OPTEK TECHNOLOGY INC, 424B1, 1998-05-01

OPTEK TECHNOLOGY INC
424B1, 1998-05-01
SEMICONDUCTORS & RELATED DEVICES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No: 333-46415

PROSPECTUS
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2,500,000 Shares

[OPTEK LOGO]

Common Stock
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All of the shares of common stock of Optek Technology, Inc. (the "Company"), par
value $0.01 per share (the "Common Stock"), offered hereby are being sold by
First Source Financial LLP ("First Source" or the "Selling Stockholder"). See
"Selling Stockholder." The Company will not receive any proceeds from the sale
of shares by the Selling Stockholder.

The Common Stock is included for quotation in The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "OPTT." On April 30,
1998, the last reported sales price of the Common Stock on the Nasdaq National
Market was $22.75 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" ON PAGES 6 TO 14 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
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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 Proceeds to
Price to Discounts and Selling
Public Commissions(1) Stockholder
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<S> <C> <C> <C>
Per Share........................ $22.50 $1.125 $21.375
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Total(2)(3)...................... $56,250,000 $2,812,500 $53,437,500
===============================================================================================================
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."

(2) The Company has agreed to pay the expenses of the offering estimated to be
$200,000.

(3) The Selling Stockholder has granted the several Underwriters a 30-day
over-allotment option to purchase up to 375,000 additional shares of the
Common Stock on the same terms and conditions as set forth above. If all
such additional shares are purchased by the Underwriters, the total Price to
Public will be $64,687,500, the total Underwriting Discounts and Commissions
will be $3,234,375 and the total Proceeds to Selling Stockholder will be
$61,453,125. See "Underwriting."
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The shares of Common Stock are offered by the Underwriters subject to delivery
by the Selling Stockholder and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made through the
facilities of the Depository Trust Company, New York, New York on or about May
6, 1998.

PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
ABN AMRO INCORPORATED

April 30, 1998
<PAGE> 2

[Photograph depicting a silicon wafer with a selection of the Company's discrete
components and assemblies.]

"Photologic" and the Optek logo are trademarks of the Company. Trademarks of
others are also referred to in this Prospectus.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus or incorporated by reference herein.
Unless the context indicates otherwise, references in this Prospectus to the
"Company" refer to Optek Technology, Inc. and its wholly-owned subsidiaries.
Unless otherwise indicated, this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. See "Underwriting."

THE COMPANY

The Company is a leading designer and manufacturer of electronic sensor
components and assemblies that detect motion and position for a broad range of
applications. The Company utilizes optoelectronic and magnetic field sensing
technologies to target non-standard applications that require specialized
engineering and manufacturing expertise. The Company sells its products for end
use by original equipment manufacturers ("OEMs") in the office equipment,
automotive, industrial, aerospace/defense, medical and communications markets.
The Company believes that in many cases it is the sole source supplier for
specific components and assemblies necessary for its customers' applications. In
fiscal 1997, major customers included C.P. Clare Corporation, General Motors
Corporation ("General Motors"), Pitney Bowes, Inc. ("Pitney Bowes"), Strattec
Security Corporation ("Strattec") and Xerox Corporation.

The Company's primary business has been focused on the design and
manufacture of optoelectronic semiconductor chips, discrete components and
assemblies for commercial (i.e., office equipment, industrial, medical and
communications) OEMs. The Company's commercial products include a wide array of
custom electronic components and assemblies which are each designed to address
specific applications required by its diverse customer base. Demand by
commercial customers for the Company's sensors is driven by sales of OEM
products that incorporate the Company's sensors. Such products frequently have
life cycles ranging from three to 15 years. Often, the Company is able to
leverage its specialized engineering expertise and close customer relationships
to assist in the design of its customers' next generation of products, which
significantly increases the Company's ability to secure continuing sales from
these customers as their product lines evolve. As a result, commercial OEMs have
represented a relatively stable and predictable sales base for the Company.

The Company has leveraged its expertise in commercial markets to develop
customized electronic sensors to address the growing application requirements of
the automotive market. The Company believes that the automotive sector
represents its primary opportunity for growth as an increasing number of sensors
are being incorporated into automobiles to improve fuel efficiency and
emissions, increase passenger safety and provide additional consumer options.
The Company believes that this trend will continue as governmental regulations
mandate improved passenger safety and reduced emissions and as consumers demand
better safety and performance and increased functionality. As a result of its
strategic pursuit of the automotive market, the Company's sales to the
automotive market have grown from 2% to 25% of net sales from fiscal 1992 to
fiscal 1997. The Company presently sells electronic sensors for use in General
Motors' automobile ignition and theft deterrent systems. In addition, the
Company's engineering and manufacturing expertise and customer relationships
have resulted in the Company being awarded other automotive programs. Currently,
a substantial portion of the Company's automotive assemblies are sold for use in
a relatively small number of applications. The Company's growth rate has been
more significantly impacted by the addition of new programs than growth in
existing programs. Therefore, the Company's year-to-year growth rate depends
largely upon the number, size and timing of new programs added, if any.

The Company's business objective is to maintain and enhance its position as
a leading designer and manufacturer of custom electronic sensors. To achieve its
objective, the Company has implemented a strategy to: (i) leverage its existing
expertise in application specific products; (ii) pursue additional opportunities
in the growing automotive sensor market; (iii) leverage its vertically
integrated manufacturing capabilities; and (iv) utilize multiple sales channels
for effective market coverage.

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<PAGE> 4

The Company's manufacturing operations are vertically integrated, with
facilities located in Carrollton, Texas and Juarez, Mexico. Over 80% of the
Company's products are assembled in facilities operated by the Company in
Juarez, Mexico. The Company markets its products worldwide through its own
technical sales staff, independent sales representatives and independent
stocking distributors.

The Company was founded and incorporated in the State of Texas in 1979 and
reincorporated in the State of Delaware in 1984. The Company's principal
executive offices are located at 1215 West Crosby Road, Carrollton, Texas 75006,
and its phone number at that location is (972) 323-2200.

SELLING STOCKHOLDER

All of the shares offered hereby will be sold by First Source. The offered
shares will be acquired pursuant to a warrant to purchase 3,150,000 shares of
Common Stock held by First Source (the "First Source Warrant"), which will be
exercised, at least in part, in connection with completion of the Offering. The
Company will not receive any proceeds of the Offering, but will receive the
aggregate exercise price of $1.25 million payable upon exercise of the First
Source Warrant to acquire the 2,500,000 shares of Common Stock to be sold in
this Offering. The exercise price for the Company's Common Stock subject to the
First Source Warrant is $0.50 per share. See "Use of Proceeds," "Capitalization"
and "Principal and Selling Stockholders."

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Selling Stockholder(1).......... 2,500,000 shares

Common Stock to be Outstanding after the Offering(1)(2)..... 6,966,025 shares

Use of Proceeds............................................. The Company will not receive any
proceeds from the sale of the
Common Stock offered hereby. See
"Use of Proceeds."

Nasdaq National Market Symbol............................... OPTT
</TABLE>

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(1) Does not include 375,000 shares which may be issued pursuant to the First
Source Warrant and offered by the Selling Stockholder if the Underwriters'
over-allotment option is exercised in full.

(2) Does not include, as of February 12, 1998 (i) 596,665 shares issuable upon
exercise of outstanding director and employee stock options, of which
options for 311,533 shares are exercisable immediately or within 60 days of
February 12, 1998 and (ii) 650,000 shares issuable upon exercise of the
First Source Warrant.

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<PAGE> 5

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth certain historical operating data for the
Company for each of the periods indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------------------------ ----------------------
OCT. 29, OCT. 28, OCT. 27, OCT. 25, OCT. 31, JAN. 31, JAN. 30,
1993(1) 1994(1)(2) 1995(2) 1996(2) 1997(3) 1997 1998
-------- ---------- -------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 55,878 $55,625 $62,542 $67,395 $75,572 $16,689 $20,419
Cost of sales................ 46,499 38,269 38,513 39,010 43,423 10,099 12,105
-------- ------- ------- ------- ------- ------- -------
Gross profit............... 9,379 17,356 24,029 28,385 32,149 6,590 8,314
Operating income (loss)...... (5,272) 7,229 13,098 15,186 17,758 3,102 4,428
Income (loss) before income
taxes and extraordinary
item....................... (10,059) 3,179 9,996 14,039 17,764 2,943 4,524
Net income (loss)............ $(10,059) $ 3,179 $ 9,838 $12,895 $11,502 $ 1,912 $ 2,940
Diluted earnings (loss) per
share before extraordinary
item(4).................... $ (3.12) $ 0.62 $ 1.40 $ 1.71 $ 1.63 $ 0.25 $ 0.37
Diluted earnings (loss) per
share(4)................... $ (3.12) $ 0.62 $ 1.40 $ 1.71 $ 1.50 $ 0.25 $ 0.37
Weighted average shares
outstanding -- diluted
basis(4)................... 3,224 5,154 7,007 7,544 7,672 7,533 7,881
</TABLE>

<TABLE>
<CAPTION>
JAN. 30, 1998
OCT. 31, ----------------------
1997 ACTUAL AS ADJUSTED
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $15,068 $16,552 $17,602
Total assets................................................ 38,936 41,622 42,672
Total current liabilities................................... 12,656 12,274 12,274
Stockholders' equity........................................ 26,163 29,193 30,243
</TABLE>

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(1) Results for fiscal 1993 and 1994 include non-recurring charges of $8.3
million and $1.3 million, respectively, relating to (i) restructuring
charges; (ii) write-off of excess and obsolete inventory; (iii) losses from
a discontinued subsidiary; and (iv) amortization of deferred development
costs.

(2) Results for fiscal 1994, 1995 and 1996 include tax benefits resulting from
utilization of net operating loss carryforwards during those years of
$305,000, $3.9 million and $3.2 million, respectively. All such
carryforwards were fully utilized during fiscal 1996.

(3) In the fourth quarter of fiscal 1997, the Company agreed to pay its former
lender, First Source, $1.5 million to release all debt obligations,
including contingent additional interest, under the credit facility and
other restrictive covenants. The provision for payment, net of related
income tax benefits of $542,000, was classified as an extraordinary item.

(4) The Company has restated all previous earnings (loss) per share data to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS No. 128"), which became effective on a retroactive basis
with the issuance of the fiscal 1998 first quarter earnings data. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations -- New Accounting Standards."

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<PAGE> 6

RISK FACTORS

An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective investors should carefully consider
the following risk factors, in addition to the other information set forth in
this Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.

This Prospectus, including the information incorporated by reference
herein, includes "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. All of the statements contained in this
Prospectus, other than statements of historical fact, should be considered
forward-looking statements, including, but not limited to, those concerning the
Company's strategies, objectives and plans for expansion of its operations,
products and services and growth in demand for sensor products. There can be no
assurances that these expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in this Prospectus,
included, without limitation, under "Risk Factors." All subsequent written and
oral forward-looking statements by or attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such
Cautionary Statements. Prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof and are not intended to give any assurance as to future results. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

FLUCTUATIONS IN OPERATING RESULTS. The Company's net sales and other
operating results have varied on a quarterly and an annual basis in the past and
may vary significantly in the future. The Company's first fiscal quarter, which
ends in January, includes the holiday season, which adversely impacts customer
order entry, and also includes an annual manufacturing facilities shutdown, and
has therefore traditionally been the Company's lowest quarter of the fiscal year
in terms of net sales and operating income. Historically, the Company's net
sales have been lower in such quarter than in the immediately preceding quarter.
The Company's third fiscal quarter has in the past been affected by the extended
vacation season in Europe, which reduces international sales during that period.
The Company's net sales and operating results could be materially and adversely
affected by many factors, some of which are partially or wholly outside the
control of the Company, including, among others: failure to be selected to
supply sensors for new products and programs; quality control of products sold;
the relatively long sales and development cycle for the Company's products; the
Company's ability to introduce new products and technologies on a timely basis;
market acceptance of the Company's and its customers' products; the timing,
deferral or cancellation of customer orders and related shipments; competitive
pressures on selling prices; availability of raw materials; fluctuations in
yields; changes in product mix; changes in the lead time required to ship
products after receipt of an order; introduction of products and technologies by
the Company's competitors and customers; personnel changes and difficulties in
attracting and retaining qualified technical personnel; and economic conditions
both generally and, in particular, in the automotive and commercial markets.

A significant portion of the Company's product sales are made pursuant to
standard purchase orders that, in some cases, are cancelable without significant
penalties. In addition, purchase orders are subject to changes in quantities of
products and delivery schedules to reflect changes in customers' requirements
and manufacturing availability. The Company's actual shipments depend in part on
the Company's manufacturing capacity and the availability of raw materials from
the Company's suppliers. The Company's expense levels are based, in part, on its
expectations as to future net sales and to some extent are fixed in the short
term. Accordingly, the Company may be unable to adjust spending in a timely
manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or any
material delay or deferral of customer orders would have a material adverse
effect on the Company's business, operating results and financial condition.

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<PAGE> 7

materialize when and as anticipated, such expenditures could adversely affect
the Company's gross margins and operating margins.

As a result of the foregoing and other factors, it is likely that in some
future periods the Company's operating results will fail to meet the
expectations of public market analysts or investors. In such event, or in the
event that adverse conditions prevail or are perceived to prevail generally or
with respect to the Company's business, the trading price of the Company's
Common Stock could drop significantly.

DEPENDENCE ON AUTOMOTIVE INDUSTRY. The automotive industry, which accounted
for approximately 25% of the Company's net sales during fiscal 1997, has in
recent years represented the fastest area of growth for the Company. Thus, the
maintenance of or improvement in the Company's operating results for future
periods will depend in part on its success in the automotive sensor market and
on the anticipated increase in use of sensors in automobiles to improve fuel
efficiency, safety and consumer options. Currently, a substantial portion of the
Company's automotive assemblies are sold for use in a relatively small number of
applications. The Company's growth rate has been more significantly impacted by
the addition of new programs than growth in existing programs. Therefore, the
Company's year-to-year growth rate depends largely upon the number, size and
timing of new programs added, if any. No assurance can be given that additional
applications will be developed or that the Company will be successful in
participating in such programs. In addition, the selection of the Company as a
supplier for a program does not necessarily entail any contractual commitment on
the part of the customer to purchase products from the Company.

The automotive industry is cyclical due to general economic conditions, the
level of interest rates, consumer confidence, patterns of consumer spending and
the automobile replacement cycle, all of which are beyond the control of the
Company. In addition, the Company's customers in the automotive industry are
highly unionized and have in the past experienced labor disruptions.
Accordingly, automotive production may not increase or may decline in the
future. A significant reduction or prolonged interruption in automotive
production could have a material adverse effect on the Company's business,
operating results and financial condition.

DEPENDENCE ON CUSTOMER SPECIFIC PRODUCTS; LENGTHY SALES AND DEVELOPMENT
CYCLE. A substantial portion of the Company's products are designed to address
the specific needs of individual customers. As a result, the sales and
development cycle for these products can be lengthy, with the development cycle
alone ranging from four to 36 months or longer for new products in new
applications, and are particularly long for products targeted to the automotive
industry. Because customer specific products are developed for particular
customers' applications, some of the Company's current and future customer
specific products may never be produced in high volume, or at all, due to the
Company's inability to introduce custom products in a timely manner, delays in
the introduction of the Company's customers' products, the failure of the
Company's customers' products to achieve and sustain commercial success or the
discontinuation of a customer's product line. Any of these occurrences could
have a material adverse effect on the Company's business, operating results and
financial condition.

PRODUCT LIFE CYCLES; DEPENDENCE ON SELECTION AS PROVIDER FOR NEW
PRODUCTS. The Company's ability to generate net sales in the future is primarily
dependent on its being selected by OEMs as a provider of sensor components
and/or assemblies for their new products. OEMs typically select and qualify
sensor providers for new product models during the initial design and testing
phases of their product development cycles, which typically range from four to
over 36 months in length. Once a new product model is implemented, its life
cycle typically ranges from three to 15 years. The Company believes that it
would be difficult for it to begin providing components and assemblies for use
in a particular end product if the Company had not been selected and qualified
as a provider during the development of such product. Therefore, a failure to be
selected as a provider during the early stages of a product's life cycle could
preclude the Company from ever providing assemblies and components for such
product model throughout its life cycle. In addition, such failure to be
selected could reduce the Company's ability to be selected as a provider for
future product models if, for example, such failure adversely affects the
working relationship between the Company and the manufacturer of such product
model. There can be no assurance that the Company will be selected as a provider
of sensor assemblies and components for new product models introduced by current
customers or other OEMs. Unless

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<PAGE> 8

the Company is selected as a supplier of sensor components and assemblies for
new models as existing models are phased out, the Company's business, operating
results and financial condition could be materially and adversely affected.

CUSTOMER CONCENTRATION. Historically, a relatively small number of
customers has accounted for a significant percentage of the Company's total net
sales, and the Company expects that this trend will continue. During fiscal
1997, the Company's ten largest customers accounted for approximately 63% of net
sales. Three customers, Strattec, General Motors and Pitney Bowes, made
purchases which accounted for 13%, 13% and 10%, respectively, of the Company's
net sales for fiscal 1997. In each of fiscal 1994, 1995 and 1996, the Company
had two customers that each accounted for at least 10% of total net sales. The
Company's ability to achieve sales in the future will depend upon its ability to
obtain orders from, maintain relationships with and provide support to a
relatively small number of existing and new key customers. As a result, any
cancellation, reduction, rescheduling or delay in orders by or shipments to any
significant customer or the discontinuation or redesign by any such customer of
its products which currently incorporate one or more of the Company's products
could have a material adverse effect on the Company's business, operating
results and financial condition.

PRICING PRESSURE. There is continuing pressure from OEMs to reduce costs
associated with outside suppliers such as the Company. In some cases, the
Company sells products under agreements which contain provisions that require
the Company to reduce its per unit price over time. The Company's other
products, which are subject to periodic re-quotation, may also experience
declining average selling prices over their life cycles. If the Company is
unable to make corresponding product cost reductions or introduce new products
with higher gross margins, such declining average selling prices could reduce
the Company's product gross margin.

FOREIGN MANUFACTURING OPERATIONS. Over 80% of the Company's components and
assemblies are produced in facilities operated by the Company in Juarez, Mexico.
Mexico has enacted legislation to promote the use of such manufacturing
operations by foreign companies and continuation of these operations depends
upon: compliance with applicable laws and regulations of the United States and
Mexico; the availability of less expensive labor and the continuation of
favorable exchange rates. These operations are authorized to operate as
Maquiladoras by the Ministry of Commerce and Industrial Development of Mexico.
Maquiladora status allows the Company to wholly own its Mexican subsidiaries and
to import items into Mexico duty free, provided that such items, after
processing, are re-exported from Mexico within six months. Maquiladora status,
which must be renewed every two years, is subject to various restrictions and
requirements, including: compliance with the terms of the Maquiladora program;
proper utilization of imported materials; hiring and training of Mexican
personnel; compliance with tax, labor, exchange control and notice provisions
and regulations; and compliance with locational constraints. Although assembly
operations in Mexico continue to be less expensive than comparable operations in
the United States, in recent years many companies have established Maquiladora
operations in the Juarez area to take advantage of lower labor costs. Increasing
demand for labor, particularly skilled labor and professionals, from new and
existing Maquiladora operations has in the past and could in the future result
in increased labor costs. The Company may be required to make additional
investments in automating equipment to partially offset increased labor costs.
The loss of Maquiladora status, the inability to recruit, hire and retain
qualified employees, a significant increase in labor costs, unfavorable exchange
rates or interruptions in the trade relations between the United States and
Mexico could have a material adverse effect on the Company's business, operating
results and financial condition. The Company anticipates that additional
manufacturing capacity, primarily in Mexico, will be required to support growth
over the next several years. Therefore, capital expenditures are planned to
increase to a total of approximately $10 to $15 million to be expended over the
next two to three fiscal years to support potential future growth in demand for
the Company's products. The timing and amount of such expenditures is subject to
adjustment based upon continued evaluation by management.

INTERNATIONAL SALES. In fiscal 1996 and 1997, international sales
constituted approximately 28% and 23%, respectively, of the Company's net sales.
The Company expects that revenues derived from international sales will continue
to represent a significant portion of its net sales in the future. Because all
of the Company's revenues from international sales have to date been denominated
in United States dollars, the Company does
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not currently face significant currency exchange rate risks. However,
international operations and demand for the Company's and its customers'
products are subject to a variety of risks, including tariffs, import
restrictions and other trade barriers, changes in regulatory requirements,
longer accounts receivable payment cycles, adverse tax consequences, export
license requirements, foreign government regulation, political and economic
instability and changes in diplomatic and trade relationships. In addition,
currency fluctuations could reduce demand for the Company's products or demand
for its customers' products by making them more expensive than competitors'
products. There can be no assurance that one or more of the foregoing risks will
not have a direct or indirect material adverse effect on the Company's business,
operating results and financial condition. Moreover, the laws of certain foreign
countries in which the Company's products are or may in the future be sold may
not protect the Company's intellectual property rights to the same extent as the
laws of the United States, thus increasing the possibility of infringement or
misappropriation of the Company's intellectual property.

COMPETITION. The Company believes that competition in the market for custom
optoelectronic and magnetic sensors is intense and is likely to increase.
Competition in the sensor markets served by the Company is primarily based upon
custom design capabilities, quality, technology, responsiveness, timely delivery
and price. The Company competes with numerous companies for the custom
optoelectronic and magnetic sensor requirements of OEMs producing office
equipment, automotive products, industrial products, specialized
aerospace/defense and medical applications and communications equipment. The
Company believes that its principal competitor for sales of custom sensor
components and assemblies is Honeywell, Inc. In addition, because certain OEMs,
either directly or through affiliated entities, have internal capabilities to
design and manufacture custom sensor components and assemblies, the Company must
also compete with the in-house capabilities of such OEMs. In some cases, the
Company's prospective customers may elect to purchase low-cost standardized
sensor components from commodity suppliers and utilize their in-house design and
manufacturing capabilities to adapt such standard components to fulfill their
sensor requirements. Certain of the Company's current and potential competitors
may have substantially greater financial resources, name recognition and/or more
extensive engineering, manufacturing, marketing and customer service and support
capabilities than the Company. Furthermore, the Company expects its competitors
to continually improve their design and manufacturing capabilities and to
introduce new products and processes with enhanced performance characteristics
and/or lower prices. While the Company believes that its custom design
capabilities, quality, responsiveness, engineering and operating efficiencies
are competitive advantages, no assurance can be given that the Company will be
able to compete successfully in the future. This competitive environment could
result in significant price reductions or the loss of orders from current and/or
potential customers which, in each case, could materially adversely affect the
Company's business, operating results and financial condition.

SOLE OR LIMITED SOURCES OF SUPPLY. The Company relies on outside vendors to
supply raw materials used in the manufacture of its sensor components and
assemblies. From time to time, certain of these materials, including lead frames
used in the manufacture of discrete sensor components, are only attainable from
a sole or limited group of qualified suppliers. The Company's reliance on
outside vendors generally, and on a sole or limited group of suppliers in
particular, involves several risks, including a potential inability to obtain an
adequate supply of required materials, reduced control over pricing and timely
delivery of materials, and limited ability to pass on price increases to its
customers. Because the procurement of certain of these components may require
long lead times, there can be no assurance that delays or shortages caused by
suppliers will not occur. The Company's ability to fill customer orders may
depend on the availability of numerous different components from its suppliers
and, particularly in periods of high demand, the Company has experienced
difficulties in obtaining certain materials when needed which, in some cases,
has delayed deliveries to the Company's customers. Furthermore, the Company's
customers, in particular in the automotive industry, may require the Company to
secure certain materials from qualified manufacturers, and the process of
qualifying an alternate supplier can take several months. If the Company is
unable to secure materials due to supplier shortages or for any other reason, it
could adversely affect the Company's ability to retain customer orders or to
deliver products on a timely basis, which in turn could adversely affect its
relationships with customers. If significant customer relationships were
adversely affected in this manner or if

9
<PAGE> 10

significant orders were cancelled or delayed, it could have a material adverse
effect on the Company's business, operating results and financial condition.

LIMITED INTELLECTUAL PROPERTY PROTECTION. The Company relies on its
technical engineering expertise as protected by trade secret laws and
nondisclosure agreements and, to a lesser extent, on a combination of patent,
maskwork rights, copyright, trademark and other intellectual property protection
methods to protect its proprietary technology. Although the Company currently
holds four patents and has one pending patent application in the United States,
the Company believes that patents are of less significance in its industry than
such factors as customer service, innovation, technical expertise and know-how
of its personnel. There can be no assurance that the Company's competitors will
not be able to legally ascertain the nonpatented proprietary information
embedded in the Company's sensor components or other products, in which case the
Company may be unable to prevent use of such information. To the extent the
Company elects to assert its patent rights, there can be no assurance that any
claims of the Company's patents will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented, that
any rights granted thereunder will provide adequate protection to the Company,
or that the Company will have sufficient resources to prosecute its rights. The
Company has received notification of patent issues concerning a process used to
manufacture a small portion of its products, but believes the issues asserted
are without merit. There can be no assurance that infringement claims by third
parties or claims for indemnification resulting from infringement claims will
not be asserted in the future, or that such assertions, if proven to be true,
will not materially adversely affect the Company's business, operating results
and financial condition. If any such claims are asserted against the Company,
the Company may seek to obtain a license under the third party's intellectual
property rights. There can be no assurance that a license will be available on
reasonable terms or at all. Alternatively, the Company could resort to
litigation to challenge such claims. Such challenges could be extremely
expensive and time consuming. Adverse determinations in any litigation could
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties and prevent the Company from
manufacturing and selling its products. Any of these developments could have a
material adverse effect on the Company's business, operating results and
financial condition.

LIMITED INSURANCE COVERAGE; ENVIRONMENTAL REGULATION. The operations of the
Company in the United States and in Mexico involve the use of industrial machine
tools and exposure to hazardous chemicals, with attendant risks of liability for
personal injury and property damage. There can be no assurance that accidents
will not occur or that the Company will not incur substantial liability in
connection with the operation of its business. The Company maintains workers'
compensation insurance and general liability insurance, with policy limits of $1
million and $2 million, respectively, per accident or occurrence. The Company
also maintains an umbrella policy with limits of $15 million in the aggregate.
Such insurance excludes coverage for losses or liabilities relating to
environmental damage or pollution. The Company's business, operating results and
financial condition could be materially adversely affected by a claim that was
not covered or only partially covered by its insurance. In addition, the Company
is subject to a variety of domestic and Mexican governmental regulations
relating to the use, storage, handling and disposal of toxic or other hazardous
substances used in connection with its manufacturing activities. Any failure by
the Company to control the use, storage, handling or disposal or adequately
restrict the discharge of hazardous or toxic substances could subject the
Company to significant liabilities or could cause the Company's manufacturing
operations to be curtailed or suspended.

TECHNOLOGICAL CHANGE. While the Company is unaware of any emerging
technology that would have an adverse effect on its business, there can be no
assurance that products or technologies developed by others will not render the
Company's products obsolete or non-competitive. There can be no assurance that
the Company will be able to design new products successfully and develop and
bring to market new and enhanced products on a timely and cost effective basis,
develop or access new processes or technologies or respond effectively to new
technological changes or new product announcements by others. A failure in any
of these areas could have a material adverse effect on the Company's business,
operating results and financial condition.

RELIANCE ON KEY PERSONNEL; NEED FOR ADDITIONAL TECHNICAL PERSONNEL. The
Company's future financial performance will depend in significant part upon the
continued contributions of its executive officers and other

10
<PAGE> 11

key personnel, many of whom would be difficult to replace. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. To better retain them, the
Company has entered into employment agreements with its senior management.
However, the Company does not maintain key person life insurance with respect to
any of these persons. The failure to retain such persons, or to attract and
retain replacements, could materially adversely affect the Company's business,
operating results and financial condition.

The Company believes that a key requirement for competing successfully in
the optoelectronic and magnetic sensor business is the ability to attract and
retain creative and knowledgeable design engineers and other technical personnel
who are qualified in these fields. The number of design engineers who have the
education, training, creativity and experience to design complex sensor
solutions is very limited, and the competition for such personnel can be
intense. Because of the active involvement of the Company's design engineers in
the sales process, the Company's ability to pursue new customers and new
projects from existing customers is affected by its available engineering
resources. The Company's future success will be heavily dependent upon its
ability to attract and retain qualified design, technical and management
personnel. There can be no assurance that the Company will be able to continue
to attract and retain these personnel, and the failure to do so could have a
material adverse effect on the Company's business, operating results and
financial condition.

RISKS OF PRODUCT LIABILITY. The use of the Company's products in various
industrial, commercial or consumer applications may subject the Company to
product liability claims. The automotive industry, in particular, has
historically faced frequent product liability and similar claims. Although the
Company has not experienced any product liability claims to date, the sale of
products by the Company may entail the risk of such claims. Further,
notwithstanding the possible existence of legal defenses or contractual
limitations of liability, industry practices or the need to maintain good
customer relationships may lead the Company to make payments related to such
product liability claims. The Company maintains product liability insurance with
a policy limit of $1 million per occurrence and $15 million in the aggregate,
except for aeronautic product liability claims, which are limited to $10 million
in the aggregate. Any product liability claim, which often involve claims for
substantial damages, brought against the Company could have a material adverse
effect upon the Company's business, operating results and financial condition.

RISKS OF PRODUCT RECALLS. The automotive industry is heavily regulated by
government agencies which establish various vehicle safety standards that are
often indirectly related to the components and subcomponents in their vehicles.
To the extent that any vehicles or any parts therein are required to be or are
voluntarily recalled and the recall involves vehicles or parts that are directly
or indirectly related to any of the Company's products, the Company may be
required to repair or replace its products, redesign or reproduce its products
or halt production or shipment of its products. Further, any recall of vehicles
or parts directly or indirectly related to any of the Company's products may
have the effect of damaging the Company's reputation. Although no such recall
has involved the Company or its products in the past, there can be no assurance
that such a recall will not occur in the future or that if such a recall does
occur that the Company's business, operating results and financial condition
will not be materially adversely affected.

YEAR 2000 COMPLIANCE. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have date-
sensitive software may recognize a date using 00 as the year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. To become Year 2000 compliant, the Company anticipates maintaining
its centralized hardware platform, but replacing or upgrading most of the
software. In addition, all PCs, HVAC, test equipment and external providers will
be reviewed and acted on accordingly. It is anticipated that the Company will be
fully Year 2000 compliant by April 30, 1999. Although the Company is committed
to a successful and timely Year 2000 conversion and funds are dedicated and
available for this project, the Company only recently initiated its Year 2000
compliance program and no assurance can be given that it will be fully and
timely implemented. Failure of the Company's equipment or software to operate
properly with regard to the Year 2000 and thereafter could require the Company
to incur unanticipated expenses to remedy any problems, which could have a
material

11
<PAGE> 12

adverse effect on the Company's business, operating results and financial
condition. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds to purchase products and services such
as those offered by the Company, which could have a material adverse effect on
the Company's business, operating results and financial condition.

UNCERTAIN NEED AND AVAILABILITY OF ADDITIONAL FUNDING. Although the Company
believes that its existing cash reserves, credit facility and cash flows from
operations will be adequate to fund the Company's operations for at least the
next 12 months, there can be no assurance that such sources will be adequate or
that additional funds will not be required either during or after such period.
No assurance can be given that additional financing will be available or that,
if available, it will be available on terms favorable to the Company or its
stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. If
adequate funds are not available to satisfy either short or long-term capital
requirements, the Company may be required to limit its operations significantly.
The Company's capital requirements will depend on many factors, including, but
not limited to, the rate at which the Company develops and introduces its
products, the market acceptance and competitive position of such products, the
levels of promotion and advertising required to market such products and attain
a competitive position in the marketplace, and the response of competitors to
the Company's products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

POSSIBLE VOLATILITY IN PRICE OF COMMON STOCK. The market price of the
Common Stock is likely to be volatile and may be significantly affected by
factors such as: actual or anticipated fluctuations in the Company's operating
results; the introduction of new products, new contracts or changes in pricing
policies by the Company or its competitors; developments with respect to
proprietary rights; changes in earnings estimates by analysts; conditions and
trends in the industries to which it markets its sensors as well as general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the securities of technology
companies. These broad market fluctuations, as well as general economic, market
and political conditions, may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's common stock, securities class action litigation has often
occurred against such companies. There can be no assurance that such litigation
will not occur in the future with respect to the Company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
business, operating results and financial condition. There can be no assurance
that the trading price of the Common Stock will not decline substantially below
the public offering price.

POTENTIAL FUTURE ACQUISITIONS. In the future, the Company may pursue
acquisitions of product lines, technologies or businesses. Future acquisitions
by the Company may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt and amortization
expenses related to goodwill and other intangible assets, each of which could
materially adversely affect the Company's business, operating results and
financial condition. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired company, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of the
acquired company. There are currently no negotiations, commitments or agreements
with respect to any acquisition. In the event that such an acquisition does
occur, however, there can be no assurance as to the effect thereof on the
Company's business, operating results and financial condition.

REGISTRATION RIGHTS. After giving effect to the sale of Common Stock by the
Selling Stockholder, the Selling Stockholder and James D. Crownover, the holder
of 262,602 shares of Common Stock, (together, the "Rights Holders") hold rights
to cause the Company to register up to an aggregate of 912,602 shares of Common
Stock under the Securities Act. The largest single block of these shares
entitled to registration rights is subject to the First Source Warrant. The
First Source Warrant grants First Source the right to purchase an

12
<PAGE> 13

additional 650,000 shares of Common Stock at a current price of $0.50 per share
(assuming no exercise of the Underwriters' over-allotment option). The exercise
price and number of shares are subject to adjustment upon the occurrence of
certain events in order to address dilution. The First Source Warrant expires on
October 31, 1998. Pursuant to the terms of the First Source Warrant, First
Source may require the Company to file a registration statement under the
Securities Act on one additional occasion at the Company's expense and on two
occasions at First Source's expense. The Company is required to use its best
efforts to effect such registration, subject to certain conditions and
limitations. Further, whenever the Company proposes to offer any of its
securities pursuant to a registration statement filed under the Securities Act
(other than securities to be issued solely to employees or pursuant to a
reorganization of the Company) either for its own account or for the account of
other security holders exercising registration rights, the Company is required
to notify the Rights Holders of the proposed registration and to include, at the
Company's expense, all Common Stock which the Rights Holders may request in such
registration, subject to certain conditions and limitations. The existence or
exercise of these rights may have an adverse effect on the market price for the
Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 6,966,025 shares of Common Stock outstanding. Of
these shares, 6,262,754 (6,637,754 if the Underwriters' over-allotment option is
exercised in full) shares, subject to the lock-up agreements described below,
will be freely tradeable without restriction or registration under the
Securities Act by persons other than "affiliates" of the Company, as defined
under the Securities Act. As of February 12, 1998, an additional 311,533 shares
of Common Stock are issuable under outstanding options at prices ranging from
$0.19 to $13.38 and, when issued, would be freely tradeable without restriction.
Further, First Source has indicated its intention to demand registration of the
650,000 (275,000 if the Underwriters' over-allotment option is exercised in
full) shares of Common Stock which are not sold in this Offering immediately
following termination of its lock-up period. The Company, its officers and
directors, the Selling Stockholder and James D. Crownover, beneficial holder of
262,602 shares of Common Stock, have agreed not to directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the Company
or any securities convertible into, or exercisable or exchangeable for, any
Common Stock, or other capital stock of the Company for a period of 90 days from
the date of this Prospectus without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, except that such
agreement does not prevent the Company from granting additional options under
any employee benefit plan or directors stock plan in the ordinary course of
business. Upon the expiration or release from such lock-up agreements, 1,625,873
shares will be available for immediate sale and 203,549 additional shares
subject to vested stock options could also be sold, subject in some cases to
certain volume limitations. Prudential Securities Incorporated may, in its sole
discretion, at any time and without notice, release all or any portion of the
securities subject to such lock-up agreements. Sale of such shares in the future
could adversely affect the prevailing market price of the Common Stock. No
prediction can be made as to the effect, if any, that future sales of shares or
the availability of shares for sale will have on the market price for the Common
Stock.

POTENTIAL ISSUANCE OF PREFERRED STOCK. The Board of Directors has the
authority to issue up to 1,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely and materially affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
preferred stock.

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW. The Company is subject to Section
203 of the Delaware General Corporation Law which, subject to certain
exceptions, prohibits a publicly held Delaware corporation from engaging in a
business combination (which includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder) with an
"interested stockholder" (defined generally as any person who beneficially owns
15% or more of the outstanding voting stock of the Company or any person

13
<PAGE> 14

affiliated with such person) for a period of three years following the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to such date the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, or (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which the
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (iii) on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.

14
<PAGE> 15

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of shares of the
Common Stock by the Selling Stockholder, but will receive the aggregate exercise
price of $1.25 million upon exercise of the First Source Warrant to acquire the
shares of Common Stock to be sold in this Offering. Such shares will be issued
by the Company pursuant to exercise of the First Source Warrant at a per share
price of $0.50 which will be exercised in connection with completion of the
Offering.

PRICE RANGE OF COMMON STOCK

The Common Stock is included for quotation in the Nasdaq National Market
under the symbol "OPTT." The following table sets forth the quarterly high and
low sales prices per share for the Common Stock for each quarterly period
subsequent to relisting on the Nasdaq Stock Market on April 22, 1996, and the
high and low bid prices during the first and second quarters of fiscal 1996 as
reported by various market makers. Bid prices represent quotations between
dealers in securities, without adjustment for retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996
First Quarter............................................. $ 8.25 $ 7.00
Second Quarter............................................ 14.00 9.00
Third Quarter............................................. 15.75 9.63
Fourth Quarter............................................ 11.25 9.00
FISCAL 1997
First Quarter............................................. $13.88 $ 9.00
Second Quarter............................................ 14.13 10.50
Third Quarter............................................. 16.00 11.00
Fourth Quarter............................................ 19.75 15.75
FISCAL 1998
First Quarter............................................. $23.25 $18.00
Second Quarter (through April 30, 1998)................... 27.50 20.75
</TABLE>

The last reported sales price per share of the Common Stock on April 30,
1998, as reported on the Nasdaq National Market, was $22.75. At January 16, 1998
the Company had approximately 151 stockholders of record.

DIVIDEND POLICY

The Company has never declared or paid a cash dividend on its Common Stock,
currently intends to retain any earnings for use in its business and does not
anticipate declaring or paying cash dividends on its Common Stock in the
foreseeable future. The Company's loan agreement contains covenants restricting
the Company from declaring dividends on its Common Stock exceeding 50% of its
net profit during any fiscal year. Any determination to declare and pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at that time by the Company's Board of Directors.

15
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company at January
30, 1998 and as adjusted as of that date to give effect to the Offering. This
information below should be read in conjunction with the Consolidated Financial
Statements of the Company and the related Notes thereto which are included
elsewhere herein.

<TABLE>
<CAPTION>
JANUARY 30, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued.................................... $ -- $ --
Common stock, $.01 par value. Authorized 12,000,000
shares; 4,259,534 shares issued and outstanding
(actual); 6,966,025 shares issued and outstanding (as
adjusted)(2)........................................... 43 68
Additional paid-in capital(2)............................... 14,053 15,078
Retained earnings........................................... 15,097 15,097
------- -------
Total stockholders' equity.................................. $29,193 $30,243
======= =======
</TABLE>

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

(1) Does not include, as of February 12, 1998 (i) 596,665 shares issuable upon
exercise of outstanding director and employee stock options, of which
options for 311,533 shares are exercisable immediately or within 60 days of
February 12, 1998, and (ii) 650,000 shares issuable upon exercise of the
First Source Warrant which are immediately exercisable.

(2) Assumes exercise of the First Source Warrant to acquire 2,500,000 shares at
a price of $0.50 per share and payment of all associated Offering costs by
the Company, estimated to be $200,000.

16
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data under the captions
"Statement of Operations Data" (excluding diluted earnings (loss) per share
data) and "Balance Sheet Data" as of and for each of the fiscal years in the
five-year period ended October 31, 1997, are derived from consolidated financial
statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The consolidated
financial statements as of October 31, 1997 and October 25, 1996, and for each
of the fiscal years in the three-year period ended October 31, 1997, and the
report thereon, are included herein. The selected consolidated financial data
presented below for the Company at January 31, 1997 and January 30, 1998 and for
the three month fiscal periods then ended are derived from the unaudited
consolidated financial statements of the Company which are incorporated by
reference herein. See footnote (4) to the table below concerning the retroactive
restatement of earnings (loss) per share data in compliance with SFAS No. 128.
The unaudited consolidated financial data has been prepared on a consistent
basis with the audited financial statements and in the opinion of management
include all adjustments, consisting only of normal recurring adjustments, which
are necessary for a fair presentation of the financial position and results of
operations of the Company for the periods covered thereby. Results for interim
periods are not necessarily indicative of those to be expected for the year. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the related Notes included elsewhere in the Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------------------------------------- -------------------------
OCTOBER 29, OCTOBER 28, OCTOBER 27, OCTOBER 25, OCTOBER 31, JANUARY 31, JANUARY 30,
1993(1) 1994(1)(2) 1995(2) 1996(2) 1997(3) 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 55,878 $55,625 $62,542 $67,395 $75,572 $16,689 $20,419
Cost of sales................... 46,499 38,269 38,513 39,010 43,423 10,099 12,105
-------- ------- ------- ------- ------- ------- -------
Gross profit.................. 9,379 17,356 24,029 28,385 32,149 6,590 8,314
Product development and
engineering expenses.......... 3,968 3,591 3,841 4,933 5,246 1,327 1,458
Selling, general and
administrative expenses....... 7,498 6,536 7,090 8,266 9,145 2,161 2,428
Provision for restructuring
cost.......................... 2,292 -- -- -- -- -- --
Reduction in value of deferred
costs......................... 893 -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Operating income (loss)......... (5,272) 7,229 13,098 15,186 17,758 3,102 4,428
Other (income) expense:
Interest (income) expense..... 3,952 3,685 2,960 1,292 (65) 83 (111)
Other (income) expense........ 835 365 142 (145) 59 76 15
-------- ------- ------- ------- ------- ------- -------
Total other, net................ 4,787 4,050 3,102 1,147 (6) 159 (96)
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes and extraordinary
item.......................... (10,059) 3,179 9,996 14,039 17,764 2,943 4,524
Income tax expense.............. -- -- 158 1,144 5,259 1,031 1,584
-------- ------- ------- ------- ------- ------- -------
Net income (loss) before
extraordinary item............ (10,059) 3,179 9,838 12,895 12,505 1,912 2,940
Extraordinary item, net of
income taxes.................. -- -- -- -- 1,003 -- --
-------- ------- ------- ------- ------- ------- -------
Net income (loss)............... ($10,059) $ 3,179 $ 9,838 $12,895 $11,502 $ 1,912 $ 2,940
======== ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per
share before extraordinary
item(4)....................... $ (3.12) $ 0.62 $ 1.40 $ 1.71 $ 1.63 $ 0.25 $ 0.37
Extraordinary item -- diluted
basis(4)...................... -- -- -- -- (0.13) -- --
-------- ------- ------- ------- ------- ------- -------
Diluted earnings (loss) per
share(4)...................... $ (3.12) $ 0.62 $ 1.40 $ 1.71 $ 1.50 $ 0.25 $ 0.37
======== ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding -- diluted
basis(4)...................... 3,224 5,154 7,007 7,544 7,672 7,533 7,881
======== ======= ======= ======= ======= ======= =======

BALANCE SHEET DATA:
Working capital................. $ 6,865 $ 4,830 $ 4,028 $ 6,658 $15,068 $ 6,106 $16,552
Total assets.................... 32,146 27,827 26,065 25,886 38,936 24,812 41,622
Total current liabilities....... 7,920 8,159 9,175 7,982 12,656 7,872 12,274
Long-term debt.................. 36,472 28,692 15,996 3,428 -- 271 --
Stockholders' equity
(deficit)..................... (12,340) (9,148) 810 14,067 26,163 16,271 29,193
</TABLE>

17
<PAGE> 18

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

(2) Results for fiscal 1994, 1995 and 1996 include tax benefits resulting from
utilization of net operating loss carryforwards during those years of
$305,000, $3.9 million, and $3.2 million, respectively. All such
carryforwards were fully utilized during fiscal 1996.

(4) The Company has restated all previous earnings (loss) per share data to
comply with SFAS No. 128, which became effective on a retroactive basis with
the issuance of the fiscal 1998 first quarter earnings data. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- New Accounting Standards."

18
<PAGE> 19

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

OVERVIEW

The Company is a leading designer and manufacturer of electronic sensor
components and assemblies that detect motion and position for a broad range of
applications. The Company utilizes optoelectronic and magnetic field sensing
technologies to target non-standard, customized applications that require
specialized engineering and manufacturing expertise. The Company sells its
products for end use by OEMs in the office equipment, automotive, industrial,
aerospace/defense, medical and communications markets. The Company believes that
in many cases it is the sole source supplier for specific components and
assemblies necessary for its customers' applications. In fiscal 1997, major
customers included C.P. Clare Corporation, General Motors Corporation, Pitney
Bowes, Inc., Strattec Security Corporation and Xerox Corporation.

The following table sets forth the Company's net sales by target market for
the last three fiscal years:

<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 25, OCTOBER 31,
1995 1996 1997
---------------- ---------------- ----------------
ACTUAL PERCENT ACTUAL PERCENT ACTUAL PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Office equipment...................... $24.8 39.7% $24.7 36.7% $25.4 33.6%
Automotive............................ 9.5 15.2 12.9 19.1 19.1 25.3
Industrial............................ 16.0 25.6 17.6 26.1 18.7 24.7
Aerospace/defense..................... 6.4 10.2 6.0 8.9 6.0 7.9
Medical............................... 4.1 6.6 4.0 5.9 4.4 5.8
Communications........................ 1.7 2.7 2.2 3.3 2.0 2.7
----- ----- ----- ----- ----- -----
Total net sales....................... $62.5 100.0% $67.4 100.0% $75.6 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

The Company's primary business has been focused on the design and
manufacture of optoelectronic semiconductor chips, discrete components and
assemblies for commercial (i.e., office equipment, industrial, medical and
communications) OEMs. The Company's commercial products include a wide array of
custom electronic components and assemblies which are each designed to address
specific applications required by its diverse customer base. Demand by
commercial customers for the Company's sensors is driven by sales of OEM
products that incorporate the Company's sensors and frequently have life cycles
ranging from three to 15 years. Often, the Company is able to leverage its
specialized engineering expertise and close customer relationships to assist in
the design of its customers' next generation of products, which significantly
increases the Company's ability to secure continuing sales from these customers
as their product lines evolve. As a result, commercial OEMs have represented a
relatively stable and predictable sales base for the Company.

The Company believes that the automotive sector represents its primary
opportunity for growth as an increasing number of sensors are being incorporated
into automobiles to improve fuel efficiency and emissions, increase passenger
safety and provide additional consumer options. The Company believes this trend
will continue as governmental regulations mandate improved passenger safety and
reduced emissions and consumers demand better safety and performance and
increased functionality. As a result of its strategic pursuit of the automotive
market, the Company's sales to the automotive market have grown from 2% to 25%
of net sales from fiscal 1992 to fiscal 1997. The Company presently sells
electronic sensors for use in General Motors' automobile ignition and theft
deterrent systems. In addition, the Company's engineering and manufacturing
expertise and customer relationships have resulted in the Company being awarded
other automotive programs. Currently, a substantial portion of the Company's
automotive assemblies are sold for use in a relatively small number of
applications. The Company's growth rate has been more significantly impacted by
the addition of new programs than growth in existing programs. Therefore, the
Company's year-to-year growth rate depends largely upon the number, size and
timing of new programs added, if any.

Gross margins have increased from 31.2% in fiscal 1994 to 42.5% in fiscal
1997. Gross margins are subject to fluctuation depending upon numerous factors,
including pricing pressure from OEMs, cost of materials and direct labor costs.
There is continuing pressure on OEMs to reduce costs, including costs associated
with

19
<PAGE> 20

outside suppliers such as the Company. In some cases, the Company sells products
under agreements requiring the Company to reduce its per unit price over time.
The Company's other products, which are subject to periodic re-quotation, may
also experience declining average selling prices over their life cycles. If the
Company is unable to make corresponding product cost reductions or introduce new
products with higher gross margins, such declining average selling prices may
reduce the Company's product gross margin.

The Company has commenced expenditures to increase manufacturing capacity
and engineering resources in anticipation of additional potential net sales. In
the event that such additional net sales do not materialize when and as
anticipated, such expenditures could adversely affect the Company's gross
margins and operating margins.

The combined effect of higher sales volumes and improved gross margins
enabled the Company to generate sufficient cash flows to pay down its long-term
debt from a high of $39.0 million at the end of fiscal 1992 to $0 by the end of
the second fiscal quarter of 1997. As a result, interest expense was reduced
from $4.0 million during fiscal 1993 to $110,000 in fiscal 1997.

Results for fiscal 1995 and 1996 include tax benefits resulting from
utilization of net operating loss carryforwards for book and tax purposes during
those years of $3.9 million and $3.2 million, respectively. All such
carryforwards were fully utilized during fiscal 1996.

Over 80% of the Company's components and assemblies are produced in
facilities operated by the Company in Juarez, Mexico. The Company is not subject
to significant exchange risk because currency required for those operations is
transferred as needed to pay related expenses and no significant balance of
funds is maintained in any foreign currency. Exchange gains and losses related
to such operations have been immaterial in the past. The United States dollar
has been determined to be the functional currency for all foreign operations.

During fiscal 1997, international sales accounted for approximately $17.4
million, or approximately 23% of net sales, as compared to $18.9 million, or
approximately 28% of net sales, during fiscal 1996, and $16.9 million, or
approximately 27% of net sales, during fiscal 1995.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's statements of
income:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- -----------------------------
OCT. 27, 1995 OCT. 25, 1996 OCT. 31, 1997 JAN. 31, 1997 JAN. 30, 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 61.6 57.9 57.5 60.5 59.3
----- ----- ----- ----- -----
Gross profit....................... 38.4 42.1 42.5 39.5 40.7
Product development and engineering
expenses........................... 6.1 7.3 6.9 8.0 7.1
Selling, general and administrative
expenses........................... 11.3 12.3 12.1 12.9 11.9
----- ----- ----- ----- -----
Operating income..................... 21.0 22.5 23.5 18.6 21.7
Other (income) expense............... 5.0 1.7 -- 1.0 (0.5)
----- ----- ----- ----- -----
Income before income taxes and
extraordinary item................. 16.0 20.8 23.5 17.6 22.2
Income tax expense................... 0.3 1.7 7.0 6.1 7.8
Extraordinary item, net of income
taxes.............................. -- -- 1.3 -- --
----- ----- ----- ----- -----
Net income........................... 15.7% 19.1% 15.2% 11.5% 14.4%
===== ===== ===== ===== =====
</TABLE>

20
<PAGE> 21

Three Months Ended January 30, 1998 Compared to Three Months Ended January 31,
1997

Net sales for the first three months of fiscal 1998 were $20.4 million, an
increase of $3.7 million or 22%, compared to net sales of $16.7 million for the
first three months of fiscal 1997. The increase was the result of higher sales
volume in automotive products primarily attributable to sales of sensor
assemblies for use in a passlock theft deterrent system on model 1998 trucks and
sport utility vehicles.

Gross profit in the first three months of fiscal 1998 was $8.3 million, or
40.7% of net sales, compared to $6.6 million, or 39.5% of net sales, in the
comparable period of fiscal 1997. The increase in absolute dollars resulted
primarily from the higher net sales volume in automotive products.

Product development and engineering expenses during the first three months
of fiscal 1998 were $1.5 million, or 7.1% of net sales, compared to $1.3
million, or 8.0% of net sales, during the comparable period of the prior fiscal
year. Although expenses in absolute dollars were up slightly from the prior
year, they are down as a percentage of net sales due to the increase in net
sales for the period. These expenses were primarily related to the development
of new products and processes as well as ongoing engineering support. The
Company anticipates expenditures to increase in absolute dollars during fiscal
1998 in order to support new product development and expand ongoing engineering
support.

Selling, general and administrative expenses during the first three months
of fiscal 1998 were $2.4 million, or 11.9% of net sales, compared to $2.2
million, or 12.9% of net sales, in the first three months of fiscal 1997.
Although expenses in absolute dollars were up slightly from the prior year, they
are down as a percentage of net sales due to the increase in net sales for the
period.

Operating income for the first three months of fiscal 1998 was $4.4
million, or 21.7% of net sales, versus $3.1 million, or 18.6% of net sales,
during the comparable period of fiscal 1997. The increase in operating income
was attributable primarily to higher net sales volume.

Other (income) expense was $96,000 income for the first three months of
fiscal 1998 as compared to $159,000 expense for the comparable period of fiscal
1997. Other (income) expense consisted primarily of interest income of $111,000
in the first three months of fiscal 1998 and interest expense of $83,000 in the
comparable period of fiscal 1997. The Company repaid the remaining balance of
long-term debt during the second quarter of fiscal 1997 and has earned interest
income on accumulated cash balances since that time.

Income tax expense for the first three months of fiscal 1998 was $1.6
million, or 7.8% of net sales, compared to $1.0 million, or 6.1% of net sales,
in the same period of fiscal 1997. The increase in tax expense for the period
was attributable to higher income. The effective tax rate for both periods was
35%.

As a result of the factors discussed above, net income for the first three
months of fiscal 1998 was $2.9 million, or 14.4% of net sales, compared to $1.9
million, or 11.5% of net sales, in the first three months of fiscal 1997.

Fiscal Year Ended October 31, 1997 Compared to Fiscal Years Ended October 25,
1996 and October 27, 1995

Net sales for fiscal 1997 were $75.6 million compared to $67.4 million in
fiscal 1996 and $62.5 million in fiscal 1995. The increase from fiscal 1996 to
fiscal 1997 of $8.2 million, or 12.1%, was primarily the result of higher
automotive net sales of $6.2 million and higher commercial (i.e., office
equipment, industrial, medical and communications) net sales of $2.0 million.
The significant increase in automotive net sales was primarily attributable to
sales of sensor assemblies for use in a new theft deterrent system for model
year 1998 trucks and sport utility vehicles. The increase from fiscal 1995 to
fiscal 1996 of $4.9 million, or 7.8%, was the result of increases in automotive
net sales of $3.4 million and commercial net sales of $1.9 million, partially
offset by a decrease in aerospace/defense optoelectronic product net sales of
$400,000.

Gross profit in fiscal 1997 was $32.1 million, or 42.5% of net sales,
compared to $28.4 million, or 42.1% of net sales, in fiscal 1996 and $24.0
million, or 38.4% of net sales, in fiscal 1995. The increase from fiscal 1996 to
fiscal 1997 was primarily attributable to the higher net sales volume in
automotive and commercial products in fiscal 1997. The increase from fiscal 1995
to fiscal 1996 was the result of higher net sales volumes in

21
<PAGE> 22

automotive and commercial products, which increased in absolute dollars and
resulted in lower unabsorbed fixed costs, continued efforts to reduce
manufacturing cycle times, favorable peso exchange rates as well as cost
reduction and yield improvement programs.

Product development and engineering expenses in fiscal 1997 were $5.2
million, or 6.9% of net sales, compared with $4.9 million, or 7.3% of net sales,
in fiscal 1996 and $3.8 million, or 6.1% of net sales, in fiscal 1995. These
expenses were primarily related to the development of new applications and
processes. Although expenses were up slightly in absolute dollars from 1996 to
1997, they declined as a percentage of net sales due to the increase in net
sales. The increase in fiscal 1996 compared to fiscal 1995 was related to
additional development expenses for fiber optic connector products used in
telecommunications and for magnetoresistive technologies for automotive
applications. In addition, certain expenses were incurred to refurbish the
Company's engineering and product development labs. The Company anticipates
expenditures to increase in absolute dollars in fiscal 1998 primarily to support
the development of new products.

Selling, general and administrative expenses in fiscal 1997 were $9.1
million, or 12.1% of net sales, compared to $8.3 million, or 12.3% of net sales,
in fiscal 1996 and $7.1 million, or 11.3% of net sales, in fiscal 1995. The
increase in absolute dollars from fiscal 1996 to fiscal 1997 was primarily
related to additional commissions earned on increased net sales volume. The
increase from fiscal 1995 to fiscal 1996 was primarily attributable to
additional sales commissions earned on higher net sales volume and expenses
related to refurbishment of the sales and customer service offices.

As a result of the factors discussed above, operating income for fiscal
1997 was $17.8 million, or 23.5% of net sales, compared to $15.2 million, or
22.5% of net sales, in fiscal 1996 and $13.1 million, or 21.0% of net sales, in
fiscal 1995.

Other (income) expense for fiscal 1997 was $6,000 of income as compared to
$1.1 million of expense in fiscal 1996 and $3.1 million of expense in fiscal
1995. Other (income) expense consists primarily of interest income net of
interest expense in fiscal 1997 and interest expense in fiscal 1996 and fiscal
1995. Interest expense decreased in fiscal 1997 and fiscal 1996 due to the
continued reduction and eventual retirement, in fiscal 1997, of long-term debt.
Net interest in fiscal 1997 consisted of $110,000 of interest expense and
$175,000 of interest income.

Income tax expense was $5.3 million, or 7.0% of net sales, in fiscal 1997
compared to $1.1 million, or 1.7% of net sales, in fiscal 1996 and $158,000, or
0.3% of net sales, in fiscal 1995. The Company's effective tax rate increased in
fiscal 1997 and fiscal 1996 as a result of the Company fully utilizing its
remaining net operating loss carryforwards during the fourth quarter of fiscal
1996. As a result, income for fiscal 1997 was taxed at the effective rate of
29.6%, which was lower than the statutory rate primarily due to research and
experimentation tax credits.

In the fourth quarter of fiscal 1997, the Company agreed to pay First
Source, its former lender, $1.5 million to release all debt obligations,
including contingent additional interest, under the credit facility and other
restrictive covenants. The provision for payment, net of related income tax
benefits of $542,000, was classified as an extraordinary item. See Note 5 to the
Consolidated Financial Statements.

As a result of the factors discussed above, net income for fiscal 1997 was
$11.5 million compared to $12.9 million in fiscal 1996 and $9.8 million in
fiscal 1995.

22
<PAGE> 23

QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly results for the last nine
quarters. The information has been prepared by the Company on a basis consistent
with the Company's audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of the information for the periods presented.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997 FISCAL 1998
------------------------------------- ------------------------------------- -----------
JAN. 26 APR. 26 JULY 26 OCT. 25 JAN. 31 MAY 2 AUG. 1 OCT. 31 JAN. 30
------- ------- ------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... $15,040 $18,051 $16,834 $17,470 $16,689 $18,251 $18,763 $21,869 $20,419
Cost of sales....................... 9,275 10,369 9,464 9,902 10,099 10,750 10,522 12,052 12,105
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... 5,765 7,682 7,370 7,568 6,590 7,501 8,241 9,817 8,314
Product development and engineering
expenses.......................... 1,143 1,307 1,286 1,197 1,327 1,320 1,205 1,394 1,458
------- ------- ------- ------- ------- ------- ------- ------- -------
Selling, general and administrative
expenses.......................... 2,123 2,171 1,869 2,103 2,161 2,151 2,268 2,565 2,428
------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses...................... 3,266 3,478 3,155 3,300 3,488 3,471 3,473 3,959 3,886
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income.................... 2,499 4,204 4,215 4,268 3,102 4,030 4,768 5,858 4,428
Other (income) expense.............. 399 311 296 141 159 3 (68) (100) (96)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes and
extraordinary item................ 2,100 3,893 3,919 4,127 2,943 4,027 4,836 5,958 4,524
Income tax expense.................. 55 274 352 463 1,031 1,408 1,692 1,128 1,584
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income before extraordinary
item.............................. 2,045 3,619 3,567 3,664 1,912 2,619 3,144 4,830 2,940
Extraordinary item, net of income
taxes............................. -- -- -- -- -- -- -- 1,003 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.......................... $ 2,045 $ 3,619 $ 3,567 $ 3,664 $ 1,912 $ 2,619 $ 3,144 $ 3,827 $ 2,940
======= ======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share:
Earnings before extraordinary
item.............................. $ 0.58 $ 0.96 $ 0.93 $ 0.92 $ 0.46 $ 0.63 $ 0.75 $ 1.13 $ 0.69
Extraordinary item.................. -- -- -- -- -- -- -- (0.23) --
------- ------- ------- ------- ------- ------- ------- ------- -------
Basic earnings per share............ $ 0.58 $ 0.96 $ 0.93 $ 0.92 $ 0.46 $ 0.63 $ 0.75 $ 0.90 $ 0.69
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding....................... 3,521 3,787 3,848 3,964 4,150 4,172 4,188 4,260 4,273
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share:
Earnings before extraordinary
item.............................. $ 0.28 $ 0.48 $ 0.47 $ 0.48 $ 0.25 $ 0.34 $ 0.41 $ 0.62 $ 0.37
Extraordinary item.................. -- -- -- -- -- -- -- (0.13) --
------- ------- ------- ------- ------- ------- ------- ------- -------
Diluted earnings per share.......... $ 0.28 $ 0.48 $ 0.47 $ 0.48 $ 0.25 $ 0.34 $ 0.41 $ 0.49 $ 0.37
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding -- diluted basis...... 7,413 7,572 7,602 7,590 7,533 7,642 7,674 7,846 7,881
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

23
<PAGE> 24

The following table sets forth certain revenue and expense items as a
percentage of net sales for the indicated quarterly periods.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997 FISCAL 1998
------------------------------------- ---------------------------------- -----------
JAN. 26 APR. 26 JULY 26 OCT. 25 JAN. 31 MAY 2 AUG. 1 OCT. 31 JAN. 30
------- ------- ------- ------- ------- ----- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 61.7 57.5 56.2 56.7 60.5 58.9 56.1 55.1 59.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit......................... 38.3 42.5 43.8 43.3 39.5 41.1 43.9 44.9 40.7
Product development and engineering
expenses............................. 7.6 7.2 7.0 6.9 8.0 7.2 6.4 6.4 7.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Selling, general and administrative
expenses............................. 14.1 12.0 11.1 12.0 12.9 11.8 12.1 11.7 11.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Total expenses......................... 21.7 19.2 18.7 18.9 20.9 19.0 18.5 18.1 19.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income....................... 16.6 23.3 25.1 24.4 18.6 22.1 25.4 26.8 21.7
Other (income) expense................. 2.6 1.7 1.8 0.8 1.0 0.0 (0.4) (0.4) (0.5)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes and
extraordinary item................... 14.0 21.6 23.3 23.6 17.6 22.1 25.8 27.2 22.2
Income tax expense..................... 0.4 1.5 2.1 2.6 6.1 7.7 9.0 5.1 7.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before extraordinary item....... 13.6 20.1 21.2 21.0 11.5 14.4 16.8 22.1 14.4
Extraordinary item net of income
taxes................................ -- -- -- -- -- -- -- 4.6 --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income............................. 13.6% 20.1% 21.2% 21.0% 11.5% 14.4% 16.8% 17.5% 14.4%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

The Company's net sales and other operating results have varied on a
quarterly and an annual basis in the past and may vary significantly in the
future. The Company's first fiscal quarter, which ends in January, includes the
holiday season, which adversely impacts customer order entry, and also includes
an annual manufacturing facilities shutdown, and has therefore traditionally
been the Company's lowest quarter of the fiscal year in terms of net sales and
operating income. Historically, the Company's net sales have been lower in such
quarter than in the immediately preceding quarter. The Company's third fiscal
quarter has in the past been affected by the extended vacation season in Europe,
which reduces international sales during that period. The Company's net sales
and operating results could be materially and adversely affected by many
factors, some of which are partially or wholly outside the control of the
Company, including, among others: failure to be selected to supply sensors for
new products and programs; quality control of products sold; the relatively long
sales and development cycle for the Company's products; the Company's ability to
introduce new products and technologies on a timely basis; market acceptance of
the Company's and its customers' products; the timing, deferral or cancellation
of customer orders and related shipments; competitive pressures on selling
prices; availability of raw materials; fluctuations in yields; changes in
product mix; changes in the lead time required to ship products after receipt of
an order; introduction of products and technologies by the Company's competitors
and customers; personnel changes and difficulties in attracting and retaining
qualified technical personnel; and economic conditions both generally and, in
particular, in the automotive and commercial markets.

LIQUIDITY AND CAPITAL RESOURCES

The Company generated approximately $14.3 million in cash from operations
during fiscal 1997. The largest uses of cash were the retirement of long-term
debt during the first and second quarters of the fiscal year in the amount of
$3.4 million, and the purchase of manufacturing equipment throughout the year in
the amount of $2.0 million. At fiscal year end, the Company's working capital
was $15.1 million, including $9.8 million of cash and cash equivalents.

The Company anticipates that additional manufacturing capacity, primarily
in Mexico, will be required to support potential growth over the next several
years. Therefore, capital expenditures are planned to increase to a total of
approximately $10 to $15 million to be expended over the next two to three
fiscal years to support potential future growth in demand for the Company's
products. The timing and amount of such expenditures is subject to adjustment
based upon continued evaluation by management.

24
<PAGE> 25

In addition, the Company is negotiating to purchase the facility it
currently leases in Juarez, Mexico and has entered into a letter of intent to
acquire that building for $1.75 million.

In January 1998, the Company obtained a three-year $10.0 million unsecured
line of credit from NationsBank N.A. Borrowings under this facility bear
interest, at the option of the Company, either at (i) a LIBOR-based rate plus a
margin ranging from 1.00% per annum to 1.50% per annum, depending upon the
Company's ratio of indebtedness to operating income, or (ii) a base rate equal
to a reference rate plus a margin ranging from -1.00% to 0%, depending upon the
Company's ratio of indebtedness to operating income. These facilities contain
customary covenants that, among other things: require the maintenance of certain
financial ratios relating to fixed charge and interest coverage and debt and
equity amounts; require the maintenance of certain net worth levels; restrict
liens on Company and subsidiary assets; and limit the payment of cash dividends.

The Company anticipates that it will generate sufficient cash flow from
operations to meet its obligations, including capital requirements, for the next
12 months. However, an unanticipated expansion or contraction of its business or
future acquisitions may require the Company to draw upon its existing credit
line or obtain other financing.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
00 as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

The Company is committed to a successful and timely Year 2000 conversion
and funds are dedicated and available for this project. The Company anticipates
maintaining its centralized hardware platform, but replacing or upgrading most
of the software. In addition, all PCs, HVAC, test equipment and external
providers will be reviewed and acted on accordingly. Although the Company has
only recently initiated its Year 2000 compliance program, the Company
anticipates that it will be fully Year 2000 compliant by April 30, 1999.

The Year 2000 Issue is not expected to have a material adverse effect on
the Company's results of operations. See "Risk Factors -- Year 2000 Compliance."

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, which establishes new standards for computing and presenting earnings per
share. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior-period earnings per share data. Early application of
SFAS No. 128 is not permitted. Effective November 1, 1997, the Company has
adopted on a retroactive basis SFAS No. 128, which requires the dual
presentation of basic and diluted earnings per share on the Company's
consolidated statements of income. All earnings per share data included herein
has been restated in compliance with SFAS No. 128 with the issuance of the
fiscal 1998 first quarter earnings date.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), Reporting Comprehensive
Income, and Statement of Financial Accounting Standards No. 131 (SFAS No. 131),
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
130 and SFAS No. 131 are effective for financial statements issued for periods
beginning after December 15, 1997. The Company does not expect these standards
to have a significant impact on the consolidated financial statements.

25
<PAGE> 26

BUSINESS

INTRODUCTION

The Company is a leading designer and manufacturer of electronic sensor
components and assemblies that detect motion and position for a broad range of
applications. The Company utilizes optoelectronic and magnetic field sensing
technologies to target customized, non-standard applications that require
specialized engineering and manufacturing expertise. The Company sells its
products for end use by OEMs in the office equipment, automotive, industrial,
aerospace/defense, medical and communications markets. The Company believes that
in many cases it is the sole source supplier for specific components and
assemblies necessary for its customers' applications. In fiscal 1997 major
customers of the Company included C.P. Clare Corporation, General Motors
Corporation, Pitney Bowes, Inc., Strattec Security Corporation and Xerox
Corporation.

The Company's primary business has been focused on the design and
manufacture of optoelectronic semiconductor chips, discrete components and
assemblies for commercial (i.e., office equipment, industrial, medical and
communications) OEMs. The Company's commercial products include a wide array of
custom electronic components and assemblies which are each designed to address
specific applications required by its diverse customer base. Demand by
commercial customers for the Company's sensors is driven by sales of OEM
products that incorporate the Company's sensors and frequently have life cycles
ranging from three to 15 years. Often, the Company is able to leverage its
specialized engineering expertise and close customer relationships to assist in
the design of its customers' next generation of products, which significantly
increases the Company's ability to secure continuing sales from these customers
as their product lines evolve. As a result, commercial OEMs have represented a
relatively stable and predictable sales base for the Company.

The Company has leveraged its expertise in commercial markets to develop
customized electronic sensors to address the growing application requirements of
the automotive market. The Company believes that the automotive sector
represents its primary opportunity for growth as an increasing number of sensors
are being incorporated into automobiles to improve fuel efficiency and
emissions, increase passenger safety and provide additional consumer options.
The Company believes this trend will continue as governmental regulation
mandates improved passenger safety and reduced emissions and consumers demand
better safety and performance and increased functionality. As a result of its
strategic pursuit of the automotive market, the Company's sales to the
automotive market have grown from 2% to 25% of net sales from fiscal 1992 to
fiscal 1997. The Company presently sells electronic sensors for use in General
Motors' automobile ignition and theft deterrent systems. In addition, the
Company's engineering and manufacturing expertise and customer relationships
have resulted in the Company being awarded other automotive programs. Currently,
a substantial portion of the Company's automotive assemblies are sold for use in
a relatively small number of applications. The Company's growth rate has been
more significantly impacted by the addition of new programs than growth in
existing programs. Therefore, the Company's year-to-year growth rate depends
largely upon the number, size and timing of new programs added, if any.

INDUSTRY BACKGROUND

The use of electronic sensors is playing a key role in the increasing
convenience, functionality, safety and performance of many products. Sensors are
electronic devices that detect the presence or amount of a physical stimulus
such as temperature, motion, position or pressure. The sensor converts the
detected stimuli into electrical signals which can be interpreted by a
microprocessor to initiate a desired response. In essence, sensors act as the
interface between the physical world and electronic systems.

Electronic sensors operate without physical contact and are generally
capable of more accurate, reliable and sensitive detection than standard
mechanical or electromechanical devices. These characteristics coupled with
generally increased speed, durability and compactness, have prompted the use of
electronic sensors in

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<PAGE> 27

applications that previously used mechanical and electromechanical switches. For
example, to achieve higher reliability, lower maintenance costs, increased fuel
efficiency and better emission control, automobile engine manufacturers are
utilizing electronic sensors to control the firing of spark plugs in ignition
systems, thereby replacing the traditional mechanical distributor. In addition,
sensors are being used to offer increased functionality and performance in
products. For example, electronic sensors are used in vending and coin changing
machines to determine whether the currency tendered is counterfeit.

Two major types of electronic sensors are optoelectronic and magnetic.
Optoelectronic sensors use a light emitting diode ("LED") and a photosensitive
receiver to detect light as a means of sensing motion, speed or position. For
example, in security systems, optoelectronic sensors sense the interruption of a
beam of light; in communications products, they transmit and receive data over
fiber optic cables; in military applications, they assist a missile's guidance
system in controlling direction; and in computer peripherals, they enable a tape
drive to sense the edge of the tape. Magnetic sensors detect small changes in a
magnetic field. Magnetic sensors are well-suited for use in environments where
the presence of dirt, heat or other hostile conditions could reduce the accuracy
and reliability of light-based optoelectronic sensors, such as in certain
automotive applications.

Electronic sensors generally divide into two categories: standardized
products which are produced to general specifications and customized products
which are designed to meet customer specific applications using significant
technical expertise. The use of custom sensors to perform basic product
functions in various commercial applications such as high-end office equipment
and certain industrial applications is well established and these markets have
presented a relatively steady sales base. However, growth in the use of sensors
in automotive applications has been driven by governmental regulation of the
environment and passenger safety and by consumer preferences, which have
required greater fuel efficiency, better emission control, additional safety
features and more passenger options in automobiles. These applications drive the
demand for more and better sensors. For example, ignition systems using magnetic
sensors, which have replaced the mechanical distributor in certain automobiles,
are better able to control the firing of the spark plugs, thus improving fuel
efficiency and reducing pollution. As new automobile designs incorporate more
and increasingly sophisticated electronics, the demand for sensors in automotive
applications is expected to continue to increase.

BUSINESS STRATEGY

The Company's objective is to maintain and enhance its position as a
leading designer and manufacturer of custom electronic sensors. Key elements of
the Company's business strategy include:

Leverage Expertise in Custom Applications. The Company has structured its
operations to effectively and efficiently handle the design and manufacture of
customer-specific products. Companies that compete on the basis of the
functionality and performance of their products often require sensors that are
unique and specific to their product. A customer's application typically
requires particular electrical, optical and mechanical packaging
characteristics. The Company's engineering and technical expertise have made it,
in many cases, an integral part of its OEM customers' design teams. This
expertise and the Company's close customer relationships have helped it to
develop a stable business to commercial (i.e., office equipment, industrial,
medical and communications) customers.

Pursue Additional Automotive Applications. The Company has leveraged its
expertise in commercial markets to develop customized electronic sensors to
address the growing application requirements of the automotive market. An
increasing number of sensors are being incorporated into automobiles to improve
fuel efficiency, increase safety and provide additional passenger options. The
Company believes this trend will continue as governmental regulations mandate
increases in safety and decreases in emissions and as consumers demand better
performance and increased functionality. In fiscal 1992, the Company began
production and sale of magnetic field sensors for automotive applications and
continued efforts to identify additional applications. As a result of this
strategic pursuit of the automotive market, by fiscal 1997 automotive sales
represented approximately 25% of net sales. In late 1997, the Company obtained
QS-9000 certification, a rigorous quality standard required by the Big Three
auto makers. In order to expand the range

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<PAGE> 28

of automotive applications which can be addressed, the Company has developed
magnetoresistive sensors, which have sensitivity characteristics particularly
useful in automotive applications. The Company is also adding engineering and
manufacturing resources primarily to enable the handling of additional
development programs for automotive customers.

Leverage Vertically Integrated Manufacturing Capabilities. The Company
believes its high degree of control of the manufacturing process and stringent
quality control procedures are competitive advantages. The Company's vertically
integrated manufacturing structure enables it to exercise better control
throughout manufacturing processes and to respond on a timely basis to customer
requests for development of new products and design changes to existing
products. The Company manufactures sensor and LED semiconductor chips; tools and
plastic molds; plastic assemblies; discrete, assembly, hybrid and high
reliability components; printed circuit boards and wire and cable assemblies.

Utilize Multiple Sales Channels for Effective Market Coverage. The Company
sells its products through a combination of direct technical sales personnel
(eight in the United States and three in Europe), 20 independent manufacturers'
representatives and 42 electronics parts distributors, both domestically and
internationally. These multiple sales channels enable more efficient and wider
coverage of available markets. The Company's technical sales personnel, together
with the Company's engineering staff, seek to develop long-term relationships
with customers by working closely with them throughout all phases of new product
development and subsequent production. In addition, independent manufacturers'
representatives, which are selected on their ability to effectively interface
with its customers' engineers, provide additional market coverage for the
Company. Distributors are typically utilized where customers desire to outsource
their electronics parts purchasing and inventory functions. The Company believes
that the combination of its own technical sales people together with independent
sales representatives and distributors allows the Company to market its products
in an efficient cost-effective manner.

PRODUCTS AND TECHNOLOGY

Optoelectronic Sensor Products

The largest portion of the Company's current business consists of the
design, manufacture and sale of custom devices which use optoelectronic
technology to satisfy the sensor requirements of its customers in all of its
target markets. During 1997, sales of optoelectronic devices accounted for
approximately 75% of the Company's net sales. Optoelectronic sensors use a light
emitting diode ("LED") and a photosensitive receiver to detect light as a means
of sensing motion, speed or position. For example, certain security systems emit
a beam of light which is received by a sensor. The interruption of this beam
causes an electrical response in the sensor which activates the alarm.

The Company's optoelectronic products consist of: (i) infrared light
emitting and light sensing semiconductor chips; (ii) discrete components, which
are plastic or metal packages housing the light emitting or light sensing chips;
(iii) assemblies, which combine the light emitting and light sensing discrete
components in a single package to meet various electrical and/or mechanical
specifications; and (iv) fiber optic products, which use light emitting and
light sensing technologies to transmit and receive light signals for data
transmission through fiber optic cables.

The following paragraphs describe these optoelectronic devices and their
basic principles of operation.

Semiconductor Chips. Light emitting and light sensing semiconductor chips
are the core elements in the Company's optoelectronic products. LED chips emit
light in response to an electrical charge. The Company

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<PAGE> 29

manufactures light emitting chips from gallium arsenide and gallium aluminum
arsenide wafers using standard semiconductor manufacturing techniques.

Light sensors are semiconductor chips which convert light into electrical
signals and can be used to sense and relay the signal produced by an LED. The
Company produces light sensitive chips from polished silicon slices using
standard silicon semiconductor manufacturing processes. The Company's light
sensing chips have varying characteristics of speed, sensitivity and
performance, which permit the Company to address applications requiring varying
specifications. For example, less sensitive chips may perform better in
applications where more ambient light is present that might otherwise cause a
false signal. Other chips incorporate transistors as an integral part of the
chip, which amplifies the signal received.

In addition, the Company has developed light sensors with analog or digital
output characteristics. Less sophisticated light sensors, which are analog in
nature, produce electricity in proportion to the amount of light applied. While
analog output must be processed before it can be communicated to a logic device
such as a microprocessor, digital output can be transmitted directly to a logic
device without processing. The Company's digital chips are marketed under the
trademark Photologic(R). The versatility of the Photologic(R) chip's output
geometry allows it to drive multiple outputs, potentially resulting in customer
savings in system processing circuitry.

The Company has also developed a Photologic(R) chip with low level input
detection and on-chip voltage regulation. The former characteristic is
particularly useful in fiber optics where the signal transmitted may be a very
low-level signal. The latter characteristic enables the chip to function under
fluctuating power conditions and has a wide range of applications, for example,
with battery-powered devices or under conditions of heavy electrical
interference.

The Company uses a substantial portion of the semiconductor chips it
manufactures in its discrete components. On occasion, however, the Company does
design and manufacture custom semiconductor chips for specific customer
applications.

Discrete Components. Discrete components incorporate the Company's LED or
sensor chips in either plastic or metal packages which protect the chip and
control the focus of light to or from the chip. These components form an
integral part of the assemblies manufactured by the Company. In manufacturing
discrete components, LED or sensor chips are mounted on lead frames or headers,
a wire is bonded from the chip to the lead, and the device is housed in a
plastic or metal package. While most of the Company's discrete components are
used in its own assembly manufacturing operations, the Company also manufactures
and sells discrete components to OEMs, which integrate them into their own
products, and through independent distributors.

Assemblies. Most of the Company's business is directed to the sale of
custom assemblies which are designed to be easily integrated into the customer's
products. In assemblies, the LED and sensor components are incorporated in
physical packaging capable of withstanding rigorous environmental conditions of
temperature, acceleration or mechanical shock. Generally, discrete LED and
sensor components are used in combination with one another in interruptive or
reflective assemblies. Each of these assemblies includes a discrete emitter, a
light transmission path and a discrete sensing component. The sensing function
occurs when an object interrupts the light transmission path from emitter to
sensor or reflects the emitted light back to the sensor.

Optoelectronic LEDs and sensors can also be paired in sealed couplings to
isolate electrical noise or high voltage from an electrical circuit. These
coupled assemblies are used to protect computers and other sensitive circuits
from potentially damaging electrical surges or electrical noise.

Fiber Optic Products. As a complement to its other optoelectronic devices,
the Company manufactures fiber optic LEDs and sensors. The Company uses its LED
and sensor technology to provide the light signal and receiver products for data
transmission through fiber. These products allow electronic equipment, such as
energy management systems, computers and even telephones, to communicate over
thin lightweight cables of glass or plastic fiber.

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<PAGE> 30

Magnetic Sensor Products

During fiscal 1992, the Company began production of Hall Effect (magnetic
field sensing) devices which sense physical events by reacting to changes in
magnetic fields. As the magnetic field applied to the sensor changes, the sensor
produces a signal which is relayed to a control device. Since magnetic fields
are relatively unaffected by the cleanliness of the environment, magnetic
devices can be used in environments in which a clear optical path is inhibited.
Because the presence of oil and dirt is characteristic of automotive
applications, magnetic sensing devices are particularly useful in such
applications. For example, magnetic devices sense rotation of gears in
automobiles for various applications where the presence of dirt and oil would
make the application of optoelectronic technology impractical. The first
practical application of this technology by the Company was the production of
crankshaft and camshaft sensors used in conjunction with ignition systems on
automobiles. The Company also produces a magnetic sensor used in an automotive
theft deterrent system. The Company has sought to utilize the expertise and
experience gained through its initial automotive programs to identify and
participate in additional sensor programs. Presently, most automotive
applications served by the Company's products use magnetic sensors, although the
Company has begun to introduce optoelectronic technology in a few automotive
applications. To date, few applications for magnetic sensors have been developed
by the Company outside automotive applications.

As with the manufacture of optoelectronic products, the Company is
vertically integrated and capable of producing each of the elements incorporated
into its magnetic sensor assemblies. The basic building block of each device is
a semiconductor chip which reacts to fluctuations in a magnetic field. The
Company produces its own magnetic sensor chips through processes and techniques
similar to those used for manufacturing the Company's light sensing chips. These
chips are mounted into discrete components, which are incorporated into custom
assemblies.

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<PAGE> 31

CUSTOMERS AND APPLICATIONS

The following table identifies representative customers in each of the
Company's target markets, the technology utilized and the applications which the
Company's products address for each.

<TABLE>
<CAPTION>
CUSTOMER SENSOR TECHNOLOGY CUSTOMER APPLICATION
-------- ----------------- --------------------
<S> <C> <C>
AUTOMOTIVE
- ---------------------------
General Motors Corporation Magnetic Camshaft and crankshaft position sensing
Strattec Security Magnetic Ignition security systems
Corporation

OFFICE EQUIPMENT
- ---------------------------
Xerox Corporation Optoelectronic Paper sensing, toner sensing for copiers
Pitney Bowes, Inc. Optoelectronic Paper motion sensing, encoders for postal
equipment
NCR Corporation Optoelectronic Automated teller machines
Eastman Kodak Company Optoelectronic Copiers/photolab processing
Quantum Corp. Optoelectronic Tape drive systems

INDUSTRIAL
- ---------------------------
C.P. Clare Corporation Optoelectronic Solid state relays
Banner Engineering Optoelectronic Retroreflective industrial sensors
Corporation
IBM Corp. Optoelectronic Point of sale equipment

MEDICAL
- ---------------------------
Pyxis Corp. Optoelectronic Position sensing of drawers and drug
disposal cabinets
Hewlett Packard Co. Optoelectronic Heart monitor equipment
Chiron Diagnostic Corp. Optoelectronic Blood analysis

AEROSPACE/DEFENSE
- ---------------------------
Lockheed/Martin Corp. Optoelectronic and magnetic Gyros, encoders, DC brushless motors
Raytheon Company Inc. Optoelectronic and magnetic DC brushless motors, missiles, FKIR
systems, target acquisition

COMMUNICATIONS
- ---------------------------
CMAC Microcircuits USA Inc. Optoelectronic Telecommunications
American Fibertek, Inc. Optoelectronic Local area networks
</TABLE>

In fiscal 1997, Optek's ten largest customers accounted for approximately
63% of net sales. Three customers, Strattec, General Motors and Pitney Bowes,
made purchases which accounted for 13%, 13% and 10%, respectively, of the
Company's net sales during fiscal 1997. Purchases by General Motors during 1997
were made under purchase orders without formal contract; General Motors has no
minimum purchase obligation and can cease doing business with the Company at any
time. Purchases by Pitney Bowes during 1997 were also primarily made on open
account, but, effective October 1997, it entered into a multi-year contract with
the Company which obligates it to purchase its requirements of certain parts, if
any, from the Company. In 1994, Strattec entered into a multi-year contract to
purchase certain parts from the Company which requires Strattec to purchase
specified quantities of the covered products at predetermined prices, subject to
adjustment based upon changes in the volumes of products purchased. The term of
this contract extends through the life of the program.

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<PAGE> 32

Historically, a relatively small number of customers has accounted for a
significant percentage of the Company's total net sales, and the Company expects
that this trend will continue. In each of fiscal 1994, 1995 and 1996, the
Company had two customers which each accounted for at least 10% of net sales.
The Company's ability to achieve sales in the future will depend upon its
ability to obtain orders from, maintain relationships with and provide support
to a relatively small number of existing and new key customers. As a result, any
cancellation, reduction, rescheduling or delay in orders by or shipments to any
customer or the discontinuation or redesign by any customer of its products
which currently incorporate one or more of the Company's products could have a
material adverse effect on the Company's business, operating results and
financial condition.

The automotive industry, which accounted for approximately 25% of the
Company's net sales during fiscal 1997, represents the fastest area of growth
for the Company. The automotive industry is cyclical due to general economic
conditions, the level of interest rates, consumer confidence, patterns of
consumer spending and the automobile replacement cycle, all of which are beyond
the control of the Company. In addition, the Company's customers in the
automotive industry are highly unionized and have in the past experienced labor
disruptions. Accordingly, automotive production may not increase or may decline
in the future. A significant reduction or prolonged interruption in automotive
production could have a material adverse effect on the Company.

The Company's customers normally purchase the Company's products and
incorporate them in products that they in turn sell into their own markets on an
ongoing basis. As a result, the Company's sales are dependent upon the success
of its customers products, and its future performance is dependent upon its
success in finding new customers and receiving new orders from existing
customers. See "Risk Factors -- Dependence on Automotive Industry" and "Risk
Factors -- Customer Concentration."

SALES, MARKETING AND DISTRIBUTION

The Company sells its products through its technical sales staff,
independent sales representatives and independent stocking distributors. At
October 31, 1997, the Company employed eight technical sales people who operate
out of the Company's offices in Carrollton, Texas and three technical sales
people operating out of offices in Western Europe. The Company also sells its
products worldwide through 20 independent sales representatives and 42 stocking
distributors.

The Company's technical sales personnel, together with the Company's
engineering staff, seek to develop long-term relationships with customers by
working closely with them throughout all phases of new product development and
subsequent production. Initial customer contact is usually made by either a
member of the Company's technical sales staff, a sales representative or a
distributor for the customer's geographic area. The representative determines if
custom optoelectronic or magnetic components or assemblies could perform the
specific sensing functions desired by the customer. Typically, the customer
either provides a detailed specification of its requirements or is assisted by
the Company's engineering and technical sales staff in the development of
specifications. The Company then develops a technical proposal, incorporating
preliminary design concepts, and submits the technical proposal to the customer.
The technical proposal typically includes pricing terms, which usually include a
one-time tooling charge and a unit price for the product over a specified period
based on an estimated production volume. After approval, the Company continues
to work with the customer to develop an assembly meeting the customer's
requirements. Frequently, especially in automotive applications, the Company is
involved in development, testing and qualification phases which involve all
aspects of the Company's engineering and manufacturing expertise.

The marketing and development process can range from four months to three
years or more from initial customer contact to purchase order, depending on the
complexity of the customer's requirements. Automotive applications tend to have
a longer development cycle, typically exceeding three years. Once a product is
qualified, subsequent production releases typically require lead times of six or
more weeks.

Many products sold by the Company are application specific and, therefore,
have life cycles generally ranging from three to 15 years. For example, many
products sold to the automotive industry are model, engine or system specific.
As described above, lengthy product development cycles requiring substantial
design and
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qualification are customary in the sourcing decisions of OEMs. Therefore, the
primary focus of the Company's sales effort is to develop applications designed
into the products of OEMs during development.

ENGINEERING AND DEVELOPMENT

A significant portion of the Company's design and application expertise is
devoted to developing customized products for performing specific applications.
As a result, the Company's efforts have been primarily directed toward
developing enhancements to existing customer applications and to identifying new
customer-specific applications. Typically, the Company conducts joint
development efforts with its customers and receives funds for the custom tooling
required to manufacture the customer's assembly. The Company employs over 70
engineers, many of whom are focused on working with customers to design
assemblies to perform additional applications. The Company seeks to involve its
engineers in the design phase of its customer's products. See "Risk
Factors -- Reliance on Key Personnel; Need for Additional Technical Personnel."

In order to expand the range of applications which can be addressed with
magnetic sensor devices, the Company has identified magnetoresistive technology
as one alternative for new magnetic sensor designs. Magnetoresistive technology
produces a superior signal to noise ratio and is able to detect very slow motion
which is required in certain applications. The Company has been awarded
additional programs by an automotive OEM utilizing magnetoresistive motion and
position sensors for electronic ignition systems.

In addition, in order to address certain fiber optic applications requiring
higher data transmission speeds, the Company has applied a portion of its
research activities in recent years to the development of higher speed fiber
optic LEDs, sensors, and transceivers.

During the past three fiscal years, the Company's product development and
engineering expenses have ranged between 6% and 8% of net sales, not including
the portion funded by customers. Future developments may require the Company to
allocate increased resources to advances in optoelectronic and magnetic sensor
technologies. However, no assurance can be given that the Company will be
successful in further expanding these technologies.

MANUFACTURING

The Company utilizes a vertically integrated manufacturing structure which
enables the Company to exercise better control through all manufacturing cycles
and to respond on a timely basis to customer requests for development of new
products and design changes to existing products. The Company manufactures
sensor and LED semiconductor chips, tools and plastic molds, plastic assemblies,
discrete, assembly, hybrid and high reliability components, printed circuit
boards and wire and cable assemblies.

The Company attempts to maintain consistent high product quality as a means
to attract and retain customer business and limit price competition. As
customers have moved to "just-in-time" inventory management, products are often
shipped directly to the production line without incoming inspection. The Company
utilizes advanced machinery and production techniques, incorporates raw
materials conforming to stringent quality standards and individually tests each
of its products in an effort to manufacture products of consistent high quality
and reliability.

The principal raw materials used by the Company in the manufacture of its
semiconductor chips, components and assemblies are silicon wafers, gallium
wafers, certain chemicals and gases used in processing wafers, gold wire, copper
lead frames, metal and plastic for packages that house the chip and the various
custom assemblies, and magnets used in certain magnetic sensor applications.
Presently, the Company uses sole sources for its requirements of some of the
materials used in its manufacturing operations, which could adversely affect the
Company if any such source failed to deliver for any reason. The Company is
currently identifying and qualifying additional sources for these materials.
From time to time, particularly during periods of increased industry-wide
demand, silicon wafers, lead frames and other materials have been in short
supply. As is typical in the industry, the Company allows for a significant
lead-time between order and delivery of raw materials. See "Risk Factors -- Sole
or Limited Sources of Supply."

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<PAGE> 34

The Company's silicon and gallium arsenide chip manufacturing, high
reliability and hybrid assembly manufacturing and tooling, plastic molding and
printed circuit board operations occupy approximately 52,000 square feet of
manufacturing space at the Company's facilities in Carrollton, Texas. The
Company's non-military discrete components, interrupter and reflective
assemblies and isolators/couplers are assembled in the facilities of the
Company's subsidiaries located in Juarez, Mexico utilizing approximately 103,000
square feet in two buildings.

Over 80% of the Company's components and assemblies are produced in
facilities operated by the Company in Juarez, Mexico. Mexico has enacted
legislation to promote the use of such manufacturing operations by foreign
companies and continuation of these operations depends upon: compliance with
applicable laws and regulations of the United States and Mexico; the
availability of less expensive labor; and the continuation of favorable exchange
rates. These operations are authorized to operate as Maquiladoras by the
Ministry of Commerce and Industrial Development of Mexico. Maquiladora status
allows the Company to wholly own its Mexican subsidiaries and to import items
into Mexico duty free, provided that such items, after processing, are
re-exported from Mexico within six months. Maquiladora status, which must be
renewed every two years, is subject to various restrictions and requirements,
including: compliance with the terms of the Maquiladora program; proper
utilization of imported materials; hiring and training of Mexican personnel;
compliance with tax, labor, exchange control and notice provisions and
regulations; and compliance with locational constraints. Although assembly
operations in Mexico continue to be less expensive than comparable operations in
the United States, in recent years many companies have established Maquiladora
operations in the Juarez area to take advantage of lower labor costs. Increasing
demand for labor, particularly skilled labor and professionals, from new and
existing Maquiladora operations has in the past and could in the future result
in increased labor costs. The Company may be required to make additional
investments in automating equipment to partially offset increased labor costs.
The loss of Maquiladora status, the inability to recruit, hire and retain
qualified employees, a significant increase in labor costs, unfavorable exchange
rates or interruptions in the trade relations between the United States and
Mexico could have a material adverse effect on the Company's business, operating
results and financial condition.

The Company anticipates that additional manufacturing capacity, primarily
in Mexico, will be required to support growth over the next several years.
Therefore, capital expenditures are planned to increase to a total of
approximately $10 to $15 million to be expended over the next two to three
fiscal years to support anticipated future growth in demand for the Company's
products. The timing and amount of such expenditures is subject to adjustment
based upon continued evaluation by management.

In addition, the Company is negotiating to purchase the facility it
currently leases in Juarez, Mexico and has entered into a letter of intent to
acquire that building for $1.75 million.

INTELLECTUAL PROPERTY

The Company relies on its technical engineering expertise as protected by
trade secret laws and nondisclosure agreements and, to a lesser extent, on a
combination of patent, maskwork rights, copyright, trademark and other
intellectual property protection methods to protect its proprietary technology.
Although the Company currently holds four patents and has one pending patent
application in the United States, the Company believes that patents are of less
significance in its industry than such factors as customer service, innovation,
technical expertise and know-how of its personnel. There can be no assurance
that the Company's competitors will not be able to legally ascertain the
nonpatented proprietary information embedded in the Company's sensor components
or other products, in which case the Company may be unable to prevent use of
such information. To the extent the Company elects to assert its patent rights,
there can be no assurance that any claims of the Company's patents will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, that any rights granted thereunder will provide
adequate protection to the Company, or that the Company will have sufficient
resources to prosecute its rights. The Company has received notification of
patent issues concerning a process used to manufacture a small portion of its
products, but believes the issues asserted are without merit. There can be no
assurance that infringement claims by third parties or claims for
indemnification resulting from infringement claims will not be asserted in the
future, or that such assertions, if
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<PAGE> 35

proven to be true, will not materially adversely affect the Company's business,
operating results and financial condition. If any such claims are asserted
against the Company, the Company may seek to obtain a license under the third
party's intellectual property rights. There can be no assurance that a license
will be available on reasonable terms or at all. Alternatively, the Company
could resort to litigation to challenge such claims. Such challenges could be
extremely expensive and time consuming. Adverse determinations in any litigation
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties and prevent the Company from
manufacturing and selling its products. Any of these developments could have a
material adverse effect on the Company's business, operating results and
financial condition.

COMPETITION

The Company believes that competition in the market for custom
optroelectronic and magnetic sensors is intense and likely to increase
substantially. Competition in the sensor markets served by the Company is
primarily based upon custom design capabilities, quality, technology,
responsiveness, timely delivery and, to a lesser extent, price. The Company
competes with numerous companies for the custom optroelectronic and magnetic
sensor requirements of OEMs producing office equipment, automotive products,
industrial products, aerospace/defense and medical applications and
communications equipment. The Company believes that its principal competitor for
sales of custom sensor components and assemblies is Honeywell, Inc. In addition,
because certain OEMs, either directly or through affiliated entities, have
internal capabilities to design and manufacture custom sensor components and
assemblies, the Company must also compete with the in-house capabilities of such
OEMs. In some cases, the Company's prospective customers may elect to purchase
low-cost standardized sensor components from commodity suppliers and utilize
their in-house design and manufacturing capability to adapt such standard
components to fulfill their sensor requirements. See "Risk
Factors -- Competition."

ENVIRONMENTAL

The Company is subject to a variety of domestic and Mexican governmental
regulations relating to the use, storage, handling and disposal of toxic or
other hazardous substances used in connection with its manufacturing activities.
Any failure by the Company to control the use, storage, handling or disposal or
adequately restrict the discharge of hazardous or toxic substances could subject
the Company to significant liability or could cause the Company's manufacturing
operations to be curtailed or suspended. See "Risk Factors -- Limited Insurance
Coverage; Environmental Regulation."

BACKLOG

The Company's order backlog was approximately $23.9 million at October 31,
1997 compared with a backlog of approximately $18.4 million at October 25, 1996
and approximately $23.2 million at October 27, 1995. The Company's backlog is
comprised of orders which customers have released and scheduled for delivery
within one year. Sales orders are typically made on the Company's standard form,
which permits the customer to cancel the order in whole or in part. By industry
practice, orders may be canceled or modified at any time, with the customer
being responsible for all finished goods, all costs, direct and indirect,
incurred by the Company and a reasonable allowance for anticipated profits. No
assurance can be given that such amounts will be received by the Company after
cancellation.

EMPLOYEES

As of October 31, 1997, the Company employed 1,971 persons, including 1,821
in manufacturing and assembly (1,633 in Juarez, Mexico and 188 in Carrollton,
Texas), 104 in sales and engineering and 46 in management and administration.
Some of the Company's employees are highly skilled and the Company's continued
success will depend in part on its ability to attract and retain such employees,
who are generally in demand. At times, the Company has had difficulty hiring
engineering personnel with previous experience in its industry due to the
limited number of engineers available with such experience. To date, this
difficulty has not

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materially affected the Company's operations. The Company has never had a work
stoppage, no employees are represented by any labor organization and the Company
considers its employee relations to be good.

FACILITIES

The Company's administrative offices, engineering facilities, silicon and
gallium arsenide chip manufacturing and hybrid assembly manufacturing, as well
as tooling, plastic molding and printed circuit board operations, are located in
a Company-owned building containing 205,000 square feet on a 15.5 acre site in
Carrollton, Texas. The Company also leases approximately 6,250 square feet of
warehouse space in El Paso, Texas. This lease expires in January of 1999.

Over 80% of the Company's discrete components, interrupter and reflective
assemblies and isolators/ couplers are assembled at the facilities of the
Company's subsidiaries located in Juarez, Mexico. The Mexican subsidiaries
beneficially own a 24,000 square foot building and a 45,000 square foot building
in Juarez, Mexico through trust agreements with Banca Serfin, Sociedad Nacional
de Credito. The Company is currently expanding the space available in the larger
facility by 12,000 square feet to provide additional space for expansion of
automotive programs. The operations formerly conducted at the smaller of those
buildings have been consolidated into the larger plant and adjacent leased
premises, and the Company is currently seeking to sell such plant. The Company's
Mexican subsidiaries also lease a 58,000 square foot building in Juarez, Mexico
under a lease expiring in December 1998 with aggregate annual lease payments of
$306,000. The lease provides for three one-year renewals exercisable on at least
180 days notice. In addition, the Company is negotiating to purchase the 58,000
square foot facility it currently leases in Juarez, Mexico and has entered into
a letter of intent to acquire that building for $1.75 million. This plant is
adjacent to the 45,000 square foot building owned by one of the Company's
subsidiaries.

The Company believes that its existing facilities and equipment are well
maintained and are in good operating condition. The Company anticipates that its
current facilities will be suitable and adequate for its operations through
1998. The Company anticipates a need for increased capital spending during 1998
to support potential increases in demand during 1999 and 2000.

36
<PAGE> 37

MANAGEMENT

Information as of February 12, 1998 with respect to the executive officers
and directors of the Company is as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Grant A. Dove.............................. 69 Chairman of the Board
Thomas R. Filesi........................... 62 President, Chief Executive Officer and Director
Richard G. Dahlberg........................ 44 Senior Vice President, Engineering
Thomas S. Garrett.......................... 51 Senior Vice President, Operations
William J. Collinsworth.................... 47 Vice President, Finance and Chief Financial
Officer
Robert J. Kosobucki........................ 46 Vice President, Worldwide Sales and Marketing
Michael E. Cahr............................ 57 Director
William H. Daughtrey, Jr. ................. 57 Director
Rodes Ennis................................ 61 Director
Wayne Stevenson............................ 62 Director
</TABLE>

Mr. Dove was elected a director of the Company in July 1989 and Chairman of
the Board in March 1993. He spent 28 years with Texas Instruments Incorporated,
retiring in 1987 as Executive Vice President. He then served as Chairman and
Chief Executive Officer of Microelectronics and Computer Technology Corporation,
a research and development consortium, retiring in 1992. Since 1992, he has been
a managing partner of Technology Strategies & Alliance, a strategic planning and
investment banking firm. He currently serves on the boards of the Cooper Cameron
Corporation, an oilfield services company; U.S. WEST, Inc., a telecommunications
company; Intervoice, Inc., a telecommunications equipment and software sales
provider; and Fore Front Group, Inc., a personal computer and internet software
provider.

Mr. Filesi has served as President, Chief Executive Officer and a director
of the Company since April 1991. Before joining the Company, he was employed by
Motorola, Inc. Semiconductor Products Sector for 21 years, completing his tenure
there as Director of Manufacturing, RF Products.

Mr. Dahlberg was elected Vice President, Engineering in March 1994 and
became a Senior Vice President in December 1997. Mr. Dahlberg has been employed
by the Company since 1983 and has served in various engineering capacities. He
is a Registered Professional Engineer in the State of Texas.

Mr. Garrett joined the Company in October 1991 as Vice President,
Operations and became a Senior Vice President in December 1997. In April 1988 he
founded Garrett Consulting Group and was President of that firm until December
1990, at which time it merged with Northwest Technology Group, Inc. These
companies provided comprehensive consulting services to the microelectronics and
other high technology related industries.

Mr. Collinsworth joined the Company as Vice President, Finance and Chief
Financial Officer in October 1996. From 1991 until joining the Company, he was
an independent financial consultant specializing in start-up and troubled
companies. In that role, he worked with several private companies and also
served as interim Chief Operating Officer and Chief Financial Officer for
Intellicall, Inc., a provider of telecommunications services and equipment, from
April 1992 to September 1993 and Chief Financial Officer for Value Added
Communications, Inc. ("VAC"), a provider of telecommunications services and
equipment, from June 1994 to October 1994. In November 1995, VAC filed for
protection under Chapter 11 of the Bankruptcy Code.

Mr. Kosobucki joined the Company as Vice President, Worldwide Sales and
Marketing in July 1995. From 1991 to 1995, he served in various strategic
marketing and sales capacities for Summagraphics Corp., a manufacturer of
computer-based printers and plotters, most recently as Director of Strategic
Sales and Product Marketing. He is a Registered Professional Engineer in the
State of New York.

37
<PAGE> 38

Mr. Cahr was elected a director of the Company in August 1988. He is
Chairman of Allscrips Pharmaceuticals, Inc., a private company engaged in the
sale of prepackaged pharmaceuticals, having previously served as President and
Chief Executive Officer from January 1995 to December 1997. Until late 1994 he
was Manager of Venture Capital at Allstate Insurance Company in Northbrook,
Illinois, having been with Allstate Insurance Company since 1987.

Mr. Daughtrey was elected a director of the Company in March 1992. Mr.
Daughtrey is currently President of Princeton Associates, Inc., a management
consulting firm. Prior to founding Princeton Associates, Inc. in January 1991,
he was Group Managing Partner for Virginia/Maryland Management Consulting
Services at Coopers & Lybrand, Richmond, Virginia from December 1984. On
September 1, 1995, JGB Industries, Inc., a company for which Mr. Daughtrey had
formerly served as interim President and Chief Executive Officer from November
1993 to August 1995, filed for protection under Chapter 11 of the Bankruptcy
Code.

Mr. Ennis was elected a director of the Company in February 1987. Mr. Ennis
formerly served as President of the Journeys and Hardy Divisions of Genesco,
Inc., a footwear retailer, from March 1990 to December 1992, at which time he
retired and has since served as an independent consultant.

Mr. Stevenson was elected a director of the Company in September 1992. Mr.
Stevenson is the Chairman and Chief Executive Officer of CSI Control Systems
International, Inc., a private firm engaged in the manufacture and installation
of environmental controls for the commercial market, a position he has held
since 1986.

Directors are elected annually and serve until their successors are duly
elected and qualified. Officers serve at the discretion of the Board, subject to
contractual rights. There is no family relationship between any director or
executive officer of the Company.

The Company has entered into indemnification agreements with its executive
officers and directors, pursuant to which the Company has agreed to indemnify
such persons to the fullest extent permitted by law, and providing for certain
other protection.

38
<PAGE> 39

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the Common Stock owned
at February 12, 1998 and as adjusted to reflect the issuance and sale of the
shares sold in this Offering by this Prospectus by (i) each stockholder known to
the Company to own beneficially more than 5% of the Common Stock, (ii) each of
the Company's executive officers and directors, (iii) all executive officers and
directors as a group, and (iv) the Selling Stockholder. To the Company's
knowledge, the persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable, and the information
contained in the footnotes to the table.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING(1) SHARES OFFERING(1)
-------------------- TO BE --------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
---------------- --------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
First Source Financial LLP(2)............ 3,150,000 43.7% 2,500,000 650,000 8.5%
2850 W. Golf Rd., 5th Floor
Rolling Meadows, IL 60008
T. Rowe Price Associates, Inc.(3)........ 291,100 6.5 -- 291,100 4.2
100 East Pratt St.
Baltimore, MD 21289
James D. Crownover....................... 262,602 6.2 -- 262,602 3.8
P.O. Box 7812
Horseshoe Bay, TX 78657
Wellington Management Company, LLP(4).... 212,800 5.2 -- 212,800 3.1
75 State Street
Boston, MA 02109
Grant A. Dove............................ 206,601 4.9 -- 206,601 3.0
15301 Dallas Parkway
Suite 840
Dallas, TX 75248
Thomas R. Filesi(5)...................... 375,499 8.7 -- 375,499 5.3
1180 Emerald Sound Blvd.
Oak Point, TX 75068
Richard G. Dahlberg(6)................... 49,755 * -- 49,755 *
Thomas S. Garrett(7)..................... 102,333 2.3 -- 102,333 1.5
William J. Collinsworth(8)............... 13,784 * -- 13,784 *
Robert J. Kosobucki(9)................... 29,998 * -- 29,998 *
Michael E. Cahr(10)...................... 51,500 1.1 -- 61,500 *
William H. Daughtrey, Jr.(11)............ 8,000 * -- 8,000 *
Rodes Ennis(12).......................... 47,100 1.1 -- 47,100 *
Wayne Stevenson(13)...................... 19,250 * -- 19,250 *
All executive officers and directors as a
group (10 persons)(14)................. 906,820 18.6% -- 916,820 12.8%
</TABLE>

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

* Less than 1%.

(1) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on: (i) 4,466,025 shares outstanding as of
February 12, 1998, (ii) 6,966,025 shares outstanding following issuance of
2,500,000 shares of Common Stock through the exercise of the First Source
Warrant in connection with the Offering and (iii) the assumption that the
Underwriters' over-allotment option will not be exercised. Beneficial
ownership is determined in accordance with the rules of the Securities and

39
<PAGE> 40

Exchange Commission and includes shares over which the listed beneficial
owner holds sole or shared voting or dispositive power. In addition to
shares actually outstanding, all shares subject to warrants and options
exercisable within 60 days of February 12, 1998 are deemed outstanding and
beneficially owned by the person holding such options and warrants for
purposes of computing the number of shares beneficially held by such
person and the percentage ownership of such person, but are not deemed to
be outstanding for the purposes of computing percentage ownership of any
other person.

(2) Includes 3,150,000 shares to be issued or issuable pursuant to the exercise
of the First Source Warrant. The indicated shares may also be deemed to be
beneficially owned by Dominion Resources, Inc., the ultimate parent company
of the Selling Stockholder and a publicly traded energy and financial
services company having its business address at Riverfront Plaza -- West
Tower 17th Floor, 901 East Byrd Street, Richmond, Virginia 23219-4069.

(3) Includes 246,400 shares that may also be deemed to be owned by T. Rowe
Price Small Cap Stock Fund, Inc. T. Rowe Price Associates, Inc. is a
publicly traded investment advisor and T. Rowe Price Small Cap Fund, Inc.
is a publicly traded investment company managed by T. Rowe Price
Associates, Inc., the address for both of which is 100 East Pratt Street,
Baltimore, Maryland 21202.

(4) Wellington Management Company, LLP is an investment advisor having its
business address at 75 State Street, Boston, Massachusetts 02109.

(5) Includes 74,499 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(6) Includes 21,332 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(7) Includes 7,999 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(8) Includes 13,334 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(9) Includes 18,135 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(10) Includes 21,000 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998. Also includes 5,500 shares owned of record by Mr.
Cahr's wife of which Mr. Cahr may be deemed the beneficial owner. In
addition, Mr. Cahr will purchase 10,000 shares of Common Stock in the
Offering.

(11) Includes 7,000 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(12) Includes 21,000 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(13) Includes 19,250 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

(14) Includes 203,549 shares that may be acquired upon exercise of stock options
which are presently exercisable or will become exercisable within 60 days
of February 12, 1998.

40
<PAGE> 41

UNDERWRITING

Prudential Securities Incorporated, BancAmerica Robertson Stephens and ABN
AMRO Incorporated (the "Underwriters") have severally agreed, subject to the
terms and conditions contained in the underwriting agreement (the "Underwriting
Agreement"), to purchase from the Selling Stockholder the number of shares of
Common Stock set forth below opposite their respective names:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated.......................... 1,250,000
BancAmerica Robertson Stephens.............................. 875,000
ABN AMRO Incorporated....................................... 375,000
---------
Total....................................................... 2,500,000
=========
</TABLE>

The Selling Stockholder is obligated to sell, and the Underwriters are
obligated to purchase, all the shares of Common Stock offered hereby, if any are
purchased.

The Underwriters have advised the Company and the Selling Stockholder that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow selected dealers a concession of $0.65 per share; and
that such dealers may reallow a concession of $0.10 per share to certain other
dealers. After the Offering, the public offering price and the concessions may
be changed by the Underwriters.

The Selling Stockholder has granted the Underwriters an over-allotment
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to 375,000 additional shares of Common Stock at the public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to 2,500,000.

The Company's officers and directors, who in the aggregate will
beneficially own approximately 916,820 shares of Common Stock upon the
completion of the Offering, the Company, the Selling Stockholder and certain
other stockholders of the Company, have agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock or any
securities convertible into, or exercisable or exchangeable for, any shares of
Common Stock or other capital stock of the Company or any right to purchase or
acquire Common Stock or other capital stock of the Company, for a period of 90
days from the date of this Prospectus without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, other than
pursuant to the exercise of currently outstanding stock options and except for
bona fide gifts or transfer effected by such stockholders other than on any
securities exchange or in the over-the-counter market to donees or transferees
that agree to execute and be bound by such agreements. Prudential Securities
Incorporated may, in its sole discretion at any time and without notice, release
all or any portion of the shares subject to such lock-up agreements.

The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters and contribute to any losses arising out of certain
liabilities, including liabilities under the Securities Act.

In connection with this Offering, certain Underwriters and selling group
members or their respective affiliates who are qualified market makers on the
Nasdaq National Market may engage in passive market making transactions in the
Common Stock of the Company on the Nasdaq National Market in accordance with
Rule 103 of Regulation M under the Exchange Act during the business day prior to
the pricing of the Offering before the commencement of offers and sales of
Common stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market

41
<PAGE> 42

maker must display its bid at a price in excess of the highest independent bid
for such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.

In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Selling Stockholder, and in such case
may purchase Common Stock in the open market following the completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 375,000 shares of
Common Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter or any selling group
member participating in the Offering for the account of the other Underwriters,
the selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transaction described in
this paragraph are required and, if they are undertaken, then they may be
discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Hewitt & Hewitt, P.C., Dallas, Texas. Mr. Hewitt, a
principal of Hewitt & Hewitt, P.C., beneficially owns 8,500 shares of Common
Stock and is the Secretary of the Company. Certain legal matters in connection
with the offering will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The consolidated financial statements and schedule of Optek Technology,
Inc. as of October 31, 1997 and October 25, 1996, and for each of the years in
the three-year period ended October 31, 1997, have been included herein and
incorporated by reference in this Prospectus and in the Registration Statement
of which this Prospectus forms a part, in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing.

42
<PAGE> 43

INFORMATION INCORPORATED BY REFERENCE

The following documents have been filed with the Commission (File No.
0-16304) pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and are incorporated herein by reference and made a part of this
Prospectus:

1. The Company's Annual Report on Form 10-K for the year ended October
31, 1997;

2. The Company's Forms 10-K/A filed on January 30, 1998; January 30,
1998; March 25, 1998 and April 29, 1998, respectively;

3. The Company's Quarterly Report on Form 10-Q for the quarter ended
January 30, 1998; and

4. Description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Company's Common Stock shall be deemed to
be incorporated herein by reference and made a part of this Prospectus from the
respective filing dates of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission").

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the Common Stock offered hereby. This
Prospectus omits certain of the information set forth in the Registration
Statement, and reference is hereby made to the Registration Statement for
further information with respect to the Company and the Common Stock offered
hereby. Any statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each such instance reference is
made to the copy of such document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by such reference.

Reports and other information filed by the Company with the Commission and
copies of the Registration Statement can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, DC 20549, and should also be available for inspection
and copying at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, New York 10048; and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material also may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates,
and through the Commission's website at "http://www.sec.gov".

43
<PAGE> 44

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 45

OPTEK TECHNOLOGY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of January 30, 1998, October
31, 1997 and October 25, 1996............................. F-3
Consolidated Statements of Income for the Quarters ended
January 30, 1998 and January 31, 1997 and the Years Ended
October 31, 1997, October 25, 1996 and October 27, 1995... F-4
Consolidated Statements of Stockholders' Equity for the
Quarter Ended January 30, 1998 and the Years Ended October
31, 1997, October 25, 1996 and October 27, 1995........... F-5
Consolidated Statements of Cash Flows for the Quarters ended
January 30, 1998 and January 31, 1997 and the Years Ended
October 31, 1997, October 25, 1996 and October 27, 1995... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 46

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Optek Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Optek
Technology, Inc. and subsidiaries as of October 31, 1997 and October 25, 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended October 31, 1997.
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 Optek
Technology, Inc. and subsidiaries as of October 31, 1997 and October 25, 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended October 31, 1997, in conformity with generally
accepted accounting principles.

KPMG PEAT MARWICK LLP

Dallas, Texas
December 16, 1997, except as to
note 1g which is as of February 16, 1998

F-2
<PAGE> 47

OPTEK TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
JANUARY 30, OCTOBER 31, OCTOBER 25,
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $11,644 $ 9,815 $ 121
Accounts receivable, net of allowance for doubtful
accounts and customer returns of $1,773 in 1998,
$1,653 in 1997 and $1,095 in 1996................... 8,049 9,196 7,288
Inventories (note 2)................................... 6,908 6,491 6,007
Deferred income taxes (note 7)......................... 2,113 2,113 1,142
Prepaid expenses....................................... 112 109 82
------- ------- -------
Total current assets........................... 28,826 27,724 14,640
Property, plant and equipment, net (note 3).............. 12,732 11,135 11,150
Other assets............................................. 64 77 96
------- ------- -------
$41,622 $38,936 $25,886
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 3,162 $ 3,109 $ 2,637
Accrued expenses (note 4).............................. 9,112 9,547 5,345
------- ------- -------
Total current liabilities...................... 12,274 12,656 7,982
Long-term debt (note 5).................................. -- -- 3,428
Other liabilities........................................ 155 117 100
Deferred income taxes (note 7)........................... -- -- 309
Stockholders' equity (note 6):
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued................................. -- -- --
Common stock, $.01 par value. Authorized 12,000,000
shares; issued and outstanding 4,272,727 shares in
1998, 4,259,534 shares in 1997 and 3,912,915 shares
in 1996............................................. 43 43 39
Additional paid-in-capital............................... 14,053 13,963 13,373
Retained earnings........................................ 15,097 12,157 655
------- ------- -------
Total stockholders' equity..................... 29,193 26,163 14,067
------- ------- -------
$41,622 $38,936 $25,886
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 48

OPTEK TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
------------------------- ---------------------------------------
JANUARY 30, JANUARY 31, OCTOBER 31, OCTOBER 25, OCTOBER 27,
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 20,419 $ 16,689 $ 75,572 $ 67,395 $ 62,542
Cost and expenses:
Cost of sales............................ 12,105 10,099 43,423 39,010 38,513
Product development expenses............. 254 318 1,233 1,348 650
Engineering expenses..................... 1,204 1,009 4,013 3,585 3,191
Selling expenses......................... 1,457 1,295 5,289 5,087 4,245
General and administrative expenses...... 971 866 3,856 3,179 2,845
--------- --------- --------- --------- ---------
Total costs and expenses......... 15,991 13,587 57,814 52,209 49,444
--------- --------- --------- --------- ---------
Operating income........................... 4,428 3,102 17,758 15,186 13,098
Other (income) expense:
Interest (income) expense................ (111) 83 (65) 1,292 2,960
Other (income) expense................... 15 76 59 (145) 142
--------- --------- --------- --------- ---------
Total other, net................. (96) 159 (6) 1,147 3,102
--------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item....................... 4,524 2,943 17,764 14,039 9,996
Income tax expense (note 7)................ 1,584 1,031 5,259 1,144 158
--------- --------- --------- --------- ---------
Net income before extraordinary item....... 2,940 1,912 12,505 12,895 9,838
Extraordinary item (net of income tax
benefit of $542 -- note 5)............... -- -- 1,003 -- --
--------- --------- --------- --------- ---------
Net income................................. $ 2,940 $ 1,912 $ 11,502 $ 12,895 $ 9,838
========= ========= ========= ========= =========
Basic earnings per share:
Earnings before extraordinary item....... $ 0.69 $ 0.46 $ 2.98 $ 3.41 $ 2.96
Extraordinary item....................... -- -- (0.24) -- --
--------- --------- --------- --------- ---------
Basic earnings per share................... $ 0.69 $ 0.46 2.74 $ 3.41 $ 2.96
========= ========= ========= ========= =========
Weighted average shares outstanding........ 4,272,727 4,150,007 4,192,530 3,779,748 3,318,649
========= ========= ========= ========= =========
Diluted earnings per share:
Earnings before extraordinary item....... $ 0.37 $ 0.25 $ 1.63 $ 1.71 $ 1.40
Extraordinary item....................... -- -- (0.13) -- --
--------- --------- --------- --------- ---------
Diluted earnings per share................. $ 0.37 $ 0.25 $ 1.50 $ 1.71 $ 1.40
========= ========= ========= ========= =========
Weighted average shares
outstanding -- Diluted basis............. 7,881,398 7,533,237 7,671,509 7,544,333 7,007,408
========= ========= ========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 49

OPTEK TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
------------------ PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
--------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at October 28, 1994............. 3,232,861 $32 $12,898 $(22,078) $(9,148)
Exercise of stock options and
warrants........................... 211,763 2 118 -- 120
Net income............................ -- -- -- 9,838 9,838
--------- --- ------- -------- -------
Balance at October 27, 1995............. 3,444,624 34 13,016 (12,240) 810
Exercise of stock options and
warrants........................... 468,291 5 357 -- 362
Net income............................ -- -- -- 12,895 12,895
--------- --- ------- -------- -------
Balance at October 25, 1996............. 3,912,915 39 13,373 655 14,067
Exercise of stock options and
warrants........................... 346,619 4 590 -- 594
Net income............................ -- -- -- 11,502 11,502
--------- --- ------- -------- -------
Balance at October 31, 1997............. 4,259,534 43 13,963 12,157 26,163
Exercise of stock options and warrants
(unaudited)........................ 13,193 -- 90 -- 90
Net income (unaudited)................ -- -- -- 2,940 2,940
--------- --- ------- -------- -------
Balance at January 30, 1998
(unaudited)........................... 4,272,727 $43 $14,053 $ 15,097 $29,193
========= === ======= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 50

OPTEK TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
------------------------- ---------------------------------------
JANUARY 30, JANUARY 31, OCTOBER 31, OCTOBER 25, OCTOBER 27,
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................... $ 2,940 $ 1,912 $11,502 $ 12,895 $ 9,838
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 410 570 2,038 2,944 2,722
Gain on sale of property, plant
and equipment................... (6) -- (204) -- (25)
Provision for deferred taxes...... -- -- (1,280) (833) --
Changes in assets and liabilities:
Accounts receivable............. 1,147 1,197 (1,908) (357) (242)
Inventories, prepaid expenses
and other assets............. (407) (521) (492) (643) 607
Accounts payable, accrued
expenses and other
liabilities.................. (344) (121) 4,691 (310) 733
------- ------- ------- -------- --------
Net cash provided by
operating activities....... 3,740 3,037 14,347 13,696 13,633
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment......................... (2,007) (165) (2,034) (1,432) (1,121)
Proceeds from sale of property, plant
and equipment..................... 6 -- 215 2 25
------- ------- ------- -------- --------
Net cash used in investing
activities................. (2,001) (165) (1,819) (1,430) (1,096)
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment under long-term bank
debt.............................. -- (3,157) (3,428) (12,568) (12,696)
Net proceeds from exercise of stock
options and warrants.............. 90 292 594 362 120
------- ------- ------- -------- --------
Net cash used in financing
activities........................ 90 (2,865) (2,834) (12,206) (12,576)
------- ------- ------- -------- --------
Net increase (decrease) in cash and
cash equivalents.................. 1,829 7 9,694 60 (39)
Cash and cash equivalents at
beginning of period............... 9,815 121 121 61 100
------- ------- ------- -------- --------
Cash and cash equivalents at
end of period.............. $11,644 $ 128 $ 9,815 $ 121 $ 61
======= ======= ======= ======== ========
Interest payments...................... -- $ 98 $ 171 $ 1,346 $ 3,075
======= ======= ======= ======== ========
Income tax payments.................... $ 1,020 $ 93 $ 4,258 $ 2,089 $ 123
======= ======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 51

OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, OCTOBER 25, 1996 AND OCTOBER 27, 1995
AND QUARTERS ENDED JANUARY 30, 1998 (UNAUDITED) AND JANUARY 31, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) General Information

Optek Technology, Inc. and subsidiaries (the "Company" or "Optek") design,
manufacture and market custom infrared optoelectronic devices, magnetic field
sensing devices and fiber optic transmitters and receivers. A substantial
portion of the Company's products are manufactured by a wholly-owned subsidiary
located in Mexico. Net assets located at that subsidiary were $5,773 at October
31, 1997, and $6,334 at October 25, 1996.

The Company uses a fiscal year ending on the last Friday in October. Fiscal
1997 comprised 53 weeks and fiscal 1996 and fiscal 1995 comprised 52 weeks.

(b) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Optek Technology, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Revenues from product sales are recognized at the time of shipment to the
customer. Certain shipments to distributors are subject to limited
right-of-return provisions. The Company provides for estimated returns when
material.

(d) Use of Estimates

The preparation of the consolidated 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 consolidated
financial statements and the reported amounts of net sales and expenses during
the reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.

(e) Inventories

Inventories are stated at the lower of cost or market on a first-in,
first-out basis. The Company continually assesses the appropriateness of the
inventory valuations giving consideration to obsolete and excess inventory.

(f) Property, Plant and Equipment

Depreciation of property, plant and equipment is provided using the
straight-line method over the estimated useful life of the asset. Useful lives
range from 20 years for buildings to 3 to 5 years for equipment. Leasehold
improvements are depreciated over the shorter of the life of the asset or the
lease.

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of, on October 26, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be 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 the asset
to future net cash flows expected to be generated by the asset. If such assets
are

F-7
<PAGE> 52
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Adoption of this Statement did not have
a material impact on the Company's financial position, results of operations, or
liquidity.

(g) Earnings per Common Share

Effective November 1, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share." This statement replaces the
primary and fully diluted earnings per share computations with basic and diluted
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by weighted
average number of common shares and dilutive securities outstanding during the
period and must be presented in all cases with basic earnings per share.
Dilutive securities consist of common stock options granted to employees and
directors, a warrant issued to First Source Financial LLP ("First Source"), and
warrants granted to non-employee Directors and advisors.

Shares used in calculating basic and diluted earnings per share are as
follows:

<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
---------------------- -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding..................... 4,272,727 4,150,007 4,192,530 3,779,748 3,318,649
Dilutive securities -- common
stock options................... 607,662 359,565 586,406 738,864 921,174
Warrants held by First Source..... 3,150,000 3,150,000 3,150,000 3,150,000 3,150,000
Other warrants.................... 178,801 196,468 191,968 233,801 251,509
Assumed repurchase of common
shares.......................... (327,792) (322,803) (449,395) (358,080) (633,924)
--------- --------- --------- --------- ---------
Weighted average shares
outstanding -- diluted basis.... 7,881,398 7,533,237 7,671,509 7,544,333 7,007,408
========= ========= ========= ========= =========
</TABLE>

(h) Cash and Cash Equivalents

The Company considers all cash and short-term investments with original
maturities of three months or less to be cash equivalents.

(i) Stock Based Compensation Plans

The Company accounts for its stock option plans and warrants in accordance
with the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and related interpretations.
Compensation expense is recorded on the date of grant only if the market price
of the underlying stock exceeds the exercise price. On October 26, 1996, the
Company adopted Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"). Under SFAS 123, the Company may elect
to recognize expense for stock-based compensation based on the fair value of the
awards, or continue to account for stock-based compensation under APB 25 and
disclose in the financial statements the effects of SFAS 123 as if the
recognition provisions were adopted. The Company has elected to continue to
account for stock-based compensation under APB 25 and provide the disclosure
required by SFAS 123.

F-8
<PAGE> 53
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(j) Financial Instruments

All financial instruments held by the Company have been stated at values
which approximate fair value as of October 31, 1997 and October 25, 1996 due to
the instruments bearing interest at market rates or due to their short duration.

(k) Foreign Currency Translation

The United States dollar has been determined to be the functional currency
for all foreign operations. Exchange gains and losses related to such operations
are immaterial for all years presented.

(l) Income Taxes

The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years 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.

(m) Reclassifications

Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the current year's presentation.

(n) Unaudited Quarterly Information

The consolidated financial statements of the Company for the quarters ended
January 30, 1998 and January 31, 1997, and the quarterly information included in
footnote 1(g) and footnote 2 are unaudited and reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. The results of operations for the three months ended January 30, 1998
are not necessary indicative of the results for the entire year ending October
30, 1998.

(2) INVENTORIES

A summary of inventories at January 30, 1998, October 31, 1997 and October
25, 1996 follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Finished goods........................................... $ 1,114 $ 1,503 $ 1,109
Work in process.......................................... 4,343 4,003 3,323
Raw materials............................................ 3,757 3,140 3,381
Reserve for excess and obsolete inventory................ (2,306) (2,155) (1,806)
------- ------- -------
$ 6,908 $ 6,491 $ 6,007
======= ======= =======
</TABLE>

F-9
<PAGE> 54
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment at October 31, 1997 and October
25, 1996 follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land........................................................ $ 3,137 $ 3,137
Building and improvements................................... 8,873 8,821
Equipment................................................... 20,106 18,238
-------- --------
32,116 30,196
Accumulated depreciation.................................... (20,981) (19,046)
-------- --------
$ 11,135 $ 11,150
======== ========
</TABLE>

(4) ACCRUED EXPENSES

A summary of accrued expenses at October 31, 1997 and October 25, 1996
follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Employee related accruals................................... $ 3,413 $ 2,778
Federal income tax.......................................... 1,625 --
Debt extinguishment charge.................................. 1,545 --
Other....................................................... 2,964 2,567
-------- --------
$ 9,547 $ 5,345
======== ========
</TABLE>

(5) LONG-TERM DEBT

At October 25, 1996, the Company had borrowings outstanding of $3,428 under
a credit facility with First Source. The facility provided for a $10,500 working
capital line of credit and an $8,000 revolving term loan. Substantially all of
the amount outstanding at October 25, 1996, was borrowed against the revolving
term loan bearing interest at the corporate base rate at the First National Bank
of Chicago (corporate base rate) plus 4.0%. On November 1, 1996, the revolving
term loan was retired using the available working capital line of credit bearing
interest at the corporate base rate plus 0.5%. During the second quarter of
fiscal 1997, the Company repaid all amounts outstanding under the credit
facility with First Source. The credit facility continued to provide a $10.5
million working capital line through the end of fiscal 1997 at which time the
Company chose to let the facility expire.

In the fourth quarter of fiscal 1997, the Company agreed to pay First
Source $1,545 to release all obligations, including contingent additional
interest, under the credit facility and other restrictive covenants. The
provision for payment, net of related income tax benefits of $542, has been
classified as an extraordinary item.

In January 1998, the Company obtained a three year $10.0 million unsecured
line of credit from NationsBank N.A. subject to customary terms and conditions.

(6) STOCKHOLDERS' EQUITY

During fiscal 1992, the Company implemented a long-term stock investment
plan (Investment Plan) which allows the granting of options to key employees and
non-employee advisors to the Company to purchase up to 1,000,000 shares of the
Company's authorized but unissued common stock at an exercise price equal to the
fair market value on the date of grant. Options vest over a period of 3 years
and are exercisable for up to 10 years after the date of grant. During fiscal
1995, the Company increased the authorized common stock available for this plan
to 1,500,000 shares. The Investment Plan allows the granting of rights to
receive cash in

F-10
<PAGE> 55
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the event of a change of control in the Company or to acquire shares of common
stock equal in value to the difference between the exercise price and the
current market price of stock issuable pursuant to exercisable options. No
rights to receive cash in lieu of common stock have been granted as of October
31, 1997. A summary of option activity under the Investment Plan follows:

<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at October 28, 1994................................. 867,820 $ .40
Granted................................................... 200,650 5.58
Exercised................................................. (177,280) .26
Canceled.................................................. (72,365) .19
--------
Balance at October 26, 1995................................. 818,825 1.72
Granted................................................... 156,000 11.88
Exercised................................................. (370,202) .41
Canceled.................................................. (17,665) 3.68
--------
Balance at October 25, 1996................................. 586,958 5.19
Granted................................................... 200,500 10.16
Exercised................................................. (272,247) 1.49
Canceled.................................................. (6,917) 8.77
--------
Balance at October 31, 1997................................. 508,294 $ 9.08
========
</TABLE>

At October 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options were $.19 to $11.97 and 9
years, respectively. At October 31, 1997 and October 25, 1996, the number of
options exercisable was 171,711 and 275,826, respectively, and the weighted
average exercise price of those options was $7.33 and $1.37, respectively.

During fiscal 1983, the Company implemented an incentive stock option plan
(Incentive Plan) which allowed the granting of options, vesting over 3 years and
exercisable for up to ten years after the date of grant, to key employees to
purchase the Company's authorized but unissued common stock at an exercise price
equal to the fair market value on the date of grant. The Incentive Plan expired
during fiscal 1993. During fiscal 1995, options to purchase 18,483 shares of
common stock were exercised. During fiscal 1996, options to purchase 84,089
shares of common stock were exercised. During fiscal 1997, options to purchase
21,166 shares of common stock were exercised at a weighted average price of
$1.31. Under the Incentive Plan, options outstanding and exercisable totaled
42,700 at a weighted average exercise price of $2.15 and a range of $1.19 to
$2.31 per share at October 31, 1997.

During fiscal 1992, the Company adopted a directors' formula award plan
(Directors' Award Plan) which provides for the granting of options to directors
of the Company to purchase up to 200,000 shares of the Company's authorized but
unissued common stock at an exercise price equal to the fair market value on the
date of grant. Each individual elected or reelected to serve as a director of
the Company who is not a full-time employee of the Company will automatically be
awarded options to purchase up to 3,500 shares of common stock. Options granted
under the Directors' Award Plan vest if such individual continues to serve as a
Director of the Company until the next annual meeting of the Company's
stockholders and are exercisable for a period of ten years from the date of
grant. During each of the fiscal years 1995, 1996, and 1997, options to purchase
14,000 shares of the Company's common stock were granted. During fiscal 1996,
options to purchase 14,000 shares of common stock were exercised. At October 31,
1997 there are 73,500 director options outstanding of which 59,500 are currently
exercisable at a weighted average exercise price of $3.90 and a range of $.44 to
$13.38 per share.

F-11
<PAGE> 56
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During fiscal 1997, the Company adopted a directors' formula compensation
plan (Directors' Compensation Plan) which provides for the reservation and
issuance of up to 100,000 shares of the Company's common stock. Under the plan,
non-employee directors may elect, in lieu of all or part of the annual retainer
of $12, to: a) receive the number of shares of Optek's common stock equal to the
amount of the retainer divided by the fair market value per share on the date
such amount would otherwise be paid; b) receive ten year options to purchase
shares of the Company's common stock at an exercise price equal to 50% of the
fair market value for the number of shares equal to the retainer divided by the
difference between the market price and the exercise price, or; c) defer payment
of the retainer until such time as they cease to be a director. For purposes of
the Directors' Compensation Plan, fair market value per share is defined as the
average of the closing prices for the Company's common stock for the twenty
trading days preceding an event. No elections to receive the benefits afforded
have been made by any director under the Director's Compensation Plan.

The per share weighted average fair value of stock options granted during
fiscal 1997 and fiscal 1996 was $3.77 and $4.13, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Expected dividend yield..................................... 0% 0%
Expected volatility......................................... 44.2% 41.5%
Risk-free interest rate..................................... 6% 6%
Expected life............................................... 3 years 3 years
</TABLE>

The Company applies APB opinion No. 25 in accounting for its plans 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 stock options granted in
fiscal 1996 and fiscal 1997 under SFAS No. 123, the Company's net income would
have been reduced to the proforma amounts indicated below:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net income:
As reported............................................... $11,502 $12,895
Proforma.................................................. 11,259 12,810
Diluted earnings per share:
As reported............................................... $ 1.50 $ 1.71
Proforma.................................................. 1.47 1.70
</TABLE>

Proforma net income reflects only options granted in fiscal 1997 and fiscal
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the proforma net income and
diluted earnings per share amounts presented above because compensation cost is
reflected over the options vesting period of 3 years and compensation cost for
options granted prior to October 28, 1995 is not considered.

Prior to fiscal 1995, warrants were granted in the amount of 261,301 shares
to certain non-employee directors and advisors. During fiscal 1995, warrants to
purchase 16,000 shares of common stock were exercised at a weighted average
exercise price of $3.25. During fiscal 1996, 11,500 warrants expired with an
exercise price of $6.13 per share. During fiscal 1997, warrants to purchase
53,333 shares of common stock were exercised at a weighted average exercise
price of $3.03. Excluding warrants granted to financial institutions, the
Company, at October 31, 1997, had 180,468 warrants outstanding at a weighted
average exercise price of $.39 and a range of $.19 to $6.00 per share expiring
July 1998 through November 1998.

Prior to fiscal 1997, the Company granted First Source a warrant, as
amended on October 31, 1997, to purchase 3,150,000 shares of the Company's
common stock at an exercise price of $.50 per share which

F-12
<PAGE> 57
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expires on October 31, 1998. The warrant contains certain antidilutive
provisions, certain registration rights upon the occurrence of a public offering
and certain demand rights for such a registration.

(7) INCOME TAXES

Income taxes consist of the following:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ----
<S> <C> <C> <C>
Current:
U.S. Federal............................................ $ 6,379 $1,887 $158
Foreign................................................. 160 90 --
Deferred.................................................. (1,280) (833) --
------- ------ ----
Income tax expense before extraordinary item.... 5,259 1,144 158
Extraordinary item........................................ (542) -- --
------- ------ ----
$ 4,717 $1,144 $158
======= ====== ====
</TABLE>

Income tax expense attributable to income before extraordinary item differs
from the expected tax expense computed by applying the U.S. corporate income tax
rate of 35% for fiscal 1997 and 1996, and 34% for fiscal 1995 to income before
income taxes and extraordinary item as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Expected tax expense................................... $6,217 $ 4,914 $ 3,399
Realization of benefits of tax loss carryforwards...... -- (3,238) (3,853)
Change in valuation allowance.......................... (358) (209) 410
Tax credit for research and experimentation
activities........................................... (600) -- --
Other, net............................................. -- (323) 202
------ ------- -------
Income tax expense........................... $5,259 $ 1,144 $ 158
====== ======= =======
</TABLE>

The fiscal 1997 change in valuation allowance and tax credit for research
and experimentation activities occurred in the fourth quarter.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at October 31, 1997 and
October 25, 1996 are presented below:

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances............................ $ 578 $ 372
Inventory allowances...................................... 506 525
Accrued expenses and other................................ 524 603
Property, plant and equipment............................. 505 --
Less valuation allowance.................................. -- (358)
------ ------
Deferred tax assets............................... 2,113 1,142
Deferred tax liabilities:
Property, plant and equipment............................. -- 309
------ ------
Net deferred tax assets........................... $2,113 $ 833
====== ======
</TABLE>

The net change in the valuation allowance for the year ended October 31,
1997 and October 25, 1996 was a decrease of $358 and $3,447, respectively. Based
on the Company's historical and current earnings,

F-13
<PAGE> 58
OPTEK TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management believes it is more likely than not that the Company will realize the
benefits of its net deferred tax assets existing at October 31, 1997.

(8) OPERATING LEASES

The Company leases certain manufacturing facilities and equipment under
noncancellable operating leases. Future minimum lease payments as of October 31,
1997 under all such operating leases are as follows: 1998, $668; 1999, $305;
2000, $233; 2001, $211; and 2002, $208. Rental expense in 1997 was $469; 1996,
$399; and 1995, $412.

(9) CREDIT RISK AND MAJOR CUSTOMER INFORMATION

Substantially all of the Company's sales are made on credit on an unsecured
basis. The Company evaluates credit risks on an individual basis before
extending credit to its customers and believes the allowance for doubtful
accounts adequately provides for losses on uncollectible accounts.

During fiscal 1997, the Company's ten largest customers accounted for
approximately 63% of net sales versus 62% in fiscal 1996 and 57% in fiscal 1995.
Such customers are involved primarily in the automotive and office equipment
industries. During fiscal 1997, net sales to one customer in the automotive
industry were 13% of total net sales, versus 11% in fiscal 1996 and 13% in
fiscal 1995, and net sales to another automotive customer were 13% of total net
sales versus 8% in fiscal 1996 and 3% in fiscal 1995. Sales to one customer in
the office equipment industry were 10% of total net sales versus 11% in fiscal
1996 and 13% in fiscal 1995.

Aggregate export sales to unaffiliated customers were $17,361 in fiscal
1997, $18,865 in fiscal 1996, and $16,856 in fiscal 1995. Export sales were
primarily to customers in Western Europe.

(10) EMPLOYEE BENEFIT PLAN

All U.S. paid employees of the Company are entitled to participate in the
Optek Technology, Inc. Profit-Sharing Plan and Trust (Profit-Sharing Plan).
Pursuant to the Profit-Sharing Plan, employees may request the Company to deduct
and contribute up to 15% of their salary up to the appropriate statutory dollar
limits. The Company has the option to contribute up to 2% of the employee's
salary. Employer contributions vest ratably over a period of five years. Vesting
occurs after each year in which employees accumulate at least 1,000 hours of
service. An employee's vested account balance is distributable either upon
termination of employment or after attaining a certain age. During fiscal 1997,
the Company provided for contributions to the Profit-Sharing Plan totaling $165
to be paid the first quarter of fiscal 1998. For fiscal 1996 and fiscal 1995 the
Company contributed $143 and $139, respectively.

(11) CONTINGENCIES

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material affect on the Company's
financial position or results of operations.

F-14
<PAGE> 59

[Picture depicting a few of the Company's sensor assemblies with examples of end
products in which they are used.]
<PAGE> 60

=============================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 6
Use of Proceeds.............................. 15
Price Range of Common Stock.................. 15
Dividend Policy.............................. 15
Capitalization............................... 16
Selected Consolidated Financial Data......... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 19
Business..................................... 26
Management................................... 37
Principal and Selling Stockholders........... 39
Underwriting................................. 41
Legal Matters................................ 42
Experts...................................... 42
Information Incorporated by Reference........ 43
Available Information........................ 43
Index to Consolidated Financial Statements... F-1
</TABLE>

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2,500,000 Shares

[OPTEK LOGO]

Common Stock

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PROSPECTUS
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PRUDENTIAL SECURITIES INCORPORATED

BANCAMERICA ROBERTSON STEPHENS

ABN AMRO INCORPORATED
April 30, 1998

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