)(5)
--------------------------
<S> <C> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFI-
CERS:
Noboru Hiraguri......... 8,400 * * 8,400 * *
Yves Dzialowski......... 8,400 * * 8,400 * *
James D. Coleman........ 8,400 * * 8,400 * *
George K. Roshon........ -- * * -- * *
Chen-Show Wang.......... -- * * -- * *
DIRECTORS:
Kenji Fujiwara(5)....... -- * * -- * *
Arnold S. Hoffman(6).... 2,500 * * 2,500 * *
Richard J. Pinola(6).... 2,500 * * 2,500 * *
Masahiko Tarumizu(5).... -- * * -- * *
Naotaka Todoroki(5)..... -- * * -- * *
All directors and
executive officers as a
group (10
persons)(7):........... 30,200 * * 30,200(7) * *
<CAPTION>
CLASS B COMMON STOCK(4)
-----------------------
<S> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDER:
Nippon Sheet Glass Co.,
Ltd.(8)(9)(10)......... 5,088,000 99.51% 99.84% 5,088,000 70.05% 87.53%
NSG Tokyo Bldg., 1-7 2-
chome,
Kaigan, Minato-Ku Tokyo
105,
Japan
</TABLE>
- --------

* Represents less than 1%.
(1) Except as indicated in footnotes to this table, the Company believes that
the stockholders named in this table have sole voting and investment power
with respect to all shares of Common Stock shown to be beneficially owned
by them based on information provided to the Company by such stockholders.
(2) Represents percentage of all outstanding Common Stock.
(3) Holders of both classes of Common Stock vote as a single class on all
matters submitted to a vote of stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to three votes for each share of Class A Common Stock into which
Class B Common Stock is convertible.
(4) The Class B Common Stock is convertible into Class A Common Stock on a
share-for-share basis, subject to adjustment for stock dividends, stock
splits, subdivisions or combinations. See "Description of Capital Stock--
Common Stock--Voting Rights."
(5) Excludes the shares of Class B Common Stock held by NSG, as to which
Messrs. Fujiwara, Tarumizu and Todoroki disclaim beneficial ownership.
Messrs. Fujiwara, Tarumizu and Todoroki are General Manager, Senior
Managing Director and Deputy General Manager of Corporate Planning of NSG,
respectively.
(6) Consists of shares of Class A Common Stock underlying options which become
exercisable upon the consummation of the offering.
(7) Includes 5,000 shares of Class A Common Stock underlying options which
become exercisable upon the consummation of the offering.
(8) NSG will not own any shares of Class A Common Stock upon the consummation
of the offering.
(9) The shares of Class B Common Stock are owned of record by NSG Holding, a
wholly owned subsidiary of NSG.
(10) No natural person is deemed to beneficially own 5% or more of NSG.

40
<PAGE>

RELATIONSHIP BETWEEN THE COMPANY AND NSG

Prior to the offering, the Company had been a subsidiary of NSG Holding,
which is a wholly owned subsidiary of NSG, located at NSG Tokyo Bldg., 1-7, 2-
chome, Kaigan, Minato-Ku, Tokyo 105, Japan. Upon the consummation of the
offering, NSG Holding will own 5,088,000 shares of Class B Common Stock, which
will represent 87.53% of the voting power of the outstanding Common Stock
(85.94% if the Underwriters' over-allotment option is exercised in full). See
"Risk Factors--Control by and Relationship with NSG" and "Description of
Capital Stock."

In December 1997, the Company declared a $10,049,528 cash dividend to the
stockholders of record on December 11, 1997, of which $10.0 million is payable
to NSG Holding. The purpose of the dividend was to implement general financial
planning policies within the NSG global organization, which contemplate
distribution of assets of international affiliates to the ultimate parent
where appropriate and consistent with the financial needs and objectives of
such affiliates. The dividend is evidenced by the Dividend Notes dated
February 9, 1998, bearing interest at a rate of 6.02% per annum, payable semi-
annually. The principal amount of the Dividend Notes is payable on the earlier
of (i) the date the Company's total stockholders' equity first equals or
exceeds $15.0 million and (ii) February 9, 2001, provided that on such date
the Company's total stockholders' equity equals or exceeds $15.0 million. The
sale of Class A Common Stock offered hereby will cause the Company's total
stockholders' equity to exceed $15.0 million. As a result, the Company will
use approximately $10.3 million of the net proceeds from the offering to repay
the principal amount of the Dividend Notes including interest thereon. See
"Use of Proceeds."

The Company and NSG or NSG Holding have entered into a number of agreements
for the purpose of defining the ongoing relationship between them. These
agreements were negotiated in the context of a parent-subsidiary relationship
and therefore are not the result of negotiations between independent parties.
The Company and NSG intended for such agreements and the transactions provided
for therein to be mutually beneficial and on overall terms which the Company
and NSG believed to be at least as favorable to the Company as could have been
obtained from unrelated third parties. However, because of the complexity of
the various relationships between the Company and NSG, there can be no
assurance that the terms of any individual element of such arrangements are as
favorable to the Company as could have been obtained from unaffiliated third
parties. While these agreements will provide the Company with certain
benefits, the Company is only entitled to the ongoing assistance of NSG for a
limited time and may not enjoy benefits from its relationship with NSG beyond
the terms of the agreements. There can be no assurance that the Company, upon
termination of such assistance from NSG, will be able to adequately provide
such services internally or will be able to obtain favorable arrangements from
third parties to replace such services. See "Risk Factors--Control by and
Relationship with NSG."

Additional or modified arrangements and transactions may be entered into by
the Company and NSG upon the consummation of the offering. Any such future
arrangements and transactions will be determined through negotiation between
the Company and NSG. All future agreements between the Company and NSG will be
on terms that the Company believes are no less favorable to the Company than
the terms the Company believes would be available from unaffiliated parties.
In that regard, the Company intends to follow the procedures provided by the
Delaware General Corporation Law (the "DGCL") which include a vote to affirm
any such future agreements by a majority of the Company's directors who are
not employees of NSG (even though such directors may be less than a quorum).
There can be no assurance that any such arrangements or transactions will be
the same as that which would be negotiated between independent parties.

The following is a summary of certain arrangements between the Company and
NSG. Each description is qualified in its entirety by reference to the
applicable agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries address all material provisions of such agreements. See "Additional
Information."

41
<PAGE>

MASTER COOPERATION AGREEMENT

The Company and NSG entered into a Master Cooperation Agreement, dated as of
April 1, 1997 (the "Cooperation Agreement"), pursuant to which NSG agreed to
continue to cooperate with the Company to pursue effective business
development and synergy of the Company's business and NSG's fiber optics
related business.

The Cooperation Agreement initially terminates on March 31, 2000. After such
initial term, the Cooperation Agreement will be automatically renewed for
successive three-year periods unless either party gives written termination
notice to the other party at least 30 days prior to the expiration of the
then-current term. Under the Cooperation Agreement, neither party is required
to pay the other party any fees or other monetary compensation.

MANAGEMENT SERVICES AGREEMENT

The Company and NSG entered into a Management Services Agreement, dated as
of April 1, 1997 (the "Services Agreement"), pursuant to which NSG agreed to
continue to provide certain management services, including personnel, banking
and credit services, productivity improvement advice, and assistance in the
development of relationships in Asia and Europe with potential customers for
the Company's products. NSG, if requested by the Company, will also be
required to bear a portion of the compensation expense associated with the
personnel provided by NSG.

The Services Agreement initially terminates on March 31, 2000. After such
initial term, the Services Agreement will be automatically renewed for
successive three-year periods unless either party gives written termination
notice to the other party at least 30 days prior to the expiration of the
then-current term.

The Company is obligated to pay fees established in the Services Agreement
of not less than 0.5% and not more than 1.0% of Net Sales (as defined in the
Services Agreement). The fees are payable semi-annually on October 1 and April
1 of each year with respect to services provided and Net Sales generated in
the previous six-month period. For the year ended March 31, 1998, the Company
incurred $126,278 in fees under the Management Services Agreement, of which
$60,000 was paid as of March 31, 1998.

RESEARCH AND DEVELOPMENT AGREEMENT

The Company and NSG entered into a Research and Development Agreement, dated
as of April 1, 1997 (the "R&D Agreement"), pursuant to which NSG agreed to
provide the Company with certain research and development services on a basis
the parties believe will permit the Company to enhance the development of its
technology.

The Company agreed to pay such fees to NSG as are mutually agreed upon as
consideration for services provided pursuant to the R&D Agreement. For the
year ended March 31, 1998, the Company incurred $100,000 in fees under the R&D
Agreement, of which $50,000 was paid as of March 31, 1998.

The R&D Agreement initially terminates on March 31, 2000. After such initial
term, the R&D Agreement will be automatically renewed for successive three-
year periods unless either party gives written termination notice to the other
party at least 30 days prior to the expiration of the then-current term.

DISTRIBUTION AGREEMENT

The Company and NSG entered into a Distribution Agreement, dated as of April
1, 1997 (the "Distribution Agreement"), pursuant to which NSG agreed to act as
the exclusive distributor of all of the Company's products in Japan. The
Distribution Agreement provides that the Company will sell its products to NSG
at prices to be agreed upon from time to time, on a case-by-case basis, for
resale in Japan. For the year ended March 31, 1998, sales by the Company to
NSG under the Distribution Agreement totaled $1.3 million.

42
<PAGE>

The Distribution Agreement will continue until terminated by agreement of
the parties, or by written notice from one party to the other, at least 90
days before the proposed termination date, or by either party during the
period beginning on the date NSG ceases to own, directly or indirectly, at
least 30% of the capital stock of the Company.

TAX SHARING AGREEMENT

Pursuant to a Tax Sharing Agreement between the Company and NSG Holding,
dated as of April 1, 1993 (the "Tax Sharing Agreement"), NSG Holding agreed to
prepare and file all tax returns that are required of the Company with NSG
Holding on a consolidated basis, to the extent permitted by applicable tax
laws, beginning with the taxable year ended March 31, 1994 and continuing for
all subsequent tax periods. Upon completion of the offering, NSG Holding and
the Company will no longer file on a consolidated basis. Under the Tax Sharing
Agreement, the Company pays NSG Holding an amount equal to the income tax
liability that the Company would have incurred had it filed an income tax
return on a separate basis for the relevant tax period. If, on the other hand,
the Company would have had a net tax loss or tax credits in excess of tax
liabilities had it filed an income tax return on a separate basis, then NSG
Holding pays the Company an amount equal to any refund.

AGREEMENT FOR LINE OF CREDIT

On May 31, 1997, the Company and NSG Holding entered into a one-year, $6.0
million dollar Agreement for Line of Credit (the "Line of Credit"), maturing
on March 31, 1999. The Company borrows under the Line of Credit to meet
working capital requirements and to fund certain capital expenditures. The
Company does not believe that the loss of credit support from NSG Holding, if
it were to occur, would have a material adverse effect on the Company's
business, financial condition and operating results. Borrowings under the Line
of Credit bear interest at LIBOR plus 0.25%. Principal and accrued interest
must be paid no later than the March 31, 1999 maturity date. If such amount is
not paid on the maturity date, however, then interest from such date will
accrue at LIBOR plus 2.00%. As of March 31, 1998, the Company had drawn down
$3.7 million under the Line of Credit and since such date, the Company has
drawn an additional $500,000 under the Line of Credit. The Company intends to
use a portion of the net proceeds from the offering to repay all amounts owed
to NSG Holding under the Line of Credit. See "Use of Proceeds."

43
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 12,500,000 shares of
Class A Common Stock, 7,500,000 shares of Class B Common Stock and 5,000,000
shares of Preferred Stock, each with a par value of $0.01 per share. After the
consummation of the offering, 2,175,200 shares of Class A Common Stock and
5,088,000 shares of Class B Common Stock will be issued and outstanding. No
shares of Preferred Stock will be issued and outstanding upon the consummation
of the offering.

The following description of the capital stock of the Company and certain
provisions of the Company's Restated Certificate of Incorporation and Amended
and Restated Bylaws is a summary of all material terms thereof and is
qualified in its entirety by the provisions of the Restated Certificate of
Incorporation and Amended and Restated Bylaws, which have been filed as
exhibits to the Company's Registration Statement, of which this Prospectus is
a part.

COMMON STOCK

Dividends. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if and as may be declared by the Board of
Directors out of funds legally available for such purposes. No dividends may
be declared or paid on any share of Class A Common Stock unless such dividend
is simultaneously declared or paid on each share of Class B Common Stock equal
to the amount which would have been payable with respect to such shares of
Class B Common Stock had such shares been converted into Class A Common Stock
immediately prior to the record date of such dividend. No dividends may be
declared or paid on any shares of Class B Common Stock unless a similar
dividend is simultaneously declared or paid on each share of Class A Common
Stock.

Voting Rights. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to three votes for each
share of Class A Common Stock into which Class B Common Stock is convertible,
subject to adjustment to preserve such initial voting ratio. Holders of shares
of Class A Common Stock and Class B Common Stock vote as a single class on all
matters submitted to a vote of stockholders, except as otherwise required by
law. Upon the consummation of the offering, NSG Holding will own 5,088,000
shares of Class B Common Stock, which will represent 87.53% of the voting
power of the outstanding Common Stock (85.94% if the Underwriters' over-
allotment option is exercised in full). As a result, NSG Holding will have
sufficient voting power to control the direction and policies of the Company,
including stockholder votes with respect to mergers, consolidations, the sale
of all or substantially all of the assets of the Company, the election of the
Board of Directors and whether a change in control of the Company occurs.

Convertibility. Each share of Class B Common Stock is convertible, at the
option of the holder, into one share of Class A Common Stock at any time,
subject to adjustment for stock dividends, stock splits, subdivisions or
combinations with respect to the shares of Class A Common Stock. If, however,
NSG Holding sells or otherwise transfers beneficial ownership of any shares of
Class B Common Stock to a third person or entity (other than NSG or a wholly
owned subsidiary of NSG), such shares will be automatically converted into
shares of Class A Common Stock. The shares of Class A Common Stock are not
convertible into shares of Class B Common Stock.

Liquidation Rights. Upon liquidation, dissolution or winding up of the
Company, the holders of Class A Common Stock are entitled to share ratably
with the holders of Class B Common Stock in all assets available for
distributions after payment in full to creditors, subject to adjustment for
stock dividends, stock splits, subdivisions or combinations with respect to
Class A Common Stock, as well as any rights of holders of any shares of
Preferred Stock that may be issued in the future.

Other Provisions. The holders of Common Stock are not entitled to preemptive
or subscription rights. In any merger, consolidation or business combination,
the consideration to be received per share by holders of Class A Common Stock
must be identical to that received by holders of Class B Common Stock.

PREFERRED STOCK

The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion

44
<PAGE>

rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by stockholders. The
Company believes that this authority will provide flexibility in connection
with possible corporate transactions. However, the issuance of Preferred Stock
could also adversely affect the voting power of holders of Common Stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation of the Company. Further, Preferred Stock could also have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred
Stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Restated Certificate of Incorporation contains provisions (i)
eliminating the personal liability of its directors, officers, employees and
other agents for monetary damages resulting from breaches of their fiduciary
duty to the fullest extent permitted by law and (ii) indemnifying its
directors and officers to the fullest extent permitted by the DGCL. These
provisions in the Restated Certificate of Incorporation do not eliminate the
duty of care and, in appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
the DGCL. Each director will continue to be subject to liability for breach of
a director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transactions from which the director derived an
improper personal benefit and for improper distributions to stockholders.
These provisions also do not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.

The Company's Restated Certificate of Incorporation and Amended and Restated
Bylaws also permit the Company to secure insurance on behalf of any person it
is required or permitted to indemnify for any liability arising out of his or
her actions in such capacity, regardless of whether the DGCL would permit
indemnification. The Company maintains liability insurance for its directors
and officers.

At present there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted and the Company is not aware of any other threatened
litigation or proceeding that might result in a claim for such
indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, employees and other agents of the
Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission
(the "Commission"), such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.

ANTI-TAKEOVER EFFECTS OF RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND
RESTATED BYLAWS

The Company's Restated Certificate of Incorporation or Amended and Restated
Bylaws, as applicable, among other things, (i) require stockholders to follow
an advance notification procedure for stockholder nominations of candidates to
the Board of Directors and for new business to be conducted at stockholder
meetings, (ii) provide that the Board of Directors, without action by the
stockholders, may issue and fix the rights and preferences of shares of
Preferred Stock and (iii) divide the members of the Board of Directors into
three classes, as nearly equal in number as possible, such that the current
directors will serve initial terms expiring at the 1998, 1999 and 2000 annual
stockholders' meeting, respectively, with the directors in each class
thereafter being elected for three-year terms. These provisions may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the stockholders, may discourage bids for the Class
A Common Stock at a premium over the market price of the Class A Common Stock,
may adversely affect the market price of, and the voting and other rights of
the holders of, the Class A Common Stock and could have the effect of
discouraging certain attempts to acquire the Company or remove incumbent
management or members of the Board of Directors even if some or a majority of
the Company's stockholders deemed such an attempt to be in their best
interests. Furthermore, after the offering, NSG will have 87.53% of the voting
control

45
<PAGE>

of the Company (85.94% if the Underwriters' over-allotment option is exercised
in full). Voting control by NSG may discourage certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of the Class A Common Stock might receive a
premium for their shares over the prevailing market price of the Class A
Common Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Class A Common Stock is American
Stock Transfer and Trust Company, New York, New York.

LISTING

The Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "EPXX."

46
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of the offering, the Company will have outstanding an
aggregate of 2,175,200 shares of Class A Common Stock (2,497,700 if the
Underwriters' over-allotment option is exercised in full) and 5,088,000 shares
of Class B Common Stock. Of the total outstanding shares of Common Stock,
2,150,000 shares of Class A Common Stock sold in the offering will be freely
tradable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act ("Rule 144"). Sales by such affiliates will
be subject to certain volume limitations and other restrictions described
below.

The 5,088,000 shares of Class B Common Stock held by NSG Holding and the
remaining 25,200 shares of Class A Common Stock will be "restricted
securities" as that term is defined in Rule 144 (the "Restricted Shares"). In
general, under Rule 144, a person (or persons whose shares are aggregated with
those of others), including any affiliate of the Company, is entitled to sell
in brokers' transactions or directly to market makers, within any three-month
period, a number of Restricted Shares that does not exceed the greater of (i)
1.0% of the class of such shares then outstanding or (ii) the average weekly
trading volume of the class of such shares in the over-the-counter market
during the four calendar weeks preceding the date on which notice of such sale
is filed with the Commission, provided that certain current public information
concerning the Company is then available, that the seller complies with
certain manner-of-sale provisions and notice requirements, and that at least
one year has elapsed since the Restricted Shares were fully paid for and
acquired from the Company or an affiliate of the Company. A person (or persons
whose shares are aggregated with those of others) who is not an affiliate of
the Company at any time during the three months preceding any sale by such
person, is entitled to sell such shares under Rule 144(k) without regard to
the limitations described above, provided that at least two years have lapsed
since the Restricted Shares were fully paid for and acquired from the Company
or an affiliate of the Company. (However, Rule 144(k) is not expected to be
available to NSG Holding for the foreseeable future.) The above is a summary
of Rule 144 and is not intended to be a complete description thereof or a
complete description of the rights of the parties to sell shares of Common
Stock thereunder.

Approximately 5,113,200 Restricted Shares will be eligible for sale in the
public market beginning 180 days after the effective date of the offering,
pursuant to Rule 144 upon the expiration of certain lock-up agreements entered
into between the Underwriters and the holders of such Restricted Shares. All
of the 5,113,200 Restricted Shares will be subject to certain volume
limitations and other restrictions pursuant to Rule 144. In addition, the
Company intends to file a Registration Statement on Form S-8 after the
effective date of the offering to register 574,800 shares of Class A Common
Stock issuable upon the exercise of stock options under the Stock Option Plan.
Such shares of Class A Common Stock issued pursuant to the Stock Option Plan
will be available for sale in the public market after the effective date of
the Registration Statement on Form S-8, subject to the expiration of the lock-
up agreements with the Underwriters. See "Management--Benefit Plans--Amended
and Restated 1996 Employee, Director and Consultant Stock Option Plan."

Except as indicated above, the Company is unable to estimate the amount,
timing or nature of future sales of outstanding Common Stock. There was no
market for the Company's capital stock prior to the offering, and no
predictions can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
the Class A Common Stock in the public market may have an adverse effect on
the market price thereof, and could impair the Company's ability to raise
capital through the future sale of its equity securities.

LOCK-UP AGREEMENTS

Pursuant to certain agreements, all of the Company's directors, executive
officers and shareholders, owning as of the date hereof all of the outstanding
Common Stock and all outstanding vested and unvested stock options, have
agreed that they will not, without the prior written consent of Cowen &
Company, offer, sell, contract to sell or otherwise dispose of any shares of
Class A Common Stock or options to acquire shares of Class A Common Stock or
securities exchangeable for or convertible into shares of Class A Common Stock
or any right to acquire shares of Class A Common Stock owned by them, for a
period of 180 days after the date of this Prospectus. See "Underwriting."

47
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters,
for whom Cowen & Company, CIBC Oppenheimer Corp. and Daiwa Securities America
Inc. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, the respective number of shares of Class
A Common Stock set forth opposite the name of such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS A
UNDERWRITERS COMMON STOCK
- ------------ ----------------
<S> <C>
Cowen & Company................................................
CIBC Oppenheimer Corp. ........................................
Daiwa Securities America Inc. .................................
---------
Total...................................................... 2,150,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all shares of Class A Common Stock offered hereby (other
than those covered by the over-allotment option described below), if any of
such shares are purchased.

The Underwriters propose to offer the shares of Class A Common Stock,
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and to certain dealers at a price less a
concession not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Class A Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters.

The Company has granted the Underwriters an option, exercisable for up to 30
days after the date of this Prospectus, to purchase up to an aggregate of
322,500 additional shares of Class A Common Stock to cover over-allotments, if
any. If the Underwriters exercise such over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Class A
Common Stock to be purchased by each of them shown in the foregoing table
bears to the total number of shares of Class A Common Stock offered hereby.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of shares of Class A Common Stock made hereby.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.

The Company and the Company's officers, directors, and shareholders have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or any right to acquire shares of Class
A Common Stock owned by them for a period of 180 days after the date of this
Prospectus without the prior written consent (which consent may be given
without notice to the Company, the stockholders or by other public
announcement) of Cowen & Company.

The Representatives have advised the Company that they currently intend to
make a market in the Class A Common Stock following this offering although
they have no obligation to do so and may cease such market making at any time.
There can be no assurance that a market in the Class A Common Stock will
develop after the offering.

48
<PAGE>

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares of Class A Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.

In order to facilitate the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Class A Common
Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Class A Common Stock, the Underwriters may bid for,
and purchase, shares of the Class A Common Stock in the open market. The
Underwriters may also reclaim selling concessions allowed to an underwriter or
a dealer for distributing the Class A Common Stock in the offering, if the
Underwriters repurchase previously distributed Class A Common Stock in
transactions to cover their short positions, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of the
Class A Common Stock in market making transactions and impose penalty bids.
These activities may stabilize or maintain the market price of the Class A
Common Stock above market levels that may otherwise prevail. The Underwriters
are not required to engage in these activities and may end any of these
activities at any time.

Prior to the offering, there has been no public market for the Company's
capital stock. Consequently, the initial public offering price for the Class A
Common Stock will be determined by negotiations among the Company and the
Representatives. Among the factors to be considered in such negotiations, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses. The estimated initial public offering price range set forth on the
cover page of this Preliminary Prospectus is subject to change as a result of
market conditions or other factors.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Class A Common
Stock offered hereby will be passed upon for the Company by Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, and for the
Underwriters by O'Sullivan Graev & Karabell, LLP, New York, New York.

EXPERTS

The Consolidated Financial Statements and schedule of the Company as of
March 31, 1997 and 1998 and for each of the years in the three-year period
ended March 31, 1998, have been included herein and in this Prospectus in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The firm of AUS Consultants
provided an appraisal to the Company as of March 31, 1997, related to the
grant of stock options by the Board of Directors.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Class A Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Class A Common Stock, reference is made to such Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents or provisions of any documents referred to herein are not
necessarily complete, and in each instance where a copy of the document has
been filed as an exhibit to the Registration Statement, reference is made to
the exhibit so filed.

49
<PAGE>

The Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement may
be obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.

50
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998................. F-3
Consolidated Statements of Income for the years ended March 31, 1996, 1997
and 1998................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended March 31, 1996, 1997
and 1998................................................................. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1997 and 1998............................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
EPITAXX, Inc.:

We have audited the accompanying consolidated balance sheets of EPITAXX,
Inc. (an indirect subsidiary of Nippon Sheet Glass Co., Ltd.) and subsidiary
as of March 31, 1997 and 1998, and the related consolidated statements of
income, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended March 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EPITAXX,
Inc. and subsidiary as of March 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998 in conformity with generally accepted accounting
principles.

/s/ KPMG Peat Marwick LLP

Short Hills, New Jersey

May 8, 1998

F-2
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
MAR. 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 109 $ 968
Trade accounts receivable, less allowance for doubtful
accounts of $47 and $75 at March 31, 1997 and 1998,
respectively (note 10)................................... 2,379 3,155
Inventories (note 4)...................................... 3,676 4,602
Due from affiliates (notes 9 and 11)...................... 886 40
Deferred income tax assets (note 9)....................... 466 416
Prepaid expenses and other current assets................. 140 113
------- --------
Total current assets.................................... 7,656 9,294
Property, plant and equipment, net (notes 5 and 13)......... 8,932 9,955
Other assets, net........................................... 389 948
------- --------
$16,977 $ 20,197
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings from affiliate under line of credit
(note 11)................................................ $ 3,400 $ 3,650
Current portion of obligation under capital lease (note
13)...................................................... 145 181
Trade accounts payable.................................... 1,326 1,102
Accrued compensation and benefits......................... 1,065 1,157
Accrued expenses.......................................... 325 696
Due to affiliates (notes 9 and 11)........................ -- 404
Promissory notes issued for dividends declared (note 7):
NSG Holding USA, Inc..................................... -- 10,000
Other stockholders....................................... -- 50
------- --------
Total current liabilities............................... 6,261 17,240
Long-term debt (note 6)..................................... 5,000 5,000
Obligation under capital lease, net of current portion (note
13)........................................................ 133 11
Deferred income tax liabilities (note 9).................... 853 1,102
------- --------
Total liabilities....................................... 12,247 23,353
------- --------
Stockholders' equity (deficit) (notes 3 and 7):
Preferred stock $.01 par value. Authorized 5,000,000
shares at March 31, 1998; no shares issued or
outstanding.............................................. -- --
Common stock, $.01 par value at March 31, 1997. Authorized
20,000,000 shares at March 31, 1997; issued and
outstanding 5,088,000 shares in 1997..................... 51 --
Class A common stock, $.01 par value. Authorized
12,500,000 shares at March 31, 1998; 25,200 shares issued
and outstanding in 1998.................................. -- --
Class B common stock, convertible, $.01 par value.
Authorized 7,500,000 shares at March 31, 1998; 5,088,000
shares issued and outstanding in 1998.................... -- 51
Additional paid-in capital................................ 12,185 12,185
Accumulated deficit....................................... (7,506) (15,392)
------- --------
Total stockholders' equity (deficit).................... 4,730 (3,156)
Commitments (note 13)
------- --------
$16,977 $ 20,197
======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenue.............................................. $17,845 $18,700 $23,925
Revenue--affiliate (note 11)......................... 1,917 2,509 1,330
------- ------- -------
Total revenue (note 10)........................ 19,762 21,209 25,255
Cost of revenue...................................... 10,876 13,978 14,568
------- ------- -------
Gross profit................................... 8,886 7,231 10,687
------- ------- -------
Operating expenses:
Research and development expense................... 2,082 2,541 2,958
Selling, general and administrative expense........ 3,555 3,187 3,940
------- ------- -------
5,637 5,728 6,898
------- ------- -------
Income from operations......................... 3,249 1,503 3,789
------- ------- -------
Other income (expense):
Interest income.................................... 12 31 28
Interest expense (note 6).......................... (276) (279) (264)
Interest expense--affiliate (note 11).............. (178) (207) (320)
Other.............................................. (16) (1) (5)
------- ------- -------
(458) (456) (561)
------- ------- -------
Income before income tax expense............... 2,791 1,047 3,228
Income tax expense (note 9).......................... 936 409 1,064
------- ------- -------
Net income..................................... $ 1,855 $ 638 $ 2,164
======= ======= =======
Net income per share (note 3):
Basic.............................................. $ 0.36 $ 0.12 $ 0.42
Diluted............................................ $ 0.36 $ 0.12 $ 0.41
======= ======= =======
Pro forma net income per share (note 3):
Basic.............................................. $ 0.35
Diluted............................................ $ 0.35
=======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
TOTAL
ADDI- STOCK-
COMMON STOCK TIONAL ACCUMU- HOLDERS'
------------------ PAID-IN LATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995...... 5,088,000 $ 12,184 $ -- $ (8,572) $ 3,612
Dividends paid................. -- -- -- (500) (500)
Net income..................... -- -- -- 1,855 1,855
--------- -------- ------- -------- --------
Balance at March 31, 1996...... 5,088,000 12,184 -- (7,217) 4,967
Change in par value per share
from no par value to $.01 per
share (note 7)................ -- (12,133) 12,133 -- --
Shares issuable under re-
stricted stock agreement
(note 7)...................... -- -- 52 -- 52
Dividends paid................. -- -- -- (927) (927)
Net income..................... -- -- -- 638 638
--------- -------- ------- -------- --------
Balance at March 31, 1997...... 5,088,000 51 12,185 (7,506) 4,730
Issuance of restricted shares
(note 7)...................... 25,200 -- -- -- --
Net income..................... -- -- -- 2,164 2,164
Dividends declared (note 7).... -- -- -- (10,050) (10,050)
--------- -------- ------- -------- --------
Balance at March 31, 1998...... 5,113,200 $ 51 $12,185 $(15,392) $ (3,156)
========= ======== ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31,
------------------------
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 1,855 $ 638 $2,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 904 1,101 1,406
Provision for bad debt expense................... 4 11 28
Loss on disposal of property, plant and
equipment....................................... -- -- 8
Deferred income tax expense (benefit)............ (188) 575 299
Compensation expense related to restricted stock
agreement....................................... -- 52 --
Changes in operating assets and liabilities:
Trade accounts receivable...................... (963) 628 (804)
Inventories.................................... (2,005) 1,435 (926)
Due from affiliates............................ 738 (686) 846
Prepaid expenses and other current assets...... (12) (96) 27
Other assets................................... (37) (109) (559)
Trade accounts payable......................... 169 94 (224)
Accrued compensation and benefits.............. 406 (102) 92
Accrued expenses............................... 103 151 371
Due to affiliates.............................. 969 (1,029) 404
------- ------- ------
Net cash provided by operating activities ..... 1,943 2,663 3,132
------- ------- ------
Cash flows from investing activities--capital
expenditures........................................ (2,061) (2,418) (2,353)
------- ------- ------
Cash flows from financing activities:
Borrowings under line of credit.................... 1,350 -- --
Repayments under line of credit.................... (3,950) -- --
Proceeds from borrowings from affiliate............ 3,950 2,552 1,250
Payments on borrowings from affiliate.............. (700) (1,852) (1,000)
Repayment of obligation under capital leases....... -- -- (170)
Dividends paid to parent........................... (500) (927) --
------- ------- ------
Net cash provided by (used in) financing
activities.................................... 150 (227) 80
------- ------- ------
Net increase in cash........................... 32 18 859
Cash at beginning of year............................ 59 91 109
------- ------- ------
Cash at end of year.................................. $ 91 $ 109 $ 968
======= ======= ======
Supplemental disclosure of cash flow information--
cash paid during the year for:
Interest.......................................... $ 454 $ 514 $ 495
======= ======= ======
Income taxes...................................... $ 20 $ 1,454 $ 483
======= ======= ======
Noncash information disclosure--net present value of
capital lease obligation incurred in connection with
lease of computer hardware and software............. -- $ 277 $ 84
======= ======= ======
</TABLE>

In December 1997, the Company declared a cash dividend of $10,050 to
stockholders of record on December 11, 1997. The dividend payable is evidenced
by promissory notes payable (note 7).

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1996, 1997 AND 1998

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) DESCRIPTION OF COMPANY BUSINESS

EPITAXX, Inc. and subsidiary (the "Company") designs, manufactures and
markets semiconductor optical detectors and receivers for fiber optics
communications. The Company's products are integral to the development and
implementation of fiber optic systems for applications such as high capacity
long-haul terrestrial and undersea transmission; digital local loop and access
networks; multi-channel cable television ("CATV") distribution; high speed
computer networking; and test and measurement equipment.

NSG Holding USA, Inc. ("NSG Holding" or the "Parent"), a wholly owned
subsidiary of Nippon Sheet Glass Co., Ltd. ("NSG"), owns 99.51% of the
outstanding shares of the Company's capital stock.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of EPITAXX, Inc.
and its wholly owned subsidiary. All material intercompany transactions and
balances have been eliminated in consolidation.

Revenue

Revenue is recognized upon product shipment, passage of title and when all
significant obligations of the Company have been fully satisfied.

Revenue from research and development contracts is recognized based upon the
percentage of completion method and, in some instances, based upon specified
contract milestones. Revenue and income on research and development contracts
recognized under the percentage of completion method are determined in the
ratio that costs incurred to date bear to total estimated costs. Income and
costs on contracts are subject to revision throughout the term of the
contracts, and any required adjustments are made in the period in which such
revisions become known. Provision is made for the full amounts of anticipated
losses in the period in which they are first determinable. Revenue from
achievement of milestone events is recognized when all parties concur that the
scientific results and/or milestones stipulated in the agreement have been
met. The terms of research and development contracts generally provide for the
design, development, prototyping and, in certain cases, the delivery of a
limited number of products.

The Company recognized revenue of $795 and $625 under research and
development contracts in the years ended March 31, 1996 and 1997,
respectively. Costs incurred under such contracts aggregated $328 and $208 in
the years ended March 31, 1996 and 1997, respectively. No revenue was
recognized and no costs were incurred under research and development contracts
during the year ended March 31, 1998.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Examples include provisions for returns, bad debts, and
obsolete inventories. Actual results could differ from those estimates.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

F-7
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.

Depreciation of plant and equipment is calculated using the straight-line
method over the estimated useful lives of the respective assets, which range
from 3 to 30 years. Equipment under capital leases is amortized using the
straight-line method over the shorter of the lease term or estimated useful
life of the asset.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

During 1995, NSG Holding and the Company entered into a tax sharing
agreement pursuant to which the Company's results of operations are included
in the consolidated federal income tax return of NSG Holding. Under the terms
of the agreement, the Company provides for federal income taxes as if it were
a stand-alone taxpayer; any income tax benefits derived from net operating
losses and tax credits generated by the Company but utilized by NSG Holding in
its consolidated return are allocated to the Company.

Risks and Uncertainties

The Company relies exclusively on its own production capability in wafer
processing, chip fabrication, device packaging, final assembly and testing of
products. Because the Company manufactures, packages and tests these
components at its own facility and because the Company only has a single
facility, any interruption in manufacturing resulting from fire, natural
disaster, equipment failures or otherwise would have a material adverse effect
on the Company's business and financial condition. The Company maintains
business property and business interruption insurance to mitigate the
potential material adverse effects of property damage and business
interruption.

Other factors may also cause the Company's results to differ from historic
levels. Some of the more significant factors include the prolonged
interruption in supply of one or more key materials, the emergence of new
technologies in the fiber optics communications industry and the introduction
by competitors of new products.

F-8
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to market
data and other valuation techniques as appropriate. The Company believes the
fair value of its financial instruments, principally cash, trade accounts
receivable, other current assets, accounts payable and accrued expenses and
debt obligations approximates their recorded values.

Stock-Based Compensation

Stock-based compensation is recognized using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stocks Issued to Employees" ("APB 25"), and related
interpretations. For disclosure purposes, net income and supplemental pro
forma net income per share data included in note 8 are provided in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as if the fair-value-based method had
been applied.

Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.

Impact of Recent Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), and Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131").

SFAS 130 establishes standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS 131
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. SFAS 130 and 131 are effective for fiscal 1999. Adoption of these
standards is expected to result in additional disclosures, but will not have
an effect on the Company's financial position or results of operations.

(3) RECAPITALIZATION AND NET INCOME PER SHARE

General

In December 1997, the Company's Board of Directors authorized the filing of
a Registration Statement on Form S-1 in connection with a planned initial
public offering (the "Offering") of the Company's common stock. In connection
with the Offering, the Board of Directors and shareholders approved a
recapitalization providing for a restatement upon filing of the Company's
Restated Certificate of Incorporation to increase the total number of shares
of all classes of share capital whereby the Company is authorized to issue up
to 25,000,000 shares, consisting of 12,500,000 shares of Class A common stock,
par value $.01 per share, 7,500,000 shares of Class B common stock, par value
$.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per
share.

F-9
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Pursuant to the Restated Certificate of Incorporation filed on January 23,
1998, each share of the Company's then issued and outstanding common stock at
the effective date, except for shares of common stock held by NSG Holding, was
converted into Class A common stock on a one-for-one basis. Each share of
common stock held by NSG Holding was converted into Class B common stock on a
one-for-one basis. The rights, preferences and privileges of Class A and Class
B common stock are identical in all respects except for voting rights. Each
share of Class A common stock entitles its holder to one vote and each share
of Class B common stock entitles its holder to three votes for each share of
Class A common stock into which the Class B common stock is convertible. The
Class B common stock is convertible into Class A common stock on a share-for-
share basis, subject to adjustment for stock dividends, stock splits,
subdivisions or combinations.

Following the filing of the Restated Certificate of Incorporation, NSG
Holding owns no shares of Class A common stock and all of the 5,088,000
outstanding shares of Class B common stock.

As further discussed in note 7, the Company plans to use $10,050 of the net
proceeds from the Offering to pay the $10,050 dividend declared to
stockholders of record on December 11, 1997.

The Company has deferred expenses of the proposed Offering totaling $622 as
of March 31, 1998. Such deferred costs are included in other assets, net, in
the accompanying consolidated balance sheet.

Net Income Per Share

In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting earnings per share and is effective for
financial statements for both interim and annual periods ending after December
15, 1997. Accordingly, the accompanying net income per share information has
been calculated and presented in accordance with the provisions of SFAS 128
and as further prescribed by Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 98, which is effective as of February 3, 1998.

Basic net income per share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period
assuming the shares of restricted stock issued for a nominal amount were
outstanding from the beginning of each period. Diluted net income per share
was calculated in a manner consistent with Basic net income per share except
that the weighted average number of common shares outstanding also includes
the dilutive effect of stock options outstanding (using the treasury stock
method and an estimated initial public offering price of $10.00 per share).

The conversion of the issued and outstanding common stock into Class A and
Class B shares had no effect on the calculation of historical earnings per
share.

The following presents a reconciliation of the numerator and denominator
used in computing Basic and Diluted net income per share:

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1996
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $1,855 5,113,200 $0.36
Effect of dilutive securities--stock op-
tions.................................... -- --
------ --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $1,855 5,113,200 $0.36
====== ========= =====
</TABLE>

F-10
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1997
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $638 5,113,200 $0.12
Effect of dilutive securities--stock op-
tions.................................... -- 22,091
---- --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $638 5,135,291 $0.12
==== ========= =====
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1998
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic net income per share--net income and
weighted average common shares
outstanding.............................. $2,164 5,113,200 $0.42
Effect of dilutive securities--stock op-
tions.................................... -- 111,363
------ --------- -----
Diluted net income per share--net income,
weighted average common shares
outstanding and effect of stock options.. $2,164 5,224,563 $0.41
====== ========= =====
</TABLE>

Pro Forma Net Income Per Share

Pro forma Basic net income per share was calculated by dividing net income
by the weighted average number of common shares outstanding during the period
assuming the shares of restricted stock were outstanding from the beginning of
each period. The weighted average number of common shares was further adjusted
to include the number of shares that would be required to be sold to fund the
$10,050 dividend to NSG Holding and other shareholders (using an assumed
initial public offering price of $10.00 per share).

Pro forma Diluted net income per share was calculated in a manner consistent
with pro forma Basic net income per share except that the weighted average
number of common shares outstanding also includes the dilutive effect of stock
options outstanding (using the treasury stock method and an estimated initial
public offering price of $10.00 per share).

The following presents a reconciliation of the numerator and denominator
used in computing pro forma Basic and Diluted net income per share:

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31, 1998
--------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Pro forma Basic net income per share:
Net income and weighted average common
shares outstanding....................... $2,164 5,113,200 $0.42
Additional shares issued to fund dividend... -- 1,005,000
------ --------- -----
2,164 6,118,200 0.35
Effect of dilutive securities--stock op-
tions...................................... -- 111,363
------ --------- -----
Pro forma Diluted net income per share--net
income, weighted average common shares
outstanding and assumed share issuance and
effect of stock options.................... $2,164 6,229,563 $0.35
====== ========= =====
</TABLE>

F-11
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(4) INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
MAR. 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Raw materials.................................................. $1,380 $1,928
Work-in-process................................................ 1,869 2,386
Finished goods................................................. 427 288
------ ------
$3,676 $4,602
====== ======
</TABLE>

(5) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including equipment under capital leases,
consists of the following:

<TABLE>
<CAPTION>
MAR. 31,
--------------
1997 1998
------- ------
<S> <C> <C>
Land......................................................... $ 422 $ 422
Building and building improvements........................... 3,961 4,146
Machinery and equipment...................................... 9,943 11,267
Furniture and fixtures....................................... 149 182
Construction in progress..................................... -- 855
------- ------
14,475 16,872
Less accumulated depreciation................................ 5,543 6,917
------- ------
$ 8,932 $9,955
======= ======
</TABLE>

(6) LONG-TERM DEBT

The Company has a loan agreement with the New Jersey Economic Development
Authority (the "Authority") for $5,000, financed by the issuance of Economic
Development Revenue Bonds (the "Revenue Bonds") by the Authority. Proceeds
from this borrowing were used to acquire and refurbish the current
manufacturing and administrative facility for the Company. The Revenue Bonds,
which are secured by a letter of credit in the amount of $5,250 issued by the
Company and guaranteed by NSG, mature on August 1, 2016. The loan agreement
provides for quarterly interest payments at the "TENR" rate, as defined, plus
0.625% (actual interest rate was 4.275% at March 31, 1998) and allows for the
redemption of the bonds prior to the scheduled maturity date under certain
circumstances, as defined in the bond indenture. The bond indenture also
provides for the conversion of the interest rate on the bonds into a fixed
interest rate, as defined, under certain circumstances.

(7) COMMON STOCK

In connection with the Offering of the Company's common stock, the Company
effected a stock split of its common stock in the form of a stock dividend in
the amount of 1.2 shares for every one share outstanding in December 1997. The
Company also effected a 42,400-for-1 stock split of its common stock and
increased the number of authorized shares of common stock from 1,000 shares,
with no par value, to 20,000,000 shares, par value $.01 in December 1996. All
share and per share data in the accompanying consolidated financial statements
have been retroactively adjusted to reflect the effects of the stock splits.

F-12
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In December 1997, the Company declared a cash dividend of $10,050 to the
stockholders of record on December 11, 1997, of which $10,000 is payable to
NSG Holding. The dividend is evidenced by promissory notes issued in February
1998, bearing interest at a rate of 6.02% per annum, payable semiannually. The
principal amount of such promissory notes is payable on the earlier of: (i)
the date the Company's total consolidated stockholders' equity first equals or
exceeds $15,000 and (ii) February 9, 2001, provided that on such date the
Company's total consolidated stockholders' equity equals or exceeds $15,000.
The interest charge incurred and payable related to these promissory notes as
of March 31, 1998 was $86.

In December 1996, the Company's Board of Directors authorized the issuance
and sale of 25,200 shares of the Company's common stock to three officers of
the Company at a purchase price of $0.01 per share under restricted stock
agreements with each officer. Vesting under the agreements is immediate. The
shares were issued on April 1, 1997 and are subject to a repurchase option in
favor of the Company at a price per share of $2.08 for a specified period
during which they are also restricted as to sale and transfer. The Company
recognized approximately $52 of compensation expense in the year ended March
31, 1997 in connection with these restricted stock agreements.

(8) STOCK OPTIONS

Pursuant to the Company's Amended and Restated 1996 Employee, Director, and
Consultant Stock Option Plan (the "Plan"), the Company's Board of Directors
may grant incentive and nonqualified stock options to key employees,
directors, and certain consultants, of the Company. The Plan authorizes grants
of options to purchase up to 574,800 shares of authorized but unissued Class A
common stock.

Options granted under the Plan are set forth in an option agreement with
each participant. The terms of each option agreement may vary at the
discretion of the Board of Directors and shares issued upon exercise of the
options may be restricted as to transferability. Options granted during the
year ended March 31, 1997 had an exercise price equal to the fair market value
(as determined by an appraisal conducted by AUS Consultants) of the underlying
common stock at the date of grant, are generally exercisable 39 months from
their date of grant and have a term not exceeding 10 years. During the year
ended March 31, 1998, 15,000 options were granted to certain directors at
exercise prices to be equal to the initial public offering price (estimated at
$10.00 per share) of the Company's Class A common stock. Such options are
exercisable in three annual installments, 5,000 of which become exercisable
upon consummation of the Offering, and have a term of 10 years.

Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAR. 31, 1997 MAR. 31, 1998
----------------- ------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of period: -- $ -- 175,200 $ 3.33
Granted............................. 175,200 3.33 15,000 10.00
Exercised........................... -- -- -- --
Canceled............................ -- -- (22,128) 3.33
------- ----- ------- ------
Outstanding at end of period.......... 175,200 $3.33 168,072 $ 3.93
======= ===== ======= ======
</TABLE>

At March 31, 1998, there were 406,728 additional shares available for grant
under the Plan. All outstanding options were nonqualified options.

F-13
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The per share weighted-average fair value of stock options granted during
the years ended March 31, 1997 and 1998 was $1.23 and $4.55, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions for the years ended March 31, 1997 and 1998: risk free
rate of 6.07%; expected option life of 10 years; and no dividend yield.

The Company applies APB 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED
MAR. 31,
------------
1997 1998
----- ------
<S> <C> <C>
Net income:
As reported................................................. $ 638 $2,164
Pro forma................................................... $ 627 $2,112
===== ======
Net income per share:
Basic:
Net income and pro forma net income per share, as report-
ed....................................................... $0.12 $ 0.35
Net income and supplemental pro forma net income per
share.................................................... $0.12 $ 0.35
Diluted:
Net income and pro forma net income per share, as report-
ed....................................................... $0.12 $ 0.35
Net income and supplemental pro forma net income per
share.................................................... $0.12 $ 0.34
===== ======
</TABLE>

At March 31, 1997 and 1998, the weighted average remaining contractual life
of outstanding options was 9.8 and 8.9 years, respectively. At March 31, 1998,
no options were exercisable.

(9) INCOME TAXES

Income tax expense attributable to income from operations consists of the
following:

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31,
---------------------
1996 1997 1998
------ ----- ------
<S> <C> <C> <C>
Current:
Federal............................................. $1,025 $(166) $ 624
State............................................... 99 -- 141
------ ----- ------
1,124 (166) 765
------ ----- ------
Deferred:
Federal............................................. (104) 585 311
State............................................... (84) (10) (12)
------ ----- ------
(188) 575 299
------ ----- ------
Total income tax expense.......................... $ 936 $ 409 $1,064
====== ===== ======
</TABLE>

F-14
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The actual income tax expense differs from the expected income tax expense
(computed by applying the U.S. corporate income tax rate of 34% to income
before income tax expense) as follows:

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31,
---------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Computed "expected" federal income tax expense...... $949 $ 356 $ 1,098
State income taxes (benefit), net of federal bene-
fit................................................ 10 (7) 85
Research and experimentation credit................. (33) (78) (121)
Other, net (including adjustment related to prior
year amounts in fiscal 1997)....................... 10 138 2
----- ----- -------
$936 $ 409 $ 1,064
===== ===== =======
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:

<TABLE>
<CAPTION>
MAR. 31,
-------------
1997 1998
----- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts......................................... $ 18 $ 28
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax Reform
Act of 1986 and reserves for obsolescence................. 393 340
Compensated absences, principally due to accrual for
financial reporting purposes.............................. 55 49
Tax credit carryforwards................................... 126 172
Other...................................................... 7 --
----- ------
Total gross deferred tax assets.......................... 599 589
Deferred tax liabilities--plant and equipment, principally
due to differences in depreciation.......................... 986 1,275
----- ------
Net deferred tax liability............................... $(387) $ (686)
===== ======
</TABLE>

There is no valuation allowance for deferred tax assets at March 31, 1996,
1997 and 1998; the net change in the total valuation allowance for the year
ended March 31, 1996 was a decrease of $81. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.

The Company's results of operations are included in the consolidated federal
income tax return filed by the Parent under a tax sharing agreement with the
Parent. At March 31, 1997 and 1998, amounts due (to) from the Parent under
this agreement amounted to $429 and $(202), respectively.

At March 31, 1998, the Company has a research and experimentation tax credit
carryforward for state income tax purposes of approximately $172 which is
available to reduce future state income taxes, if any, through 2005.

F-15
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(10) GEOGRAPHIC INFORMATION, BUSINESS AND CREDIT CONCENTRATIONS

The Company operates in a single industry segment: the design, manufacture,
and marketing of semiconductor optical detectors (see note 1). The Company has
one manufacturing facility located in the United States. Certain materials
necessary for the manufacture of the Company's products are obtained from a
sole supplier or a small group of suppliers. In particular, the Company
currently obtains a key material, the epitaxial wafers of InGaAs used to
manufacture the Company's products, from one primary vendor. Although the
Company has identified and qualified several alternative sources for the
epitaxial wafers and other materials currently obtained from single sources,
there can be no assurance that such materials could be made available at
competitive prices, at acceptable reliability standards or in a timely fashion
to respond to customer needs. Interrupted or delayed supplies of key materials
could have a material adverse effect on the Company's business, financial
condition and operating results.

Revenues from one customer were 12.8% of total net revenues during the year
ended March 31, 1996. In addition, revenues from NSG were 11.8% of total net
revenues during the year ended March 31, 1997. While the Company did not have
customers whose sales represented more than 10% of total net revenues during
the year ended March 31, 1998, one customer accounted for nearly 10%.

Revenue by geographic area is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED MAR. 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
North America...................................... $ 7,788 $10,921 $14,054
Europe............................................. 8,786 4,420 8,899
Asia and other (including revenue from an affili-
ate).............................................. 3,188 5,868 2,302
------- ------- -------
$19,762 $21,209 $25,255
======= ======= =======
</TABLE>

The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which is unsecured. The
Company estimates an allowance for doubtful accounts based upon the
creditworthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimates of bad debts.

(11) RELATED PARTY TRANSACTIONS

Effective April 1997, the Company and NSG entered into a number of
agreements for the purpose of defining their ongoing relationship. Pursuant to
a Master Cooperation Agreement (the "Master Agreement"), NSG agreed to
continue to cooperate with the Company to pursue effective business
development and synergy of the Company's business and NSG's fiber optics
related business. Pursuant to the Master Agreement, the Company also entered
into a Management Services Agreement ("Services Agreement"), a Research and
Development Agreement ("R&D Agreement") and a Distribution Agreement with NSG.
Prior to the formalization of the Master Agreement and related agreements,
such services were provided between the Company and NSG on an informal basis.
Management believes that such charges are reasonable and that no additional
costs would have been incurred had the Company operated as an entity
unaffiliated with NSG.

The Services Agreement requires NSG to continue to provide management
services, including personnel, banking and credit services, productivity
improvement advice, and assistance in the development of relationships in Asia
and Europe. Fees payable under the Services Agreement range from 0.5% to 1.0%
of net sales (as defined). Pursuant to the R&D Agreement, NSG has agreed to
provide the Company with certain research and development services to enhance
the development of its technology.

F-16
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Fees charged by NSG under the Service Agreement and the R&D Agreement during
the year ended March 31, 1998 were $126 and $100, respectively.

The Master Agreement, Services Agreement and R&D Agreement terminate on
March 31, 2000, at which time they will be renewed automatically for
successive three-year periods unless terminated by either party at least 30
days prior to the end of their then-current term.

In addition, the Company entered into a Distribution Agreement with NSG
pursuant to which NSG acts as the exclusive distributor of all of the
Company's products in Japan. The Distribution Agreement may be terminated by
agreement between the parties or by either party if NSG ceases to own at least
30% of the capital stock of the Company.

The Company also has a tax sharing agreement pursuant to which the Company's
results of operations are included in the consolidated federal income tax
return of NSG Holding (see note 9).

Purchases of inventory from affiliates were $353, $191 and $306 in the years
ended March 31, 1996, 1997 and 1998, respectively.

The Company has a $6,000 line of credit with NSG Holding to meet working
capital requirements and to fund certain capital expenditures. The amount and
length of borrowings are negotiable and bear interest at LIBOR plus 0.25%
(6.28% at March 31, 1998). The facility expires on March 31, 1999. Borrowings
outstanding under this facility aggregated $3,400 as of March 31, 1997 and
$3,650 as of March 31, 1998. The weighted average interest rate on short-term
borrowings was 5.8% and 6.11% as of March 31, 1997 and 1998, respectively.

On April 22, 1998, the Company was advanced $500 under the $6,000 line of
credit maintained with NSG Holding. The borrowing matures on June 15, 1998,
and bears interest at a rate of 6.375%.

(12) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) and profit sharing plan covering substantially all
of its employees. Under the plan, employees may elect to contribute a portion
of their compensation to the 401(k) plan, subject to certain limitations.
Company-matching contributions are made on a discretionary basis subject to a
guaranteed minimum. Pension costs incurred under the 401(k) plan were $93, $84
and $233 in the years ended March 31, 1996, 1997 and 1998, respectively.

(13) COMMITMENTS

The Company is obligated under capital lease arrangements that expire in
1999 for certain computer hardware and software equipment. At March 31, 1998,
the gross amount of computer hardware and software equipment and related
accumulated amortization recorded under capital leases is as follows:

<TABLE>
<S> <C>
Computer equipment..................................................... $314
Less accumulated amortization........................................ 44
----
$270
====
</TABLE>

The Company also leases certain equipment and machinery under various
capital and operating leases. Rent expense charged to operations under such
operating lease agreements aggregated approximately $209, $217 and $105 in the
years ended March 31, 1996, 1997 and 1998, respectively.

F-17
<PAGE>

EPITAXX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Approximate future minimum rental payments required for all noncancellable
operating leases and future minimum capital lease payments as of March 31,
1998 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending March 31:
1999................................................... $177 $ 84
2000................................................... 18 59
2001................................................... -- 30
---- ----
Total minimum lease payments......................... 195 $173
====
Less amount representing interest (at 3.0% per annum).. 3
----
Present value of net minimum capital lease payments.. 192
Less current installments of obligation under capital
leases................................................ 181
----
Obligation under capital leases excluding current in-
stallments.......................................... $ 11
====
</TABLE>

The Company has entered into employment contracts with several officers of
the Company. Such contracts extend through March 2000 with terms for automatic
renewal for consecutive three-year periods. Compensation accrues to the
officers over the term of the contract as the respective services are
provided. Amounts charged to operations under the aforementioned contracts
aggregated approximately $588, $579 and $707 in the years ended March 31,
1996, 1997 and 1998, respectively.

The Company also maintains management incentive compensation arrangements
available to certain key employees. Under such arrangements, eligible
employees earn additional compensation based upon the Company attaining
certain annual and multiyear performance objectives, as defined. Amounts
charged to operations under such management incentive compensation
arrangements aggregated approximately $660, $250 and $440 in the years ended
March 31, 1996, 1997 and 1998, respectively.

On April 6, 1998, the Company entered into an Agreement For Sale related to
the purchase of a tract of land. The purchase price of the land is $355, and
the Company expects to close on the purchase in June 1998.

F-18
<PAGE>

[Inside back cover contains photographs of the Company's manufacturing
facilities and personnel. In addition, the Company's logo appears on the inside
back cover.]

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF CLASS A COMMON STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

------------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 34
Principal Stockholders................................................... 40
Relationship Between the Company and NSG................................. 41
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Additional Information................................................... 49
Index To Consolidated Financial Statements............................... F-1
</TABLE>

------------------

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

2,150,000 SHARES

[LOGO OF EPITAXX APPEARS HERE]

CLASS A COMMON STOCK

------------------
PROSPECTUS
------------------

COWEN & COMPANY

CIBC OPPENHEIMER

DAIWA SECURITIES
AMERICA INC.

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Class A Common Stock being registered. Except for the Commission
Registration Fee, the NASD Filing Fee and the Nasdaq National Market Listing
Fee, the amounts listed below are estimates.

<TABLE>
<S> <C>
Commission Registration Fee........................................ $ 7,294
NASD Filing Fee.................................................... 3,219
Nasdaq National Market Listing Fee................................. 48,750
Printing and Engraving Expenses.................................... 100,000
Legal Fees and Expenses............................................ 325,000
Accounting Fees and Expenses....................................... 300,000
Blue Sky Fees and Expenses......................................... 1,000
Transfer Agent and Registrar Fees and Expenses..................... 5,000
Miscellaneous Expenses............................................. 9,737
--------
TOTAL(1)......................................................... $800,000
========
</TABLE>
- --------

(1) $622,000 of these expenses have been paid by the Company to date.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The General Corporation Law of the State of Delaware and the Registrant's
Restated Certificate of Incorporation and Amended and Restated Bylaws provide
for indemnification of the Registrant's directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
the Registrant, and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Registrant's Restated Certificate of Incorporation
and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 hereto,
respectively.

Additionally, reference is made to the form of Underwriting Agreement filed
as Exhibit 1.1 hereto, which provides for indemnification by the Underwriters
of the Company, its directors and officers who sign the Registration Statement
and persons who control the Company, under certain circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the three years preceding the filing of this Registration Statement, the
Registrant has sold the following securities that were not registered under
the Securities Act:

1. On January 21, 1997, pursuant to Restricted Stock Agreements, the
Registrant sold 8,400 shares of its Common Stock, par value $.01 per share,
to each of Noboru Hiraguri, Yves Dzialowski and James D. Coleman for an
aggregate purchase price of $210. In the foregoing instance, the Registrant
relied on Section 4(2) of the Securities Act for the exemption from the
registration requirements of the Securities Act, since no public offering
was involved.

2. The Registrant's Amended and Restated 1996 Employee, Director and
Consultant Stock Option Plan (the "Stock Option Plan") was adopted by the
Registrant in December 1996. As of the date hereof, options to purchase
168,072 shares of Common Stock were outstanding under the Stock Option
Plan, which options to purchase 15,000 shares of Class A Common Stock
exercisable at the initial public offering price (assumed to be $10.00 per
share) and the remaining options were granted at an exercise price of $3.33
per share. In the foregoing instance, the Registrant relied on Rule 701
promulgated under the Securities Act for the exemption from the
registration requirements of the Securities Act.

II-1
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(1.1)** Form of Underwriting Agreement
(3.1)** Restated Certificate of Incorporation of the Registrant
(3.2)** Amended and Restated Bylaws of the Registrant
(4.1) Article Fourth of the Restated Certificate of Incorporation of
Registrant (see Exhibit 3.1)
(4.2)** Form of Class A Common Stock Certificate
(5.1)** Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of the securities being registered
(10.1)** Distribution Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Sheet Glass Co., Ltd.
(10.2)** Management Services Agreement, dated as of April 1, 1997, between
the Registrant and Nippon Street Glass Co., Ltd.
(10.3)** Master Cooperation Agreement, dated as of April 1, 1997, between the
Registrant and Nippon Sheet Glass Co., Ltd.
(10.4)** Research and Development Agreement, dated as of April 1, 1997,
between the Registrant and Nippon Sheet Glass Co., Ltd.
(10.5)** Amended and Restated 1996 Employee, Director and Consultant Stock
Option Plan
(10.6)** Tax Sharing Agreement, dated as of April 1, 1993, between the
Registrant and NSG Holding USA, Inc.
(10.7)** Agreement for Line of Credit, dated as of January 15, 1998 to become
effective on May 31, 1998, between the Registrant and NSG Holding
USA, Inc.
(10.8)** Loan Agreement, dated as of August 15, 1991, between the Registrant
and the New Jersey Economic Development Authority
(10.9)** Form of Promissory Note dated as of February 9, 1998, from the
Registrant to certain stockholders of the Registrant
(10.11)** Registrant's Form of Executive Employment Agreement
(23.1)* Independent Auditors' Report and Consent of KPMG Peat Marwick LLP
(23.2) Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(included in Exhibit 5.1)
(23.3)** Consent of AUS Consultants
(24.1)** Power of Attorney
(27.1)** Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Previously filed.

(B) FINANCIAL STATEMENT SCHEDULES:

Schedule II-Valuation and Qualifying Accounts

II-2
<PAGE>

SCHEDULE II

EPITAXX, INC. AND SUBSIDIARY

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED MARCH 31, 1998, 1997, AND 1996

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED OTHER
BEGINNING OF TO COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
----------- ------------ ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ending:
March 31, 1998........ $ 47 28 -- -- $ 75
March 31, 1997........ 36 11 -- -- 47
March 31, 1996........ 32 4 -- -- 36
Inventory--reserves for
obsolescence:
Year ending:
March 31, 1998........ $476 585 -- (664) $397
March 31, 1997........ 702 -- -- (226) 476
March 31, 1996........ 200 502 -- -- 702
Warranty reserve:
Year ending:
March 31, 1998........ $185 -- -- (52) $133
March 31, 1997........ 141 44 -- -- 185
March 31, 1996........ 117 24 -- -- 141
</TABLE>

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.

(2) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(3) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification

II-3
<PAGE>

is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding), is asserted by such
director, officer or controlling person of the Registrant in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF WEST TRENTON, NEW JERSEY ON THIS 13TH DAY OF MAY, 1998.

EPITAXX, INC.
(Registrant)

By: /s/ Noboru Hiraguri
---------------------------------
NOBORU HIRAGURI
CHIEF EXECUTIVE OFFICER AND VICE
CHAIRMAN

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive May 13, 1998
- ------------------------------------- Officer and Vice
NOBORU HIRAGURI Chairman (principal
executive officer)
and Director

* President and Chief May 13, 1998
- ------------------------------------- Operating Officer
YVES DZIALOWSKI and Director

/s/ James D. Coleman Vice President, May 13, 1998
- ------------------------------------- Chief Financial
JAMES D. COLEMAN Officer, Treasurer
and Secretary
(principal
financial and
accounting officer)

* Chairman of the May 13, 1998
- ------------------------------------- Board
KENJI FUJIWARA

* Director May 13, 1998
- -------------------------------------
ARNOLD S. HOFFMAN
</TABLE>

II-5
<PAGE>

<TABLE>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

* Director May 13, 1998
- -------------------------------------
RICHARD J. PINOLA

* Director May 13, 1998
- -------------------------------------
MASAHIKO TARUMIZU

* Director May 13, 1998
- -------------------------------------
NAOTAKA TODOROKI

*By: /s/ James D. Coleman
--------------------------------
ATTORNEY-IN-FACT
</TABLE>

II-6
<PAGE>

EXHIBIT INDEX

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' REPORT AND CONSENT

The Board of Directors and Stockholders
EPITAXX, Inc.:

The audits referred to in our report dated May 8, 1998 included the related
financial statement schedule on Valuation and Qualifying Accounts for each of
the years in the three-year period ended March 31, 1998 included in the
registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.

/s/ KPMG Peat Marwick LLP

Short Hills, New Jersey

May 13, 1998