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

                                    FORM 10-Q

                        [X] QUARTERLY REPORT PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 2006

                                       or

                        [ ] TRANSITION REPORT PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   For the transition period from ____________________ to ____________________


                        Commission file number 000-31861


                      OPTICAL COMMUNICATION PRODUCTS, INC.
             (Exact Name of Registrant as Specified in Its Charter)
                              --------------------





Delaware                                                              95-4344224
(State or Other Jurisdiction                                    (I.R.S. Employer
of Incorporation or Organization)                            Identification No.)

                               6101 Variel Avenue
                        Woodland Hills, California 91367
                    (Address of principal executive offices,
                               including zip code)

       Registrant's Telephone Number, Including Area Code: (818) 251-7100




        Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

        Indicate by check mark  whether the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act).

Large Accelerated Filer |_|   Accelerated Filer |_|   Non-Accelerated Filer  |X|

        Indicate by check mark  whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act).

        Yes |_|No |X|

        The  registrant  has two  classes of common  stock  authorized,  Class A
Common Stock and Class B Common Stock. The rights, preferences and privileges of
each class of common stock are identical  except for voting rights.  The holders
of Class A Common  Stock are  entitled  to one vote per share  while  holders of
Class B Common  Stock are entitled to ten votes per share on matters to be voted
on by  stockholders.  As of February 5, 2007,  there were  47,489,909  shares of
Class A common stock  outstanding and 66,000,000  shares of Class B Common Stock
outstanding.



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<PAGE>




                      OPTICAL COMMUNICATION PRODUCTS, INC.

                          QUARTERLY REPORT ON FORM 10-Q
                     FOR THE PERIOD ENDED DECEMBER 31, 2006

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                     PAGE
                          PART I. FINANCIAL INFORMATION
<S>          <C>                                                                      <C>
Item 1.      Condensed Consolidated Financial Statements (Unaudited)

             Condensed Consolidated Balance Sheets at December 31, 2006 and
             September 30, 2006 ..................................................    1

             Condensed Consolidated Statements of Operations for the Three Months
             Ended December 31, 2006 and 2005 and Condensed Consolidated
             Statements of Comprehensive Income (Loss) for the Three Months Ended
             December 31, 2006 and 2005...........................................    2

             Condensed Consolidated Statements of Cash Flows for the Three Months
             Ended December 31, 2006 and 2005.....................................    3

             Notes to Condensed Consolidated Financial Statements.................    4

Item 2.      Management's Discussion and Analysis of Financial Condition and
             Results of Operations................................................    17

Item 3.      Quantitative and Qualitative Disclosures about Market Risk...........    29

Item 4.      Controls and Procedures..............................................    29

                    PART II. OTHER INFORMATION AND SIGNATURES

Item 1.      Legal Proceedings....................................................    30

Item 1A.     Risk Factors.........................................................    30

Item 4.      Submission of Matters to a Vote of Security Holders..................    45

Item 6.      Exhibits.............................................................    46

Signatures......................................................................      47

</TABLE>


<PAGE>



                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

OPTICAL COMMUNICATION PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

<TABLE>
<CAPTION>
                                                                           December 31,  September 30,
                                                                               2006           2006
                                                                           ---------------------------
<S>                                                                           <C>            <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                   $  55,740      $  57,413
  Marketable securities                                                          68,235         69,523
  Accounts receivable less allowance for doubtful accounts and sales
   returns of $603 at December 31, 2006 and $550 at September 30, 2006           10,071         11,185
  Inventories                                                                    26,197         25,715
  Income taxes receivable                                                           371          1,284
  Deferred income taxes                                                             330            330
  Prepaid expenses and other current assets                                       1,625          1,333
                                                                              ---------      ---------

           Total current assets                                                 162,569        166,783

Property, plant and equipment, net                                               30,051         29,313
Goodwill                                                                          8,817          8,330
Intangible assets, net                                                            2,422          2,656
Deferred income taxes                                                               207            207
Other assets                                                                         12             29
                                                                              ---------      ---------

TOTAL ASSETS                                                                  $ 204,078      $ 207,318
                                                                              =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                            $   5,387      $   7,239
  Accounts payable to related party                                               2,869          2,142
  Accrued payroll related expenses                                                2,798          1,599
  Accrued bonus                                                                   1,045          1,688
  Accrued transitional costs for contract manufacturing                             487              -
  Other accrued expenses                                                          3,094          2,595
  Income taxes payable                                                              223            180
                                                                              ---------      ---------

           Total current liabilities                                             15,903         15,443
                                                                              ---------      ---------

OTHER LONG-TERM LIABILITIES                                                         161            159
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Class A common stock, $0.001 par value; 200,000,000 shares authorized,
    47,489,409 and 47,424,178 shares issued and outstanding at December
    31, 2006 and September 30, 2006, respectively.                                   47             47
  Class B common stock $0.001 par value; 66,000,000 shares
    authorized, 66,000,000 shares issued and outstanding at
    December 31, 2006 and September 30, 2006, respectively.                          66             66
  Additional paid-in-capital                                                    135,481        135,123
  Accumulated other comprehensive income (loss)                                      41            (86)
  Retained earnings                                                              52,379         56,566
                                                                              ---------      ---------

           Total stockholders' equity                                           188,014        191,716
                                                                              ---------      ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $ 204,078      $ 207,318
                                                                              =========      =========
</TABLE>

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                       1
<PAGE>



<TABLE>
<CAPTION>

OPTICAL COMMUNICATION PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
                                                                                    Three Months Ended December 31,
                                                                                 ------------------------------------

                                                                                        2006               2005
                                                                                 ------------------------------------

<S>                                                                                 <C>               <C>
REVENUE                                                                             $      17,024     $      17,749
COST OF REVENUE                                                                            13,824            11,440
                                                                                    -------------     -------------

GROSS PROFIT                                                                                3,200             6,309
                                                                                    -------------     -------------

OPERATING EXPENSES:
  Research and development                                                                  2,809             3,262
  Selling and marketing                                                                     1,282             1,190
  General and administrative                                                                4,404             2,112
  Transitional cost for contract manufacturing                                                493                 -
                                                                                    -------------     -------------
           Total operating expenses                                                         8,988             6,564
                                                                                    -------------     -------------

LOSS FROM OPERATIONS                                                                       (5,788)             (255)

INVESTMENT INCOME                                                                           1,573             1,297
OTHER INCOME, net                                                                              71                85
                                                                                    -------------     -------------

INCOME (LOSS) BEFORE INCOME TAXES                                                          (4,144)            1,127

PROVISION FOR INCOME TAXES                                                                     43                35
                                                                                    -------------     -------------

NET INCOME (LOSS)                                                                   $      (4,187)    $       1,092
                                                                                    =============     =============

BASIC EARNINGS (LOSS) PER SHARE                                                     $       (0.04)    $        0.01
                                                                                    =============     =============

DILUTED EARNINGS (LOSS) PER SHARE                                                   $       (0.04)    $        0.01
                                                                                    =============     =============

BASIC SHARES OUTSTANDING                                                                  113,444           113,027
                                                                                    =============     =============

DILUTED SHARES OUTSTANDING                                                                113,444           113,326
                                                                                    =============     =============

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
                                                                                    Three Months Ended December 31,
                                                                                 ------------------------------------
                                                                                        2006               2005
                                                                                 ------------------------------------
NET INCOME (LOSS)                                                                   $      (4,187)    $       1,092

OTHER COMPREHENSIVE INCOME (LOSS):
   Foreign currency translation adjustment                                                    127                 -
                                                                                    -------------     -------------

COMPREHENSIVE INCOME (LOSS)                                                         $      (4,060)    $       1,092
                                                                                    =============     =============
</TABLE>

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                       2
<PAGE>


<TABLE>
<CAPTION>

OPTICAL COMMUNICATION PRODUCTS, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                                                                                    Three Months Ended December 31,
                                                                                 ------------------------------------
                                                                                        2006               2005
                                                                                 ------------------------------------
<S>                                                                                 <C>               <C>
OPERATING ACTIVITIES:
  Net income (loss)                                                                 $      (4,187)    $       1,092

  Adjustments to reconcile net income (loss) to net cash (used in)
    provided by operating activities:
    Depreciation and amortization                                                           1,200             1,020
    Inventory write-down                                                                    1,278               434
    Amortization of premium (discount) on marketable securities                              (265)             (185)
    Stock-based compensation expense                                                          282               240
    Deferred income taxes                                                                       -              (385)
    Changes in operating assets and liabilities:
      Accounts receivable, net                                                              1,134            (1,270)
      Income taxes receivable                                                                 913                 -
      Inventories                                                                          (2,318)           (3,047)
      Prepaid expense and other assets                                                       (279)              118
      Accounts payable                                                                     (1,998)             (450)
      Accounts payable to related parties                                                     727              (133)
      Accrued payroll and benefits                                                          1,195               424
      Accrued bonuses                                                                        (647)             (608)
      Accrued transitional costs for contract manufacturing                                   486                 -
      Other accrued expenses                                                                  285               523
      Income taxes payable                                                                     43                 -
                                                                                    -------------     -------------

Net cash used in operating activities                                                      (2,151)           (2,227)
                                                                                    -------------     -------------

INVESTING ACTIVITIES:
Purchase of marketable securities                                                         (18,448)          (14,767)
Maturities of marketable securities                                                        20,000            10,000
Purchase of property, plant and equipment                                                  (1,286)             (115)
                                                                                    -------------     -------------

Net cash (used in) provided by investing activities                                           266            (4,882)
                                                                                    -------------     -------------

FINANCING ACTIVITIES:
Proceeds from the exercise of stock options                                                    76               111
                                                                                    -------------     -------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                       136                 -

NET DECREASE IN CASH AND CASH EQUIVALENTS                                                  (1,673)           (6,998)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             57,413            83,975
                                                                                    -------------     -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $      55,740     $      76,977
                                                                                    =============     =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during period for:
      Interest                                                                      $         135     $           -
      Income taxes                                                                  $        (925)    $           -
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Purchase of property, plant and equipment through accounts payable
  and accrued expenses                                                              $         297     $           -
</TABLE>

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                       3
<PAGE>


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   GENERAL INFORMATION

        The accompanying  unaudited  interim  condensed  consolidated  financial
statements of Optical Communication Products,  Inc., a Delaware corporation (the
"Company"),   have  been  prepared  in  accordance  with  accounting  principles
generally  accepted  in the  United  States of  America  and  Article  10 of the
Securities and Exchange Commission's  Regulation S-X.  Accordingly,  they do not
include all of the information and footnotes  required by accounting  principles
generally  accepted  in the United  States of  America  for  complete  financial
statements.  In  management's  opinion,  the  unaudited  condensed  consolidated
financial  statements  contain all  adjustments,  consisting of normal recurring
adjustments,  necessary to present fairly the Company's  condensed  consolidated
financial  statements  as of  December  31,  2006  and for all  interim  periods
presented.  The consolidated  financial statements should be read in conjunction
with the audited consolidated financial statements included in the Annual Report
of the Company filed on Form 10-K with the  Securities  and Exchange  Commission
for the year ended  September 30, 2006. The results of operations for the period
ended December 31, 2006 are not  necessarily  indicative of the results that may
be  expected  for the fiscal year  ending  September  30,  2007.  The  Company's
operations  are primarily  located in Woodland  Hills,  California  and Hsinchu,
Taiwan  (through the  acquisition of GigaComm  Corporation in August 2006).  The
Company is a majority-owned  subsidiary of The Furukawa Electric,  Ltd. of Japan
("Furukawa").  Furukawa beneficially owns 58.2% of the Company's common stock at
December 31, 2006,  which accounts for 93.3% of the combined voting power of all
of the Company's outstanding stock.

        Operations - The Company  operates in one industry  segment which is the
design and manufacture of fiber optic  components for use in  metropolitan  area
networks,  ("MANs"), local area networks ("LANs") and fiber-to-the-home ("FTTH")
networks.  The Company's  products consist of optical  transmitters,  receivers,
transceivers  and  transponders  which convert  electronic  signals into optical
signals and back to electronic  signals,  enabling  high-speed  communication of
voice and data traffic over public and private fiber optic networks.

        Principles  of  Consolidation  - The  condensed  consolidated  financial
statements  include  the  accounts  of the  Company  and its  subsidiaries.  All
significant intercompany amounts and transactions have been eliminated.

2.   SIGNIFICANT ACCOUNTING POLICIES


         Use of Estimates in the Preparation of the Financial  Statements -- The
preparation of financial  statements in conformity  with  accounting  principles
generally  accepted in the United States of America requires  management to make
estimates and  assumptions  that affect  amounts  reported  therein.  Due to the
inherent  uncertainty  involved in making estimates,  actual results reported in
future periods may differ from those estimates.


        Cash  and  Cash  Equivalents  --  Cash  and  cash  equivalents   include
unrestricted  deposits  and money  market  funds with a maturity  at the date of
purchase of three months or less.


         Marketable  Securities -- Marketable securities represent United States
treasury  notes and  treasury  bonds with an original  maturity of greater  than
three months.  These  securities are classified as held to maturity  because the
Company has the intent and ability to hold the  securities  to  maturity.  Gross
unrealized  gains and  losses on  held-to-maturity  marketable  securities  have
historically  not been  material.  Should  a  decline  in the  fair  value of an
individual security or securities be judged to be other than temporary, the cost
basis of the security  would be written down to fair value and the amount of the
write-down   would  be  accounted  for  as  a  realized   loss.   Maturities  on
held-to-maturity  marketable debt  securities  range from less than one month to
seven months from the date of purchase.


                                       4
<PAGE>



        Investments in marketable  securities  were as follows at December 31 of
each respective year (in thousands):


                                                Fair     Unrealized   Unrealized
 Type of Security                 Book/Cost     Value       Gains      (Losses)
 ----------------                 ---------   ---------  ----------   ----------
 United States Treasury Notes
    2006                          $ 68,235     $68,242     $     7     $     --
    2005                          $ 69,597     $69,432     $    --     $   (165)




         Inventories  --  Inventories  are stated at the lower of cost or market
value.  Cost is determined  using the first-in,  first-out  method.  The Company
establishes its inventory  write-downs based on excess and obsolete  inventories
determined primarily by historical usage and future demand forecasts. Provisions
for excess and obsolete  inventory  result in a new,  lower-cost  basis for that
inventory and subsequent changes in facts and circumstances do not result in the
restoration or increase in that newly established cost basis.


         Property,  Plant and  Equipment -- Property,  plant and  equipment  are
recorded  at cost.  Provision  for  depreciation  has been made  based  upon the
estimated  useful  lives of the assets,  which  range from three to  thirty-nine
years, using the straight-line method. Leasehold improvements are amortized over
the shorter of the term of the lease or estimated useful life.  Improvements and
betterments are capitalized if they extend the useful life of the asset. Routine
repairs and maintenance are expensed when incurred.


         Impairment of  Long-Lived  Assets -- The Company  evaluates  long-lived
assets for impairment whenever events or changes in circumstances  indicate that
the carrying  value of an asset may no longer be  recoverable.  If the estimated
future cash flows (undiscounted and without interest charges) from the use of an
asset are less than the carrying value, a write-down would be recorded to reduce
the related asset to its estimated fair value. For purposes of estimating future
cash flows from impaired  assets,  the Company groups assets at the lowest level
for which there are identifiable cash flows that are largely  independent of the
cash flows of other  groups of assets.  There  have been no  impairment  charges
recorded by the Company.


         Income Taxes -- Income taxes are provided for taxes  currently  payable
or refundable, and deferred income taxes arising from future tax consequences of
events that have been  recognized in the Company's  financial  statements or tax
returns.  Deferred  income tax assets and  liabilities  are  recognized  for the
estimated  future tax  consequences  attributable  to  differences  between  the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their  respective  tax basis.  Deferred  income 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.  Valuation allowances are established when necessary to reduce deferred
income tax assets to the amounts  that are more  likely than not  expected to be
realized.


         Earnings per Share -- Basic  earnings per share are computed  using the
weighted-average  number of common shares outstanding during the period. Diluted
earnings  per share are  computed  using the  weighted-average  number of common
shares and dilutive potential common shares outstanding during the period, using
the treasury stock method.


         Revenue Recognition -- The Company generally recognizes revenue, net of
sales returns and allowances,  when persuasive evidence of an arrangement exits,
shipment  has  occurred,  all  significant  contractual  obligations  have  been
satisfied,  the fee is  fixed  or  determinable  and  collection  is  considered
probable.  Products  are  generally  shipped  "FOB  shipping  point." In certain
limited cases wherein  customer  acceptance must occur,  the Company defers such
revenue  until such  acceptance  is obtained and all other


                                       5
<PAGE>



revenue recognition criteria have been met. The Company records an allowance for
sales  returns  based on an analysis of the history of sales returns in order to
reasonably estimate the allowance.


         Research and Development Costs -- Costs associated with the development
of new products and any sustaining engineering costs are charged to expense when
incurred.


         Common Stock -- At December  31,  2006,  the Company had two classes of
common  stock with a par value of $0.001  per  share.  Holders of Class A common
stock generally have identical rights to holders of Class B common stock, except
that  holders of Class A common  stock are  entitled to one vote per share while
holders of Class B common  stock are  entitled to ten votes per share on matters
submitted to a vote of the stockholders.  Furukawa owns all 66,000,000 shares of
the Company's outstanding Class B common stock.


         Fair  Value  of  Financial   Instruments  --  The  recorded  values  of
marketable  securities,   accounts  receivable,  accounts  payable  and  accrued
expenses  approximate  their fair values based on their short-term  nature.  The
Company has no long-term debt at December 31, 2006.


         Concentration of Credit Risk -- Financial  instruments that potentially
subject the Company to  concentrations  of credit risk consist primarily of cash
and cash equivalents, placed with high credit quality institutions, and accounts
receivable. The Company sells products and extends credit to customers, monitors
its exposure to credit losses, and maintains  allowances for anticipated losses.
Accounts  receivable from the Company's  customers with amounts greater than 10%
of gross accounts receivable amounted to $1,859,000 (17.4%),  $1,350,000 (12.7%)
and $1,264,000  (11.8%) at December 31, 2006 and $1,648,000 (14.0%) at September
30, 2006. Revenue from the Company's  customers with amounts greater than 10% of
total  revenues  amounted to 17.7%,  17.2% and 16.2% for the three  months ended
December 31, 2006 and 16.3% and 16.2% for the three  months  ended  December 31,
2005. No other customers represented more than 10% of total revenues.


        Segment  Reporting  --  Statement  of  Financial   Accounting  Standards
("SFAS")  No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information,"  establishes  standards  for the manner in which public  companies
report  information  about  operating  segments in annual and interim  financial
statements.  SFAS No. 131 also  establishes  standards  for related  disclosures
about products and services,  geographic areas and major  customers.  The method
for  determining  what  information  to  report  is based on the way  management
organizes the operating segments within a Company for making operating decisions
and assessing financial performance.


         The  Company's  Chief  Executive  Officer  ("CEO") and Chief  Financial
Officer  ("CFO")  are its chief  operating  decision  makers.  The  Company  has
determined  that it operates in one  reportable  segment which is the design and
manufacture of fiber optic components for use in MANs, LANs and FTTH networks.


         Stock-Based  Compensation -- On December 16, 2004, the FASB issued SFAS
123 (revised 2004),  "Share-Based  Payment," which requires  compensation  costs
related to share-based  payment  transactions  to be recognized in the financial
statements. With limited exceptions, the amount of compensation cost is measured
based on the  grant-date  fair  value of the  equity  or  liability  instruments
issued.  In addition,  liability  awards are remeasured  each reporting  period.
Compensation  cost is  recognized  over the  period  that an  employee  provides
service in exchange for the award.  SFAS 123(R)  replaces SFAS 123,  "Accounting
for Stock-Based  Compensation,"  and supersedes APB Opinion No. 25,  "Accounting
for Stock Issued to Employees." SFAS 123(R) is effective as of the first interim
or annual  reporting  period  that  begins  after  June 15,  2005.  The  Company
implemented SFAS 123(R) as of October 1, 2005.




                                       6
<PAGE>



        The  Company   adopted  SFAS  123(R)   using  the   modified-prospective
transition method. Under this transition method,  compensation cost includes: a)
compensation cost for all share-based payments granted prior to October 1, 2005,
but not yet vested,  based on the grant-date  fair value estimated in accordance
with the  original  provisions  of SFAS 123,  and b)  compensation  cost for all
share-based  payments  granted  subsequent to September  30, 2005,  based on the
grant-date  fair value  estimated  in  accordance  with the  provisions  of SFAS
123(R). The results for the prior periods have not been restated.


        The  Company  adopted  the  transition  method  described  in FASB Staff
Position No. FAS 123(R)-3,  "Transition  Election  related to accounting for the
Tax Effect of Share-Based  Payment  Awards," in the quarter ended  September 30,
2006.  The  adoption of FAS 123(R)-3  did not have a  significant  impact on the
Company's condensed consolidated financial statements.

 Recent Accounting Pronouncements

        In June  2006,  the FASB  issued  FASB  Interpretation  No.  (FIN) 48 --
"Accounting  for  Uncertainty  in  Income  Taxes  -- an  interpretation  of FASB
Statement No. 109".  FIN 48 prescribes a recognition  threshold and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on accounting for  derecognition,  interest,  penalties,  accounting in
interim periods, disclosure and classification of matters related to uncertainty
in income taxes, and transitional  requirements  upon adoption of FIN 48. FIN 48
is effective for fiscal years beginning  after December 15, 2006.  Management is
currently  evaluating the effect that adoption of this  interpretation will have
on the Company's consolidated financial position and results of operations.


        In  September   2006,   the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements."  SFAS No. 157 defines  fair value,  establishes  a framework  for
measuring fair value in generally accepted  accounting  principles,  and expands
disclosures  about fair value  measurements.  SFAS No. 157  applies  under other
accounting  pronouncements that require or permit fair value  measurements,  the
FASB having previously  concluded in those accounting  pronouncements  that fair
value is the relevant measurement attribute.  Accordingly, SFAS No. 157 does not
require  any new fair  value  measurements.  This  statement  is  effective  for
financial  statements issued for fiscal years beginning after November 15, 2007,
and  interim  periods  within  those  fiscal  years.   Management  is  currently
evaluating the effect that the adoption of this  pronouncement  will have on the
Company's consolidated financial position or results of operations.


        In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior
Year  Misstatements  When  Quantifying  Misstatements  in Current Year Financial
Statement."  Due to diversity in practice among  registrants,  SAB 108 expresses
SEC staff  views  regarding  the  process by which  misstatements  in  financial
statements are evaluated for purposes of determining whether financial statement
restatement  is  necessary.  SAB 108 is effective  for fiscal years ending after
November 15, 2006, and early application is encouraged.  The adoption of SAB 108
is  not  currently  expected  to  have a  significant  impact  on the  Company's
consolidated financial statements.

        Reclassifications  --  Certain  reclassifications  have been made in the
prior period to conform to the current period presentaion.

3.   ACQUISITION OF GIGACOMM

        On August 24, 2006,  the Company  completed the  acquisition of GigaComm
Corporation,  a Taiwan  corporation  ("GigaComm")  pursuant to the Primary Stock
Purchase agreement by and among the Company,  GigaComm,  certain stockholders of
GigaComm  and  YEONGYI  (Asia) Co.,  Ltd.,  a Taiwan  corporation,  as a selling
stockholder and the  representative  of the selling  stockholders  (the "Selling
Stockholders").  Pursuant to the Primary Stock Purchase Agreement and additional
stock purchase  agreements  entered into with additional holders of common stock
holding  shares of GigaComm  common stock,  the Company  acquired  96.88% of the
issued and outstanding shares of GigaComm common stock



                                       7
<PAGE>



and paid consideration of approximately  $18.8 million,  consisting of both cash
payments to  stockholders  of GigaComm and the  repayment  of all of  GigaComm's
outstanding  debt  obligations   (the   "Acquisition").   As  a  result  of  the
transaction,  GigaComm  became a  subsidiary  of the Company and the Company was
able to expand its market presence in Asia.  This expanded  presence in Asia and
the  potential  that GigaComm will become a second source for lasers are factors
contributing to the Company  recording  goodwill as a result of the Acquisition.
The Company has consolidated the financial position and results of operations of
GigaComm since the date of acquisition.

        The   Acquisition  was  accounted  for  using  the  purchase  method  of
accounting.  The  carrying  values of  GigaComm's  assets and  liabilities  were
adjusted  to reflect  the fair  values of the assets and  liabilities  as of the
acquisition date to the extent of the Company's 96.88% controlling interest. The
remaining 3.12% was accounted for at GigaComm's historical basis.

        The acquisition price was comprised of the following (in thousands):


                 Purchase price               $    18,796
                 Transaction costs                    710
                                              -----------
                                              $    19,506
                                              ===========

        Of the $19,506,000 acquisition price, approximately $1.3 million is held
in escrow as of  December  31,  2006.  Such amount is to be  distributed  to the
Selling  Stockholders at the end of a contingency  period of  approximately  one
year  pending  resolution  of any  matters  that may arise  relating  to Selling
Stockholders'   indemnification   provisions  in  the  Primary  Stock   Purchase
Agreement.


        The purchase price allocation below is based on preliminary estimates of
the value of the inventory,  fixed assets and intangible assets acquired and the
related  income tax impact of the purchase  accounting  adjustments.  During the
three months ended December 31, 2006, the purchase price allocation was adjusted
to reduce the fair value of  inventory  by  $487,000.  The  Company  expects the
purchase  price  allocation to be finalized by the end of the  Company's  second
fiscal quarter (March 31, 2007) upon the finalization of the related valuations.
We do not expect that goodwill will be deductible for tax purposes.

        The preliminary purchase price allocation is as follows (in thousands):

            Cash                                 $        196
            Accounts receivable                         2,264
            Inventories                                 4,374
            Prepaids and other current assets             782
            Fixed assets                                7,072
            Other assets                                  160
            Intangible assets                           2,228
            Goodwill                                    8,817
            Accounts payable                           (4,573)
            Accrued liabilities                        (1,588)
            Other liabilities                            (226)
                                                 ------------
                                                 $     19,506
                                                 ============


                                       8
<PAGE>



        The  preliminary  allocation  of  the  purchase  price  to  identifiable
intangible  assets,  along with their  respective  estimated useful lives, is as
follows (in thousands):

            Developed technology (6.5 years)     $      1,356
            Customer relationships (3 years)              678
            Tradename (3 years)                           194
                                                 ------------
                                                 $      2,228
                                                 ============

4.   TRANSITION TO CONTRACT MANUFACTURING

        On November 1, 2006, the Company  announced that it reached an agreement
with SAE  Magnetics  (H.K.)  Limited  (SAE),  a  wholly-owned  subsidiary of TDK
Corporation, which will enable the Company to manufacture certain of its product
lines in China commencing in the summer of 2007. The Company expects to maintain
its  existing  manufacturing   facilities  but  will  reduce  its  manufacturing
workforce in Woodland Hills,  California and at GigaComm once  manufacturing  at
SAE begins. In connection with this workforce reduction,  the Company expects to
incur transition  charges of approximately $3 million to $3.5 million during the
fiscal year ended  September  30,  2007.  These  transition  charges,  which are
primarily  estimated  severance and retention  payments,  are being  recorded in
accordance with SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities," and SFAS 112, "Employees' Accounting for Postemployment  Benefits."
During the three months ended December 31, 2006, the Company charged $493,000 to
transitional  costs for  contract  manufacturing,  of which $6,000 had been paid
during the period.  No employees  have been  terminated as of December 31, 2006.
The Company  anticipates  that the transition will be completed by September 30,
2007.

5.   STOCK-BASED COMPENSATION

Prior to adoption of SFAS 123(R)

        Prior to the  Company's  October 1, 2005  adoption of SFAS  123(R),  the
Company provided the disclosure  required under SFAS 123 as amended by SFAS 148,
"Accounting  for  Stock-Based  Compensation  - Transition and  Disclosure."  The
Company  generally did not  recognize  stock-based  compensation  expense in its
statements  of  operations  for periods  prior to the adoption of SFAS 123(R) as
options are generally  granted at an exercise price equal to the market value of
the underlying stock on the date of grant.




                                       9
<PAGE>



Adoption of SFAS 123(R)

        Stock-based  compensation recognized is based on the fair value of stock
options on their date of grant using a Black-Scholes fair value model, amortized
on a straight-line  basis over the vesting period of the options.  The effect of
recording stock-based  compensation for the three months ended December 31, 2006
and 2005 was as follows:

<TABLE>
<CAPTION>

                                                           Three Months Ended December 31,
                                                                 2006              2005
                                                         ------------------------------------
                                                        (in thousands except per share amounts)
<S>                                                        <C>                <C>
Stock-based compensation expense by type of award
    Employee stock options                                 $         254      $         232
    Restricted stock awards                                           28                  -
    Employee stock purchase plan                                       -                  8
                                                         ------------------------------------
Total stock-based compensation expense                     $         282      $         240
Tax effect of stock-based compensation expense                         -                  -
                                                         ------------------------------------
Total stock-based compensation expense , net of tax        $         282      $         240

Effect on earnings per share
   Basic earnings per share                                $        0.00      $        0.00
   Diluted earnings per share                              $        0.00      $        0.00
</TABLE>


        As  required  by  SFAS  123(R),   management   has  estimated   expected
forfeitures and is recognizing  compensation  costs only for those equity awards
expected  to vest based on this rate of  forfeiture.  The  estimated  forfeiture
rates  utilized in the three months ended December 31, 2006 and 2005 was 22% and
25%, respectively.

Stock Options

        The Company's 2000 Stock  Incentive Plan authorizes  22,121,680  options
(increased  from  12,121,680  options at the 2007 Annual Meeting of Shareholders
held on  January  24,  2007) for  grant and  provides  that  options  may have a
contractual term up to ten years and become  exercisable and vest in increments.
The  vesting  is 25% per year or 25%  vesting  after  the  first  year  with the
remainder  vesting  incrementally  over the subsequent 36 months.  Options under
this plan are generally granted with the exercise price equal to the fair market
value of the Company's  common stock on the date of grant.  The Company  granted
1,180,000  and 195,228  stock options with an estimated  total  grant-date  fair
value of $1,771,000 and $313,000 during the three months ended December 31, 2006
and 2005, respectively. The Company recorded stock-based compensation related to
stock options of $254,000 and $232,000 for all unvested options granted prior to
and all options  granted  after the  adoption  of SFAS  123(R)  during the three
months ended  December 31, 2006 and 2005,  respectively.  The Company issues new
shares upon the exercise of stock options.

Restricted Stock Awards

        From  time to time the  Company  may issue  restricted  stock at a price
equal to the fair  market  value of the  Company's  common  stock on the date of
grant.  The normal vesting is 25% per year.  During the year ended September 30,
2006, the Company  issued  300,000 shares of restricted  stock with an estimated
total  grant-date fair value of $570,500.  Of the 300,000 shares issued,  50,000
shares were issued from the 2000 Stock  Incentive  Plan and 250,000  shares were
issued outside of the plan. None of the 300,000 shares of restricted  stock that
were issued in the year ended  September  30, 2006 have vested  during the three
months ended December 31, 2006 and all such shares were contingently returnable.
During  the  three  months  ended  December  31,  2006,  the  Company   recorded
stock-based  compensation expense related to restricted stock of $28,000.  There
was no compensation  expense related to restricted stock during the three months
ended  December  31, 2005 as there were no  restricted  stock  grants  until the
quarter ended September 30, 2006.



                                       10
<PAGE>



Employee Stock Purchase Plan (ESPP)

        The  Company  has an  Employee  Stock  Purchase  Plan (ESPP) that allows
employees to purchase a limited  amount of the  Company's  common stock at a 15%
discount to a defined fair market value.  There was no stock-based  compensation
cost related to the ESPP in the three months ended  December 31, 2006 and $8,000
for the three months ended December 31, 2005. The total stock-based compensation
cost  related to employee  purchases  of stock under the ESPP is  amortized on a
straight-line basis over a weighted-average period of approximately 1 year.

Valuation Assumptions

        During the three  months ended  December 31, 2006 and 2005,  the Company
valued employee  options for  compensation  expense  purposes at the measurement
dates using the Black-Scholes  pricing model with the following weighted average
assumptions:

                                                 Three months ended
                                                    December 31,
                                              ------------------------
                                                  2006        2005
                                              ------------ -----------
        Dividend yield                             0%          0%
        Average expected volatility              74.0%        89.0%
        Average risk-free rate of return         4.57%        4.52%
        Average expected life (years)             7.9          8.0

        Expected Volatility: The volatility factor utilized in the Black-Scholes
valuation model was based on the Company's historical stock prices.

        Risk-free Rate of Return:  The Company based the risk-free interest rate
used  in the  Black-Scholes  valuation  model  on the  implied  yield  currently
available on U.S. Treasury zero-coupon issues with an equivalent expected life.

        Expected  Life: The Company's  expected life  represents the period that
the  Company's  stock-based  awards  are  expected  to be  outstanding  and  was
determined based on historical experience of similar awards.

        Estimating   Forfeitures:   The  Company  uses   historical   forfeiture
experience to derive an estimated rate of forfeiture.  Compensation  expense for
any period,  as derived using the  Black-Scholes  valuation  model,  is adjusted
based on this estimated rate of forfeiture.

        The  Black-Scholes  option  valuation model requires the input of highly
subjective assumptions, including the expected life of the stock-based award and
stock price volatility. The assumptions listed above represent management's best
estimates,   but  these  estimates   involve  inherent   uncertainties  and  the
application of management  judgment.  As a result, if other assumptions had been
used,  the recorded and pro forma  stock-based  compensation  expense could have
been materially different from that depicted above. In addition,  the Company is
required to estimate the expected forfeiture rate and only recognize expense for
those  shares  expected to vest.  If the actual  forfeiture  rate is  materially
different  from the estimated  forfeiture  rate,  the  share-based  compensation
expense could be materially different.

Non-Vested  Options

         As of December 31, 2006, there was approximately  $4.0 million of total
unrecognized  compensation cost related to non-vested  share-based  compensation
arrangements  that is expected to be  substantially  amortized  by December  31,
2010. The total cost is expected to be recognized over a weighted-average period
of 3.6 years.



                                       11
<PAGE>



Stock Option Activity

        Stock option  activity for the three months ended  December 31, 2006 and
options available for future grant at December 31, 2006 are as follows:

<TABLE>
<CAPTION>
                                          Options                               Weighted
                                         Available                  Exercise     Average
                                        for Future   Number of      Price per   Exercise
                                           Grant      Options        Option       Price
                                        ----------  ----------  --------------- --------

<S>                                      <C>         <C>        <C>      <C>       <C>
Balance as of September 30, 2006         4,851,184   8,496,512  $0.19 to $17.38    8.01
Options granted                         (1,180,000)  1,180,000     1.65 to 2.12    2.00
Options exercised*                                     (39,670)    0.97 to 1.83    0.98
Options forfeited                          295,292    (295,292)    0.90 to 3.10    2.18
Options canceled                         1,541,388  (1,541,388)   1.08 to 17.38   11.68
                                         ---------  ----------  ---------------  ------
Balance as of December 31, 2006          5,507,864   7,800,162  $0.19 to $17.38    6.64
                                         =========  ==========  ===============  ======
</TABLE>

*The intrinsic value of options exercised during the three months ended December
31, 2006 and 2005 was approximately $27,000 and $80,000, respectively.

        The following table summarizes information regarding options outstanding
at December 31, 2006:

<TABLE>
<CAPTION>
                               Options Outstanding               Options Exercisable
                        --------------------------------------------------------------------
                                     Weighted                           Weighted
                                      Average   Weighted                Average    Weighted
                                     Remaining   Average                Remaining   Average
       Range of           Number    Contractual Exercise     Shares    Contractual Exercise
       Exercise Prices  Outstanding    Life       Price    Exercisable    Life      Price
                        --------------------------------------------------------------------

<S>                         <C>         <C>       <C>         <C>          <C>     <C>
       $0.19 - $1.69*       960,197     4.0       $0.70       834,147      3.5     $ 0.58
       $1.74 - $3.47      3,215,808     7.9       $2.12       644,799      6.4     $ 2.26
       $3.64 - $9.72         62,200     5.0       $7.25        58,950      5.0     $ 7.45
       $11.00 - $11.12    2,837,395     3.7      $11.00     2,837,395      3.7     $11.00
       $17.38 - $17.38      724,562     4.1      $17.38       724,562      4.1     $17.38

                          7,800,162     5.5      $ 6.64     5,099,853      4.1     $ 9.06
                        ===========  ========  ==========  ===========  =======  ==========
</TABLE>

* The aggregate  intrinsic  value of options  outstanding  and  exercisable  was
approximately $903,000 and $891,000, respectively, at December 31, 2006.

        The  weighted  average  estimated  fair value of options  granted in the
three months ended December 31, 2006 and 2005 was $1.50 and $1.60, respectively.
The total  number of shares  exercisable  were  5,099,853  and  6,605,163  as of
December 31, 2006 and 2005, respectively.

ESPP Activity

        There were a total of 25,561 and 33,017 shares of the  Company's  common
stock issued at a weighted average purchase price of $1.44 and $1.41 pursuant to
the employee stock purchase plan during the three months ended December 31, 2006
and 2005,  respectively.  The weighted  average fair value of the shares  issued
were  $0.95 and $0.84 for the  respective  periods.  There are a total of 24,466
shares available for future issuance under the plan at December 31, 2006.



                                       12
<PAGE>



6.   INVENTORIES

        Inventories consist of the following (in thousands):

                                             December 31,        September 30,
                                                 2006                 2006
                                          ------------------   -----------------
       Raw materials                              $15,691             $15,394
       Work-in-process                              5,516               4,929
       Finished goods                               4,990               5,392
                                          ------------------   -----------------
       Total inventories                          $26,197             $25,715
                                          ==================   =================

7.   PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                              December 31,        September 30,      Useful
                                                  2006                 2006           Lives
                                            ----------------     ---------------    ----------

<S>                                               <C>                   <C>          <C>
       Land                                       $  6,729              $  6,729
       Buildings and improvements                   15,311                15,311     39 years
       Machinery and equipment                      23,892                23,151      5 years
       Computer hardware and software                1,802                 1,591      3 years
       Furniture and fixtures                          471                   467      5 years
       Leasehold improvements                          372                   350      9 years
       Construction in process                         882                   222
                                            ----------------     ---------------
                                                    49,459                47,821
       Less accumulated depreciation               (19,408)              (18,508)
                                            ----------------     ---------------
                                                  $ 30,051              $ 29,313
                                            ================     ===============
</TABLE>

         Depreciation  and  amortization  expense for fixed assets for the three
months ended December 31, 2006 and 2005 was $966,000 and $912,000, respectively.



                                       13
<PAGE>



8.      INTANGIBLE ASSETS

The  following  table  sets forth  intangible  assets by major  asset  class (in
thousands):

<TABLE>
<CAPTION>
                                                                               Weighted
                                                                               Average
                                               December 31,  September 30,   Amortization
                                                   2006         2006            Period
                                              ------------- -----------------------------
                                                                             (Years from
                                                                              inception)
<S>                                                   <C>           <C>          <C>
        Patents                                       950           950          5.0
        Accumulated amortization                     (792)         (744)
        Acquired and developed technology           2,572         2,572          5.8
        Accumulated amortization                   (1,083)         (970)
        Customer relationships                        678           678          3.0
        Accumulated amortization                      (75)          (19)
        Tradename                                     194           194          3.0
        Accumulated amortization                      (22)           (5)
                                              ------------- -------------
        Total intangible assets, net          $     2,422   $     2,656
                                              ============= =============
</TABLE>

        Aggregate amortization expense related to intangible assets was $234,000
and  $108,000   for  the  three  months  ended   December  31,  2006  and  2005,
respectively.  Amortization  expense for the current  period ended  December 31,
2006  includes  $125,000  of  amortization  attributable  to  intangible  assets
acquired in the GigaComm acquisition.

        Following  is a summary  of future  amortization  expense in each of the
next five fiscal years and thereafter (in thousands):

      Remaining nine months fiscal 2007                   $         698
      2008                                                          535
      2009                                                          475
      2010                                                          209
      2011                                                          209
      Thereafter                                                    296

                                                         ---------------
                                                          $       2,422
                                                         ===============


                                       14
<PAGE>



9.   EARNINGS (LOSS) PER SHARE

        The following is a calculation of basic and diluted  earnings (loss) per
share ("EPS"):

                                              Three Months Ended December 31,
                                                     2006           2005
                                           (in thousands, except per share data)

         BASIC EPS COMPUTATION:
         Net income (loss) applicable to
         common stock                         $       (4,187)  $       1,092
                                              ===============  =============

         Weighted average common shares
         outstanding                                 113,444         113,027
                                              ---------------  -------------

         Basic earnings (loss) per share      $        (0.04)  $        0.01
                                              ===============  =============

         DILUTED EPS COMPUTATION:
         Net income (loss) applicable to
         common stock                         $       (4,187)  $       1,092
                                              ===============  =============

         Weighted average common shares
         outstanding                                 113,444         113,027
         Effect of dilutive securities:
           Common stock options                            -             299
                                              ---------------  -------------

         Diluted weighted average shares
         outstanding                                 113,444         113,326
                                              ===============  =============

         Diluted earnings (loss) per share
                                                       (0.04)           0.01
                                              ===============  =============

         The basic  earnings  (loss) per share is  computed  using the  weighted
average  number of common shares  outstanding.  For purposes of computing  basic
earnings  (loss) per share,  shares of restricted  stock which are  contingently
returnable  and subject to repurchase if the  purchaser's  status as an employee
terminates are not considered  outstanding until they are vested. As of December
31,  2006,  300,000  shares of  non-vested  restricted  stock were  contingently
returnable.  Diluted loss per share is also computed  without  consideration  to
potentially  dilutive instruments because the Company incurred losses during the
three  months  ended  December  31,  2006 which  would  make  these  instruments
antidilutive.   Additionally,   the  weighted   average  diluted  common  shares
outstanding  for the three months ended  December 31, 2005 excludes the dilutive
effect of 5,513,668  options.  The options are excluded when the options have an
exercise  price in excess of the average  market value of the  Company's  common
stock during the period or as a result of the Company's net loss.

10.  COMMITMENTS AND CONTINGENCIES

        Operating  Leases  -  The  Company  has  operating  leases  for  certain
facilities.  Lease payments are made monthly. The Company's leases are renewable
monthly, semiannually, annually or for five years. Rent expense for these leases
for the three months ended December 31, 2006 and 2005 was $367,000 and $139,000,
respectively.  Rental  expense for the current  period  ended  December 31, 2006
includes $322,000 rental expense attributable to our GigaComm facility.



                                       15
<PAGE>



        The  following  is a  summary  of  future  minimum  payments  due  under
operating  leases that have  initial or remaining  noncancelable  lease terms in
excess of one year at December 31, 2006 (in thousands):

      Nine months ending September 30, 2007               $       930
      2008                                                      1,180
      2009                                                      1,112
      2010                                                         79
      2011                                                         66
                                                         ---------------
      Total minimum lease payments                        $     3,367
                                                         ===============

        Legal  Proceedings - In August 2006,  the Company filed an action in the
United States District Court for the District of Colorado for breach of contract
and declaratory relief against Olympia Properties, LLC ("Olympia"), its landlord
at its former  Colorado  facility.  The action arose after Olympia  retained the
Company's  security  deposit of $93,700 upon  expiration of the lease,  claiming
that the Company  contaminated the leased premises with arsenic, in violation of
the lease.  The Company  denies that the  premises  contained  arsenic at levels
exceeding either those permitted by the lease or any other applicable  authority
and, accordingly, the Company filed suit.

        In  its  complaint,   the  Company   requests  that  the  court  provide
declaratory  relief that the Company has not breached the lease  through any act
or omission, and also requests damages for breach of contract in connection with
Olympia's  retention  of the  security  deposit.  Further,  the Company  alleges
additional breaches of the lease by Olympia.

        Olympia denied the Company's allegations and asserted  counterclaims for
breach of ten affirmative defenses.  Further, Olympia asserted counterclaims for
breach of contract and equitable relief alleging  damages of approximately  $1.2
million. The Company denied Olympia's  counterclaims.  We intend to aggressively
pursue our claims, and vigorously defend against Olympia's counterclaims.

        Purchase  Commitments - As of December 31, 2006, the Company has entered
into  purchase  commitments  for  materials,  supplies,  equipment  and  outside
services in  aggregate  of  approximately  $13.5  million for fiscal year ending
September  30,  2007.  Included  in  these  purchase  commitments  are  purchase
commitments to a related party for approximately $4.7 million.

        Warranty  Accruals - The  Company  provides a standard  warranty  of its
products from defects in materials  and  workmanship.  The standard  warranty is
limited to repair or replacement,  at the Company's  option,  of defective items
authorized for return within one year from the date of the sale. The table below
sets forth the activity of the Company's warranty reserve (in thousands),  which
is included in other accrued expenses in the accompanying  consolidated  balance
sheets:


                                                    Three Months Ended
                                                       December 31,
                                                    ------------------
                                                     2006         2005
                                                     ----         ----
        Balance at beginning of period                $25          $14
        Additions charged to expense                    6           36
        Deductions                                     (3)         (10)
                                                      ---          ---
        Balance at end of period                      $28          $40
                                                      ===          ===


                                       16
<PAGE>



11.  RELATED PARTY TRANSACTIONS

        The Company is a subsidiary of Furukawa  Electric,  Ltd. Of Japan. Three
members  of the  Company's  board of  directors  are  Furukawa  executives.  The
Company's  related party  transactions  occur between  itself and other Furukawa
owned subsidiaries and affiliates.

        The Company  sells fiber optic  components  and  purchases raw materials
from some of these  entities in the regular  course of business.  Sales of fiber
optic  modules to related  parties  amounted to $2,000 and $23,000 for the three
months  ended  December  31,  2006  and  2005,  respectively.  Purchases  of raw
materials  from the related party  amounted to $5,131,000 and $6,687,000 for the
three months ended December 31, 2006 and 2005, respectively. Accounts receivable
due from the related  party were none and $5,000 at December  31, 2006 and 2005,
respectively.  Accounts  payable  to  the  related  party  were  $2,869,000  and
$3,962,000 at December 31, 2006 and 2005, respectively.  No management fees were
paid in the three months ended December 31, 2006 and 2005, respectively.


ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The  following  discussion  of our  financial  condition  and results of
operations  should  be read  in  conjunction  with  our  consolidated  financial
statements  and the  related  notes to such  consolidated  financial  statements
included   elsewhere  in  this  Report.   The  following   discussion   contains
forward-looking  statements that involve risks and uncertainties.  Words such as
"anticipates,"  "expects,"  "intends,"  "plans,"  "believes,"  "may,"  "will" or
similar  expressions are intended to identify  forward-looking  statements.  The
statements  are based on current  expectations  and actual  results could differ
materially from those discussed  herein.  Factors that could cause or contribute
to the  differences  are discussed below in this Report under "Risk Factors" and
elsewhere in this Report,  and in our Annual  Report on Form 10-K filed with the
Securities  and Exchange  Commission  ("SEC") for the year ended  September  30,
2006.

Recent Accounting Pronouncements

    In  June  2006,  the  FASB  issued  FASB  Interpretation  No.  (FIN)  48  --
"Accounting  for  Uncertainty  in  Income  Taxes  -- an  interpretation  of FASB
Statement No. 109".  FIN 48 prescribes a recognition  threshold and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on accounting for  derecognition,  interest,  penalties,  accounting in
interim periods, disclosure and classification of matters related to uncertainty
in income taxes, and transitional  requirements  upon adoption of FIN 48. FIN 48
is effective for fiscal years beginning  after December 15, 2006.  Management is
currently  evaluating the effect that adoption of this  interpretation will have
on the Company's consolidated financial position and results of operations.


     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value,  establishes  a framework  for  measuring  fair
value in generally accepted accounting principles, and expands disclosures about
fair  value   measurements.   SFAS  No.  157  applies  under  other   accounting
pronouncements that require or permit fair value  measurements,  the FASB having
previously  concluded in those accounting  pronouncements that fair value is the
relevant measurement attribute.  Accordingly,  SFAS No. 157 does not require any
new  fair  value  measurements.   This  statement  is  effective  for  financial
statements  issued for fiscal years  beginning  after  November  15,  2007,  and
interim  periods within those fiscal years.  Management is currently  evaluating
the effect that the adoption of this  pronouncement  will have on the  Company's
consolidated financial position or results of operations.


     In September  2006, the Securities and Exchange  Commission  ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior
Year  Misstatements  When  Quantifying



                                       17
<PAGE>



Misstatements in Current Year Financial Statement." Due to diversity in practice
among  registrants,  SAB 108 expresses SEC staff views  regarding the process by
which  misstatements  in  financial  statements  are  evaluated  for purposes of
determining  whether financial  statement  restatement is necessary.  SAB 108 is
effective for fiscal years ending after November 15, 2006, and early application
is  encouraged.  The  adoption  of SAB 108 is not  currently  expected to have a
significant impact on the Company's consolidated financial statements.

Critical Accounting Policies

        The  preparation  of financial  statements  and related  disclosures  in
conformity with accounting  principles  generally  accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the financial  statements and accompanying  notes. Note 2 to
the consolidated  financial statements in the Annual Report on Form 10-K for the
fiscal  year ended  September  30, 2006  describes  the  significant  accounting
policies  and methods  used in the  preparation  of the  consolidated  financial
statements.  Estimates are used for, but not limited to, the  accounting for the
allowance  for  doubtful  accounts  and sales  returns,  valuation of excess and
obsolete  inventory,  goodwill and identifiable  intangible  assets,  long-lived
assets, SFAS 123(R) fair value calculations for stock-based compensation, income
taxes and loss contingencies.  Actual results could differ from these estimates.
The  following  critical  accounting  policies  are  impacted  significantly  by
judgments, assumptions and estimates used in the preparation of our consolidated
financial statements.

Allowance for Doubtful Accounts and Sales Returns

        Our accounts receivable balance,  net of allowance for doubtful accounts
and sales  returns,  was $10.1  million as of  December  31, 2006 as compared to
$11.2 million as of September 30, 2006. The allowance for doubtful  accounts and
sales returns as of December 31, 2006 was $603,000 as compared to $550,000 as of
September  30,  2006.   The  allowance  is  based  on  our   assessment  of  the
collectibility of customer accounts and potential  returns.  We regularly review
the  allowance by  considering  factors such as  historical  experience,  credit
quality,  age of the accounts receivable  balances,  current economic conditions
that may affect a customer's ability to pay and historical  customer returns. If
a major  customer's  creditworthiness  deteriorates,  or if actual  defaults are
higher than our historical experience, or if actual future customer returns were
to deviate from our expectations, our estimates of the recoverability of amounts
due to us could be  overstated,  and  additional  allowances  could be required,
which could have an adverse impact on our operations.

Inventory Write-Downs

        Our  inventory  balance  was $26.2  million as of  December  31, 2006 as
compared to $25.7  million as of September  30,  2006.  At December 31, 2006 and
September  30, 2006  inventory  with a historical  cost of $8.8 million and $8.0
million,  respectively,  has been written down as excess and obsolete inventory.
We estimate our excess and obsolete  inventory  primarily  through  reference to
historical  usage and future demand  forecasts.  We operate in a highly volatile
industry with high and  unpredictable  rates of inventory  obsolescence.  At the
point of write down, a new,  lower-cost basis for that inventory is established,
and  subsequent  changes  in  facts  and  circumstances  do  not  result  in the
restoration or increase in that newly  established  cost basis. If there were to
be a sudden and  significant  decrease in demand for our  products,  or if there
were a higher  incidence of inventory  obsolescence  because of rapidly changing
technology and customer requirements, we could be required to increase inventory
write-downs, and our gross margin could be adversely affected.

Goodwill and Identifiable Intangible Assets

        As  discussed  in  Note  2  to  our  condensed   consolidated  financial
statements  appearing  in Part I, the  acquisition  of  GigaComm  included  $8.8
million of goodwill and $2.2 million of other  identifiable



                                       18
<PAGE>



intangible assets.  SFAS 142,  "Goodwill and Other Intangible  Assets," requires
that we review and test  goodwill and  indefinite  lived  intangible  assets for
impairment  on at least an annual basis,  rather than  amortize  them. We may be
required to review and test for impairment  more frequently if events or changes
in  circumstances  indicate  that the assets may be  impaired.  In testing for a
potential impairment of goodwill, SFAS 142 requires us to: (1) allocate goodwill
to our  various  business  units to which the  acquired  goodwill  relates;  (2)
estimate the fair value of those businesses to which goodwill  relates;  and (3)
determine the carrying value of the  businesses.  If the estimated fair value is
less  than the  carrying  value  for a  particular  business  unit,  then we are
required to estimate the fair value of all  identifiable  assets and liabilities
of the business unit, in a manner similar to a purchase price  allocation for an
acquired  business  unit.  This requires the  identification  of any  previously
unrecognized  intangible assets.  When this process is completed,  the amount of
goodwill  impairment is determined based on the difference  between the carrying
value and implied fair value of goodwill.

Long-Lived Assets - SFAS 144

        In addition to the goodwill  and other  identifiable  intangible  assets
acquired with GigaComm,  SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived  Assets,"  requires us to monitor and evaluate the  recoverability of
our long-lived assets whenever events or changes in circumstances  indicate that
the  carrying  value of an asset may no longer be  recoverable.  If the carrying
amount  of  a  long-lived   asset   exceeds  the  expected   future  cash  flows
(undiscounted  and  without  interest  charges)  from the use of the  asset,  we
recognize  an  impairment  loss in the  amount  of the  difference  between  the
carrying  amount and the fair value of the asset.  For  purposes  of  estimating
future cash flows from potentially impaired assets, the Company groups assets at
the lowest  level for which there are  identifiable  cash flows that are largely
independent of the cash flows of other groups of assets.  Our long-lived  assets
subject  to  impairment  are our  property,  plant  and  equipment  and  certain
intangible  assets  that  had net  carrying  values  of $30.1  million  and $2.4
million,  respectively,  at December 31, 2006.  Assumptions  used in determining
whether  our  long-lived   assets  are  impaired   include   estimating  if  the
undiscounted  future cash flows will be  sufficient  to recover the value of our
long-lived assets.  However,  such estimates of future cash flows are subject to
change because the underlying  assumptions,  such as revenues and expenses,  are
based on  projections  that may differ from actual  future  results.  Should our
estimates of future  undiscounted cash flows indicate that the carrying value of
our long-lived assets may not be recoverable,  we would be required to determine
the fair value of those  assets and  record a loss for the  difference,  if any,
between the carrying value and the fair value of those assets.

Stock-Based Compensation

        During the  quarter  ended  December  31,  2006,  the  Company  recorded
stock-based  compensation  expense of $282,000 in  accordance  with SFAS 123(R),
adopted  on  October  1,  2005.  The  current  period  stock-based  compensation
recognized  is based on the  amortization  of the fair value of stock options on
their  date  of  grant  using  a  Black-Scholes   option  valuation  model.  The
Black-Scholes  option  valuation  model requires the input of highly  subjective
assumptions,  including  the expected  life of the  stock-based  award and stock
price  volatility.  In  addition,  management  has made an  estimate of expected
forfeitures and is recognizing  compensation  costs only for those equity awards
expected to vest based on a 22% estimated  forfeiture  rate.  These  assumptions
represent  management's  best estimates,  but these estimates  involve  inherent
uncertainties and the application of management judgment.  As a result, if other
assumptions had been used, our recorded and pro forma  stock-based  compensation
expense  could have been  materially  different  from that  depicted  above.  In
addition,  we are  required to estimate the  expected  forfeiture  rate and only
recognize  expense for those shares  expected to vest. If our actual  forfeiture
rate is materially  different from our estimate,  the  share-based  compensation
expense could be materially different.



                                       19
<PAGE>



Income Taxes

        The provisions of SFAS No. 109  "Accounting for Income Taxes," require a
valuation allowance when, based upon currently  available  information and other
factors, it is more likely than not that all or a portion of the deferred income
tax asset will not be realized. During the fiscal year ended September 30, 2006,
we released  valuation  allowance to the extent of our current period  estimated
federal  income taxes payable as it was  considered  more likely than not that a
portion of our deferred  income tax assets  attributable  to federal credits and
federal  book-tax  differences  would be  realized.  We expect that income taxes
payable for fiscal 2007 will be  attributable  only to foreign taxes payable and
that there will be no liability and no release of valuation allowance related to
Federal or state income  taxes.  We expect to maintain the  remaining  valuation
allowance  until  sufficient   evidence   exists,   in  the  form  of  sustained
profitability,  to support  full  reversal  of the  valuation  allowance  on all
deferred tax assets.

Loss Contingencies

       We are subject to the possibility of various loss  contingencies  arising
in the  ordinary  course of  business.  We consider  the  likelihood  of loss or
impairment of an asset or the incurrence of a liability,  as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies.  An
estimated loss is accrued when it is probable that an asset has been impaired or
a  liability  has  been  incurred  and  the  amount  of loss  can be  reasonably
estimated.  We  regularly  evaluate  current  information  available  to  us  to
determine  whether such accrual  should be adjusted and whether new accruals are
required.

Overview

        We  design,   manufacture  and  sell  a   comprehensive   line  of  high
performance,  highly  reliable fiber optic modules for fiber optic  transmission
systems that are used to address the bandwidth  limitations in metropolitan area
networks, or MANs, local area networks, or LANs, and fiber-to-the-home,  or FTTH
networks. Our modules predominantly include optical transmitters,  receivers and
transceivers  that convert  electronic  signals into optical signals and back to
electronic signals,  enabling high-speed communication of voice and data traffic
over public and private networks.  We began our operations and shipped our first
products in November of 1991.

        Furukawa  beneficially owns all of our outstanding Class B common stock,
representing  58.2% of our  outstanding  shares of common stock and 93.3% of the
combined voting power of all of our outstanding  common stock as of the December
31, 2006. Since our inception, we have purchased substantially all of our lasers
and the  majority of our other fiber optic  components  from  Furukawa.  We have
relied on Furukawa's  research and  development  capabilities to provide us with
technologically advanced lasers and fiber optic components that we purchase from
Furukawa for  inclusion in our products.  We currently  purchase the majority of
lasers from Furukawa  under a Master  Purchase  Agreement  which we entered into
with Furukawa on October 1, 2003. This Agreement  automatically renews each year
thereafter  unless it is terminated upon written notice by either Furukawa or us
prior to renewal.

        In the last three years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  the laser price  reductions that we
have been able to obtain from Furukawa have been less than the price  reductions
for the  associated  products  that we have given our  customers  in response to
market conditions. As a result, our gross margins have been negatively impacted,
and may be  negatively  impacted in the future.  While we continue to  negotiate
with  Furukawa  with respect to the pricing of the lasers we purchase from them,
we cannot assure you that these  efforts will be  successful in addressing  this
negative  impact on our gross margins.  While we believe that our acquisition of
GigaComm may provide us with a second  source for lasers used within  certain of
our products, potentially reducing our dependence on Furukawa and improving lead
times and current cost  structures,  there can be no  assurance  that we will be
able to achieve these benefits in the near future or at all.



                                       20
<PAGE>



        We operate in one industry segment,  the design and manufacture of fiber
optic modules. We sell our products to communication  equipment manufacturers or
CEMs,  their contract  manufacturers  or CMs, who incorporate  them into systems
they assemble for CEMs and to distributors.  We define our customers as CEMs who
have purchased our products directly or indirectly through CMs and distributors.
We recognize  revenue upon product  shipment and the history of sales returns is
analyzed  in order to  reasonably  estimate  and record an  allowance  for sales
returns.  A small number of end  customers  have  historically  accounted  for a
significant portion of our total revenue. Our 10 largest customers accounted for
approximately  77.4% and 71.7% of our total  revenue for the three  months ended
December 31, 2006 and 2005,  respectively with Alcatel, Cisco Systems and Huawei
Technologies   (including  sales  to  each  of  their  contract   manufacturers)
accounting  for  approximately  17.7%,  17.2% and  16.2% of our  total  revenue,
respectively,  for the three months ended December 31, 2006. Huawei Technologies
and Alcatel (including sales to each of their contract manufacturers)  accounted
for approximately 16.3%, and 16.2% of our total revenue,  respectively,  for the
three months ended December 31, 2005. No other customer  accounted for more than
10.0% of our total  revenue for the quarters  ended  December 31, 2006 and 2005.
Although our revenue from sales to our other customers continues to increase, we
expect that significant customer concentration will continue for the foreseeable
future.  Our sales are made on a purchase  order basis  rather than by long-term
purchase commitments.  Our customers may cancel or defer purchase orders without
penalty on short notice.

        In October  1999,  Methode  Electronics,  Inc.  filed a lawsuit  against
Infineon Technologies Corporation and us seeking unspecified damages,  including
monetary damages,  injunctive relief, attorneys' fees and costs arising from our
alleged  infringement  of some of the claims  contained  in patents  assigned to
Methode, including patents relating to our 1x9 pin configuration products. After
Methode initiated the lawsuit, it assigned to Stratos Lightwave, Inc., a Methode
spin-off,  all of Methode's  rights,  title and interest in the patent at issue.
The court subsequently added Stratos as a plaintiff to the lawsuit. On April 12,
2002,  we  resolved  our  patent  infringement   litigation  with  Stratos.  The
settlement  resolved all claims in the lawsuit among us and Stratos.  As part of
the  settlement,  we entered  into a five-year  license  agreement  with Stratos
covering  Stratos'   portfolio  of  optoelectronic   transceiver   patents.   In
consideration  of the license  agreement,  we are  required to pay a total of $2
million  over the license  term.  As of December  31,  2006,  $200,000  remained
outstanding  and  is  expected  to be  paid  in the  current  fiscal  year.  Our
optoelectronic  products  covered by this license  include our 1x9, GBIC,  small
form factor (SFF) and small form-factor pluggable (SFP) product families. At the
end of the five-year term, we have the option to renegotiate with Stratos for an
extension of the license.

        The  Company  acquired  GigaComm  on August 24,  2006 (see Note 2 to the
condensed  consolidated  financial  statements  contained  in  Part  I  of  this
document).  GigaComm was founded in 2000, has its headquarters and manufacturing
facilities in the Hsinchu Science-Based  Industrial Park in Taiwan, ROC, and has
approximately  320 employees.  GigaComm is currently a leading  supplier of FTTH
modules in Japan, which is presently the world's largest FTTH market. GigaComm's
results of  operations  are  included in the  Company's  Condensed  Consolidated
Statements of Operations for the three months ended December 31, 2006.

        The average  selling  prices of our products  generally  decrease as the
products mature from factors such as increased competition,  the introduction of
new products,  increased  unit volumes,  and price  concessions  required by our
customers.  We anticipate that average  selling prices of our existing  products
will continue to decline in future periods although the timing and degree of the
declines cannot be predicted with any certainty. We must continue to develop and
introduce  new products  that  incorporate  features  that can be sold at higher
average selling prices on a timely basis.

        The  fastest-growing   subsets  of  the  market  in  which  the  Company
participates,  and those that currently have the highest margins, involve higher
speed applications. The Company, relative to its competitors, does not currently
have a sufficiently  broad product line to compete  effectively  with respect to
these applications,  especially products operating at 10 Gigabit speeds. Company
management is taking



                                       21
<PAGE>



steps to improve its competitive  position in this area, including releasing its
first 10 Gigabit Ethernet industrial and extended  temperature XFP components to
its principal customer base.

        Our  cost of  revenue  consists  principally  of  materials,  as well as
salaries  and  related  expenses  for  manufacturing  personnel,   manufacturing
overhead  and  provisions  for  lower of cost or  market,  excess  and  obsolete
inventory.  We purchase  several key  components for our products from a limited
number of suppliers.

        Our research and  development  expenses  consist  primarily of salaries,
stock-based  compensation  and related  expenses for design  engineers and other
technical personnel, cost of developing prototypes, and depreciation of test and
prototyping  equipment.  Our research and  development  expenses also consist of
materials and overhead costs related to major product development  projects.  We
charge all research  and  development  expenses to  operations  as incurred.  We
believe that continued investment in research and development is critical to our
future success. Accordingly, we may expand our internal research and development
capabilities  in the future to develop new products.  As a result,  our research
and  development  expenses in  absolute  dollar  amounts may  increase in future
periods.

        Sales and marketing expenses consist primarily of salaries,  stock-based
compensation and related expenses for sales and marketing personnel, commissions
paid  to  sales  personnel  and  independent   manufacturers'   representatives,
marketing and promotion costs. We may expand our sales and marketing  efforts in
order to increase  sales and market  awareness of our products.  We believe that
investment  in sales and  marketing  is  critical  to our success and that these
expenses may increase in the future.

        General and  administrative  expenses  consist  primarily  of  salaries,
stock-based  compensation and related expenses for our  administrative,  finance
and human resources  personnel,  professional fees and other corporate expenses.
Our professional fees include fees associated with litigation and accounting and
consulting  fees  associated  with  several  finance  and  accounting  projects,
including  regulations  associated  with the  Sarbanes-Oxley  legislation.  As a
result, our general and administrative  expenses in fiscal 2007 may exceed those
incurred in fiscal 2006.

        Transitional  costs for  contract  manufacturing  consist  primarily  of
accruals for  severance  and  retention  benefits  related to planned  workforce
reductions  associated with the manufacturing of certain of our product lines in
China commencing in the summer of 2007.




                                       22
<PAGE>



Results of Operations - Comparison  of Three Months Ended  December 31, 2006 and
2005

        The  following  table  sets  forth  statement  of  operations  data  and
percentage  of change for the three  months  ended  December  31,  3006 and 2005
(dollars in thousands):

<TABLE>
<CAPTION>
                                                Three Months Ended December 31,
                                               -------------------------------------                     %
                                                   2006                2005               Change       Change
                                               --------------------------------------------------------------
<S>                                            <C>         <C>      <C>       <C>       <C>             <C>

REVENUE                                         $ 17,024    100.0%   $17,749   100.0%    $   (725)       (4.1)%
                                                  13,824     81.2%    11,440    64.4%       2,384         20.8%
COST OF REVENUE                                 --------             -------             --------

GROSS PROFIT                                       3,200     18.8%     6,309    35.6%      (3,109)      (49.3)%
                                                --------             -------             --------

OPERATING EXPENSES:                                2,809     16.5%     3,262    18.4%        (453)      (13.9)%
  Research and development                         1,282      7.5%     1,190     6.7%          92          7.7%
  Selling and marketing
  General and administrative                       4,404     25.9%     2,112    11.9%       2,292        108.5%

  Transitional cost for contract manufacturing       493      2.9%         -                  493
                                                --------             -------             --------
    Total operating expenses                       8,988     52.8%     6,564    37.0%       2,424         36.9%
                                                --------             -------             --------
LOSS FROM OPERATIONS                              (5,788)  (34.0)%      (255)  (1.4)%      (5,533)    (2169.8)%

INVESTMENT INCOME                                  1,573      9.3%     1,297     7.3%         276         21.3%

OTHER INCOME, net                                     71      0.4%        85     0.5%         (14)      (16.5)%
                                                --------             -------             --------
INCOME (LOSS) BEFORE INCOME TAXES                 (4,144)    24.3%     1,127     6.4%      (5,271)     (467.7)%
PROVISION FOR INCOME TAXES                            43      0.3%        35     0.2%           8         22.9%
                                                --------             -------             --------
NET INCOME (LOSS)                               $ (4,187)    24.6%    $1,092     6.2%    $ (5,279)     (483.4)%
                                                ========             =======             ========
</TABLE>


Revenues


                                                       Three Months Ended
                                                          December 31,
                                                --------------------------------
                                                  2006                   2005
                                                ---------              ---------
                                                     (Dollars in thousands)

Revenues                                        $ 17,024                $17,749
Percentage Decrease                                         ( 4.1) %

        Revenues  decreased  $725,000  or 4.1% during the  comparable  quarters.
Revenues  decreased  by $3.4  million or 19.0 % offset by the  inclusion of $2.7
million in revenues  from  GigaComm  during the three months ended  December 31,
2006.  The  decrease in revenues,  excluding  the revenues  from  GigaComm,  was
primarily  due to an  approximate  4.6%  reduction  in  unit  sales  and a 15.2%
reduction in average  sales prices.  The most  significant  product  decrease in
absolute dollars was in Transceivers.

        The mix of the Company's  products available for sale contributed to the
reduction  in  unit  sales  and the  reduction  in  average  sales  prices.  The
fastest-growing  subsets of the market in which the  Company  participates,  and
those  that   currently   have  the  highest   margins,   involve  higher  speed
applications.  The Company, relative to its competitors, does not currently have
a sufficiently  broad product line to compete  effectively with respect to these
applications,  especially  products  operating  at 10  Gigabit  speeds.  Company
management  is taking  steps to improve its  competitive  position in this area,
including  releasing  its first 10  Gigabit  Ethernet  industrial  and  extended
temperature   XFP   components   to  its   principal   customer   base.




                                       23
<PAGE>



        The  following  table sets  forth  revenue  attributable  to each of our
product groups as a percentage of revenues for the periods presented.

                                                          Three Months Ended
                                                             December 31,
                                                         ---------------------
                                                          2006        2005
                                                         --------  -----------
  Transceivers                                             85.9%        86.5%
  Transmitters                                              4.4%         7.7%
  Receivers                                                 3.9%         5.3%
  Other                                                     5.8%         0.5%
                                                         --------  -----------
                                                          100.0%       100.0%
                                                         ========  ===========

        The following table sets forth revenue by market segment as a percentage
of revenues for the periods presented.

                                                          Three Months Ended
                                                             December 31,
                                                         ---------------------
                                                          2006        2005
                                                         --------  -----------
Metropolitan area networks                                 72.5%        89.4%
Fiber-to-the-home networks                                 15.6%          -
Local area networks                                         9.6%         9.8%
Other                                                       2.3%         0.8%
                                                         --------  -----------
                                                          100.0%       100.0%
                                                         ========  ===========

Gross Profit

                                                           Three Months Ended
                                                              December 31,
                                                         -----------------------
                                                           2006          2005
                                                         ---------     ---------
                                                          (Dollars in thousands)
Gross Profit                                              $ 3,200       $ 6,309
Gross Margin                                                 18.8%         35.5%

        Cost of revenue  increased  20.8% to $13.8  million in the three  months
ended  December 31, 2006 from $11.4  million in the three months ended  December
31, 2005. Cost of revenue attributable to GigaComm was $3.8 million in the three
months  ended  December 31,  2006.  The gross margin for our Woodland  Hills and
GigaComm operations were 29.7% and (39.3)%,  respectively,  for the three months
ended December 31, 2006. The gross margin for our Woodland Hills  operations was
35.5% for the three months ended December 31, 2005.  Gross profit and margins in
Woodland  Hills were  negatively  impacted  during the  current  quarter  due to
competitive  pricing pressures and changes in product mix,  resulting in a 15.2%
decrease in average selling prices,  a 4.6% reduction in units shipped which was
partially  offset by an 11.8%  reduction  in  average  raw  material  costs.  In
addition,  the  usage  of  previously  written  down  Woodland  Hills  inventory
decreased to $388,000 in the three months ended  December 31, 2006 from $829,000
in the three months ended  December 31,  2005.  The negative  gross  margins for
GigaComm is primarily  attributable to competitive pricing pressures,  resulting
in a 13.5%  reduction in average selling prices as compared to the quarter ended
September 30, 2006,  $210,000  associated with excess capacity at GigaComm and a
$402,000  write down of inventory to market value,  during the current  quarter.
Stock-based  compensation expense charged to manufacturing  overhead was $36,000
and $18,000 for the three months ended December 31, 2006 and 2005, respectively.
The above will continue to impact gross profit and margins in the future.



                                       24
<PAGE>



Research and Development (R&D)

                                                      Three Months Ended
                                                         December 31,

                                              ----------------------------------
                                                 2006                    2005
                                              ----------               ---------
                                                    (Dollars in thousands)
 R&D Expense                                   $ 2,809                  $ 3,262
 Percentage Decrease                                        (13.9)%

        Research and development  expense decreased  $453,000 to $2.8 million in
the three months  ended  December 31, 2006 from $3.3 million in the three months
ended  December  31, 2005.  Research and  development  expense  attributable  to
GigaComm and included in our consolidated R&D expense for the current period was
$464,000.  The  decrease  in research  and  development  expense  was  primarily
attributable to the closure of the Colorado  research and  development  facility
(see Part IV, Item 15, Note 4 to the consolidated financial statements in our in
our Annual  Report on Form 10-K  filed  with the SEC) in the  second  quarter of
fiscal  2006.   Stock-based   compensation   expense  charged  to  research  and
development  expenses  was  $60,000  and  $122,000  for the three  months  ended
December 31, 2006 and 2005,  respectively.  We believe that continued investment
in research and development is critical to our future success and these expenses
may increase in absolute dollars in the future.

Sales and Marketing

                                                    Three Months Ended
                                                       December 31,
                                               -----------------------------
                                                 2006                 2005
                                               --------             --------
                                                   (Dollars in thousands)
 Sales and marketing expense                   $ 1,282               $ 1,190
 Percentage Increase                                        7.7 %

        Sales and marketing expenses increased $92,000 in the three months ended
December  31, 2006 from the three months  ended  December  31,  2005.  Sales and
marketing  expenses  attributable  to GigaComm and included in our  consolidated
sales and marketing  expense in the current  period were  $106,000.  Stock-based
compensation  expense  charged to sales and  marketing  expenses was $29,000 and
$7,000 for the three months ended December 31, 2006 and 2005,  respectively.  We
believe that  investment  in sales and  marketing is critical to our success and
these expenses may increase in absolute dollars in the future.

General and Administrative

                                                     Three Months Ended
                                                        December 31,

                                               ------------------------------
                                                 2006                  2005
                                               --------              --------
                                                   (Dollars in thousands)
 General and administrative expense            $ 4,404                $ 2,112
 Percentage Increase                                       108.5%

         General and administrative expenses increased $2.3 million in the three
months ended  December  31, 2006 from the three months ended  December 31, 2005.
General and administrative expenses attributable to GigaComm and included in our
consolidated  general and  administrative  expenses  in the current  period were
$367,000.  The remaining increase includes an increase in professional  services
of  $690,000  primarily  due to an internal  investigation  into how the Company
accounted for stock option grants,  legal expenses  associated  with the Olympia
litigation,  accounting  and legal  expenses  in  connection  with the  purchase
accounting and the Form 8-K/A filing connected with the GigaComm acquisition and
accounting fees relative to several finance and accounting  projects,  including
regulations  associated with the Sarbanes-Oxley  legislation.  Other significant
increases in general and administrative expenses included $651,000 for executive
severance costs and $280,000 in higher salary and benefits associated



                                       25
<PAGE>



with the employment of the Company's new executive officers in the quarter ended
September 30, 2006. In addition, $204,000 of costs, such as depreciation,  taxes
and  utilities,  associated  with space  previously  occupied by a lessee in our
Woodland  Hills  facility,  are now  classified  as general  and  administrative
expenses. Previously, such expenses were offset by rental income and included in
other income in the accompanying  condensed  consolidated  financial statements.
Stock-based  compensation expense charged to general and administrative expenses
was $157,000 and $93,000 for the three months ended  December 31, 2006 and 2005,
respectively.

Transitional cost for contract manufacturing

       During the current  quarter ended December 31, 2006, the Company  charged
$493,000 to transitional  costs for contract  manufacturing.  In connection with
the  transition  to SAE,  we  expect  to  maintain  our  existing  manufacturing
facilities but will reduce our workforce once  manufacturing at SAE begins.  The
transition  charges are related  primarily to estimated  severance and retention
payments  and are  estimated  in the range of  approximately  $3 million to $3.5
million for fiscal 2007.

Investment Income and Other Income, net

                                                     Three Months Ended
                                                        December 31,
                                               -------------------------------
                                                 2006                   2005
                                                   (Dollars in thousands)
 Investment income                              $ 1,573                $ 1,297
 Other income, net                                   71                     85
                                               ---------              --------
 Total                                          $ 1,644                $ 1,382
 Percentage Increase                                         19.0 %

         The total of investment income and other income, net increased $262,000
in the three months ended December 31, 2006 from the three months ended December
31, 2005.  This increase was primarily due to the increase in investment  income
as the result of rising  interest rates.  Other income  attributable to GigaComm
and  included in other  income,  net was $40,000 in the current  period.  Rental
income  included in other  income,  net for the three months ended  December 31,
2005 was $85,000; there was no rental income for the three months ended December
31, 2006.

Provision for income taxes

                                                     Three Months Ended
                                                        December 31,
                                               ------------------------------
                                                 2006                  2005
                                               --------              --------
                                                   (Dollars in thousands)
 Income tax provision                          $     43              $     35

        The income tax provision of $43,000 for the three months ended  December
31, 2006 was comprised of foreign taxes related to our  operations in the United
Kingdom. The income tax provision of $35,000 for the three months ended December
31,  2005 was  comprised  of foreign  taxes in the  amount of $28,000  and state
income taxes of $7,000.

Liquidity and Capital Resources

        As of December 31, 2006,  our primary  source of liquidity  was our cash
and cash  equivalents  balance of $55.7  million and our  marketable  securities
balance of $68.2  million,  which consists  primarily of United States  Treasury
notes and bonds.  At September  30, 2006,  we had $57.4 million in cash and cash
equivalents and $69.5 million in current marketable securities.



                                       26
<PAGE>



        Current assets and current liabilities

        Since  inception,  we have financed our  operations  primarily with cash
generated from operations, through term loans and our initial public offering of
our Class A common stock, which we completed on November 3, 2000. As of December
31, 2006,  our working  capital was $146.7  million with a current ratio of 10:2
compared to our working  capital of $151.3  million with a current ratio of 10:8
as of September 30, 2006. Our net loss was the primary factor in the decrease in
working capital during the three months ended December 31, 2006. We believe that
additional  cash  could  be  borrowed  if  necessary;  however,  cash  and  cash
equivalents,  and  marketable  securities  are expected to be sufficient to fund
operations for the next twelve months.

        Cash flows provided by / (used in)

        The following table sets forth, for the periods indicated, selected cash
flow information (dollars in thousands):


                                                     Three Months Ended
                                                        December 31,
                                               ------------------------------
                                                  2006                2005

Operating activities                            $ (2,151)           $ (2,227)
Investing activities                                 266              (4,882)
Financing activities                                  76                 111
Effect of exchange rate changes on cash              136                   -
                                                --------            --------
Net decrease in cash and cash equivalents       $ (1,673)           $ (6,998)
                                                ========            ========

        During  the three  months  ended  December  31,  2006,  net cash used in
operating  activities  was  primarily the result of the net loss for the period,
increases in inventories  partially offset by a decrease in accounts payable and
a decrease in accounts receivable and income taxes receivable.  During the three
months  ended  December  31, 2005,  net cash used in  operating  activities  was
primarily the result of increases in accounts  receivable  and  inventory  which
more than offset net income.

        During the three months ended December 31, 2006,  cash used in investing
activities   was   primarily   the  result  of  $1.3  million  of  fixed  assets
acquisitions,  particularly  in our GigaComm  facility,  which was offset by the
maturation of marketable securities greater than the conversion of cash and cash
equivalents to marketable securities for a net of $1.6 million. During the three
months ended December 31, 2005, cash used in investing  activities was primarily
the  result  of the  conversion  of cash  and  cash  equivalents  to  marketable
securities  net of  the  maturation  for a net of  $4.8  million.  Purchases  of
property,  plant and  equipment  were  $115,000  during the three  months  ended
December 31, 2005.

        During the three months  ended  December 31, 2006 and December 31, 2005,
cash provided by financing activities was from the exercise of stock options.

        We believe that our existing cash and cash  equivalents  and  marketable
securities on hand will be sufficient to meet our capital needs for at least the
next twelve months.  However,  it is possible that we may need or elect to raise
additional  funds to fund our  activities  beyond the next year or to consummate
acquisitions of other businesses,  products or technologies. We could raise such
funds by  selling  more  stock to the  public or to  selected  investors,  or by
borrowing money. We cannot assure you that we will be able to obtain  additional
funds on commercially  favorable  terms, or at all. If we raise additional funds
by issuing  additional  equity or  convertible  debt  securities,  the ownership
percentages of existing  stockholders would be reduced. In addition,  the equity
or debt  securities  that we issue may have rights,  preferences  or  privileges
senior to those of the holders of our common stock.



                                       27
<PAGE>


     Although we believe we have  sufficient  capital to fund our activities for
at least the next  twelve  months,  our  future  capital  requirements  may vary
materially  from those now  planned.  The amount of capital that we will need in
the future will depend on many factors, including:

o    the market acceptance of our products;
o    the levels of promotion and advertising that will be required to launch our
     new  products  and  achieve  and  maintain a  competitive  position  in the
     marketplace;
o    price discounts on our products to our customers;
o    our business,  product,  capital  expenditure  and research and development
     plans and product and technology roadmaps;
o    the levels of inventory and accounts receivable that we maintain;
o    capital improvements to new and existing facilities;
o    technological advances;
o    our competitors' response to our products;
o    our   pursuit  of   strategic   alternatives,   including   future   market
     opportunities; and
o    our relationships with suppliers and customers.

        In addition,  we may require additional  capital to accommodate  planned
growth, hiring,  infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.

Inflation

        Inflation  has not had a  material  adverse  effect  on our  results  of
operations,  however,  our results of operations may be materially and adversely
affected by inflation in the future.

Off-Balance Sheet Arrangements

        We do not have  any  off-balance  sheet  arrangements,  as such  term is
defined in rules  promulgated by the Securities  and Exchange  Commission,  that
have or are  reasonably  likely  to  have a  current  or  future  effect  on our
financial  condition,  changes in  financial  condition,  revenues or  expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors.

Contractual Obligations

        The  following  is a  summary  of  future  minimum  payments  due  under
operating  leases that have  initial or remaining  noncancelable  lease terms in
excess of one year at December 31, 2006 (in thousands):

      Nine months ending September 30, 2007               $       930
      2008                                                      1,180
      2009                                                      1,112
      2010                                                         79
      2011                                                         66
                                                         ---------------
      Total minimum lease payments                        $     3,367
                                                         ===============

        We also have purchase commitments for materials, supplies, equipment and
outside  services in aggregate of  approximately  $13.5  million for fiscal year
ending September 30, 2007.  Included in these purchase  commitments are purchase
commitments to a related party for approximately  $4.7 million.  We believe that
our cash and cash  equivalents  and  marketable  securities  are  expected to be
sufficient to meet all of the known requirements.


                                       28
<PAGE>


ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are  currently  exposed  to  interest  rate  risk  on our  investment
portfolio.

        The  primary  objective  of our  investment  activities  is to  preserve
capital.  We have not used  derivative  financial  instruments in our investment
portfolio.  Our cash and cash  equivalents  are $55.7  million,  the majority of
which is  invested  in money  market and other  interest  bearing  accounts.  In
addition,  we have  $68.2  million  invested  in  marketable  securities,  which
represents investments in United States treasury notes and treasury bonds.

        As of December 31, 2006, our  investment in marketable  securities had a
weighted-average   time  to  maturity  of  approximately  121  days.  Marketable
securities  represent  United  States  treasury  notes and  treasury  bonds with
maturity on the date  purchased of greater than three months.  These  securities
are classified as held to maturity  because we have the intention and ability to
hold  the  securities  to  maturity.   Gross  unrealized  gains  and  losses  on
held-to-maturity  marketable  securities  have  historically  not been material.
Maturities on the date purchased of held-to-maturity  marketable debt securities
can range from one to twelve months.

        If interest  rates were to increase or decrease  1%, the result would be
an annual  increase  or  decrease  of  interest  income of $1.5  million  on our
investment  portfolio.  This analysis does not consider the effect of the change
in the  level  of  overall  economic  activity  that  could  exist  in  such  an
environment.

Foreign Currency Risk

        Prior to the  acquisition of GigaComm,  sales to foreign  customers were
denominated in U.S. dollars and as such we had no foreign  currency  fluctuation
risk related to accounts  receivable.  We are exposed to foreign  currency  risk
from the  translation  of our  Taiwan and United  Kingdom  operations  into U.S.
dollars. Based on the relative size and nature of our foreign operations,  we do
not believe that fluctuations in the exchange rate between the New Taiwan Dollar
or the British  Pound and the U.S.  dollar  would have a material  impact on our
consolidated financial statements.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our principal  executive officer and principal  financial officer have concluded
that our disclosure  controls and  procedures (as defined in Rules  13a-15(e) or
15d-15(e)  under the  Securities  Exchange  Act of 1934  ("Exchange  Act"))  are
effective as of the end of the period covered by this quarterly  report based on
their  evaluation of these controls and procedures  required by paragraph (b) of
Rules 13a-15 or 15d-15 under the Exchange Act.

Changes in Internal Control

There  were  no  changes  in  our  internal  control  over  financial  reporting
identified in connection with the evaluation  required by paragraph (d) of Rules
13a-15 or 15d-15  under the Exchange  Act that  occurred  during our last fiscal
quarter that have materially  affected,  or are reasonably  likely to materially
affect, our internal control over financial reporting.



                                       29
<PAGE>



                                    PART II.
                        OTHER INFORMATION AND SIGNATURES

ITEM 1. LEGAL PROCEEDINGS

        We are not currently  involved in any material legal  proceedings  other
than the proceedings  with Olympia  Properties,  LLC described below. We are not
aware of any material legal  proceedings  threatened or pending against us. From
time to time,  however,  we may become subject to additional legal  proceedings,
claims, and litigation arising in the ordinary course of business.  In addition,
in the past we have  received,  and we may  continue  to receive in the  future,
letters alleging  infringement of patent or other intellectual  property rights.
Our  management  believes  that these  letters  generally  are without merit and
intend to contest them vigorously.

        In  August  2006,  the  Company  filed an action  in the  United  States
District  Court  for the  District  of  Colorado  for  breach  of  contract  and
declaratory relief against Olympia Properties, LLC ("Olympia"),  its landlord at
its former  Colorado  facility.  The action  arose after  Olympia  retained  the
Company's  security  deposit of $93,700 upon  expiration of the lease,  claiming
that the Company  contaminated the leased premises with arsenic, in violation of
the lease.  The Company  denies that the  premises  contained  arsenic at levels
exceeding either those permitted by the lease or any other applicable  authority
and, accordingly, the Company filed suit.

        In  its  complaint,   the  Company   requests  that  the  court  provide
declaratory  relief that the Company has not breached the lease  through any act
or omission, and also requests damages for breach of contract in connection with
Olympia's  retention  of the  security  deposit.  Further,  the Company  alleges
additional breaches of the lease by Olympia.

        Olympia denied the Company's allegations and asserted  counterclaims for
breach of ten affirmative defenses.  Further, Olympia asserted counterclaims for
breach of contract and equitable relief alleging  damages of approximately  $1.2
million. The Company denied Olympia's  counterclaims.  We intend to aggressively
pursue our claims, and vigorously defend against Olympia's counterclaims.


ITEM 1A.       RISK FACTORS

        This Report  contains  forward-looking  statements  based on the current
expectations,  assumptions, estimates and projections about us and our industry.
Our  actual  results  could  differ  materially  from those  discussed  in these
forward-looking  statements  as a  result  of  certain  factors,  as more  fully
described in this section and  elsewhere in this Report.  These  forward-looking
statements  involve risks and  uncertainties.  You should carefully consider the
following risks before you decide to buy shares of our Class A common stock. The
risks  and  uncertainties  described  below  are not the only  ones  facing  us.
Additional  risks  and  uncertainties,   including  those  risks  set  forth  in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and elsewhere in this Report,  may also adversely  impact and impair
our  business.  If any of the  following  risks  actually  occur,  our business,
results of operations or financial  condition would likely suffer. In such case,
the trading  price of our Class A common stock could  decline,  and you may lose
all or part of the  money  you paid to buy our  stock.  We do not  undertake  to
update  publicly  any  forward-looking  statements  for any reason,  even if new
information becomes available or other events occur in the future.

Our continued success in generating revenue depends on growth in construction of
fiber optic MAN, LAN and FTTH networks and our ability to compete in the markets
for those networks.

        Our  fiber  optic  modules  are used  primarily  in MAN,  LAN,  and FTTH
applications. These markets are rapidly evolving, and it is difficult to predict
their potential size or future growth rate. In addition,  we are uncertain as to
the extent to which fiber optic technologies will be used in these markets.



                                       30
<PAGE>



Our success in generating revenue will depend on the growth of these markets and
their adoption of fiber optic technologies. A substantial portion of our revenue
is derived  from sales of our product in the MAN market.  Sales of our  products
for the MAN market represented  approximately 72% and 89% of our revenue for the
three months ended December 31, 2006 and 2005, respectively.

        As demand for bandwidth grows,  service  providers are likely to require
increasingly  sophisticated systems able to support and meet the requirements of
MAN, LAN and FTTH  applications  and networks,  such as  cost-effectiveness  and
reliability in harsh  environmental  conditions.  The projected  demand for such
networking  equipment has led to the expansion of production by existing optical
component  manufacturers,  as  well as the  creation  of new  companies  in Asia
offering  cost-effective fiber optic components.  This increased competition and
resulting  lower  component cost  structure has started to accelerate  price and
margin erosion in this market.

        The fiber optic  communication  industry  continues to face  challenging
market   conditions.   Capital   spending  by  service   providers   on  network
infrastructure  has remained  substantially  below pre-2001 levels. As a result,
equipment manufacturers have also dramatically reduced their quarterly purchases
of components  and modules from our  competition  and us. While several  service
providers,  including  BellSouth,  AT&T and Verizon,  have announced current and
planned investment in FTTH applications, which we believe could increase traffic
demand on the MANs into which such FTTH  infrastructure  would  feed,  it is too
early  to  predict  the  outcome  of these  potential  FTTH  roll-outs.  Because
visibility in the industry remains  limited,  we cannot provide any assurance as
to the  timing or extent of any  increased  business  that we may  receive  as a
result of these or other industry developments.

        Competition within the telecommunication  industry for this growing FTTH
segment is likely to  intensify  and certain of our  competitors  may be able to
more quickly and effectively  respond to newer technology or industry standards,
devote more resources to  development,  production,  promotion and sale of their
products and deliver those products at lower prices.

        Based on these and other  factors,  customers  may reduce orders for our
products  and,  as a result,  our  revenue in future  periods  may  decline.  In
addition,  our ability to meet financial  expectations for future periods may be
harmed.

We derive a  significant  portion of our total  revenue  from a few  significant
customers,  and our total  revenue  may  decline  significantly  if any of these
customers cancels, reduces or delays purchases of our products or extracts price
concessions from us.

        Our success  depends on our  continued  ability to develop and  maintain
relationships  with a  limited  number  of  significant  customers.  We sell our
products  into  markets  dominated  by a  relatively  small  number  of  systems
manufacturers,  a fact that limits the number of our  potential  customers.  Our
dependence  on orders from a  relatively  small  number of  customers  makes our
relationship with each customer critical to our business.

        We do not have long-term  sales  contracts with our customers.  Instead,
sales to our customers are made on the basis of individual  purchase orders that
our customers may cancel or defer on short notice without  significant  penalty.
In the past,  some of our major  customers  canceled,  delayed or  significantly
accelerated  orders in response to changes in the  manufacturing  schedules  for
their  systems,  and they are  likely  to do so in the  future.  The  reduction,
cancellation  or delay of individual  customer  purchase  orders would cause our
revenue to decline.  Moreover,  these  uncertainties  complicate  our ability to
accurately  plan  our  manufacturing  schedule.  Additionally,  if  any  of  our
customers  cancel or defer  orders,  our  operating  expenses  may increase as a
percentage of revenue.

        In the past,  our customers have sought price  concessions  from us, and
they are likely to  continue to do so in the future.  In  addition,  some of our
customers may shift their purchases of products from us to our competitors.  The
loss of one or more of our significant customers,  our inability to successfully



                                       31
<PAGE>



develop  relationships  with  additional  customers or future price  concessions
could cause our revenue to decline significantly.

If we do not develop and  introduce  new products  with higher  average  selling
prices in a timely manner,  the overall  average  selling prices of our products
will decrease.

        The market for fiber optic modules is characterized by declining average
selling  prices  for  existing  products  due  to  increased  competition,   the
introduction of new products, product obsolescence and increased unit volumes as
manufacturers deploy new network equipment. We have in the past experienced, and
in the future may experience, period-to-period fluctuations in operating results
due to declines in our overall average  selling  prices.  We anticipate that the
selling prices for our existing products will decrease in the future in response
to product  introductions  by  competitors  or us, or other  factors,  including
pressure from significant  customers for price concessions.  Therefore,  we must
continue to develop and introduce new products that can be sold at higher prices
on a timely basis to maintain our overall average selling prices.  Failure to do
so could cause our revenue and gross margins to decline.

Our  markets  are  highly  competitive,  some  of our  customers  are  also  our
competitors,  and our other  customers  may choose to purchase our  competitors'
products  rather than our products or develop  internal  capabilities to produce
their own fiber optic modules.

        The market for fiber optic modules is highly  competitive  and we expect
competition to intensify in the future.  Our primary  competitors  include Avago
Technologies,  ExceLight  Communications  and its parent  corporation,  Sumitomo
Electric, Finisar, JDSU, MRV Communications, OpNext, Picolight, and Fiberxon. We
also face  indirect  competition  from  public and private  companies  providing
non-fiber optic networking  products that address the same networking needs that
our products  address.  The development of alternative  solutions to fiber optic
transmission needs by our competitors,  particularly systems companies that also
manufacture  modules,  such as Fujitsu and JDSU, could  significantly  limit our
growth and harm our competitive position.

        Many of our current  competitors and potential  competitors  have longer
operating histories and significantly  greater financial,  technical,  sales and
marketing  resources  than we do. As a  result,  these  competitors  are able to
devote  greater  resources to the  development,  promotion,  sale and support of
their products.  In addition,  those of our  competitors  that have large market
capitalization  or cash reserves are in a much better  position to acquire other
companies in order to gain new  technologies  or products  that may displace our
products.  Any of these  potential  acquisitions  could give our  competitors  a
strategic  advantage.  In addition,  many of our  competitors  have much greater
brand  name   recognition,   more  extensive   customer  bases,  more  developed
distribution  channels and broader product offerings than we do. These companies
can use their broader customer bases and product  offerings and adopt aggressive
pricing policies to gain market share.

        In addition,  existing and potential customers,  especially in Japan and
other international  markets, may also become competitors.  These customers have
the internal  capabilities to integrate their  operations by producing their own
optical  modules  or by  acquiring  our  competitors  or the  rights to  produce
competitive  products  or  technologies,  which may allow  them to reduce  their
purchases or cease purchasing from us.

        We expect our  competitors  to introduce new and improved  products with
lower prices, and we will need to do the same to remain competitive.  We may not
be able to compete  successfully  against either  current or future  competitors
with respect to new products.  We believe that competitive  pressures may result
in price reductions, reduced margins and our loss of market share.



                                       32
<PAGE>



Our sales  cycle  runs from our  customers'  initial  design to  production  for
commercial sale. This cycle is long and  unpredictable and may cause our revenue
and operating results to vary from our forecasts.

        The period of time  between our initial  contact with a customer and the
receipt of a purchase  order  from that  customer  may span more than a year and
varies by product  and  customer.  During  this time,  customers  may perform or
require us to perform  extensive  evaluation  and  qualification  testing of our
products.  Generally, they consider a wide range of issues before purchasing our
products,  including  interoperation with other components,  product performance
and  reliability.  We may incur  substantial  sales and  marketing  expenses and
expend  significant  management effort while potential  customers are qualifying
our products.  Even after incurring these costs, we ultimately may not sell any,
or sell only small  amounts of, our products to a potential  customer.  If sales
forecasts to specific  customers  are not  realized,  our revenue and results of
operations may be negatively impacted.

The market for our products is characterized by rapid technological  changes and
evolving  industry  standards.  If we do not  respond to the changes in a timely
manner, our products likely will not achieve market acceptance.

        The market for our  products  is  characterized  by rapid  technological
change, new and improved product introductions, changes in customer requirements
and evolving industry standards. Our future success will depend to a substantial
extent on our  ability to develop,  introduce  and  support  cost-effective  new
products  and   technology  on  a  timely  basis.   The   development   of  new,
technologically  advanced  products is a complex and uncertain process requiring
high  levels of  innovation  and  highly  skilled  engineering  and  development
personnel,  as well as the accurate  anticipation  of  technological  and market
trends.  Because the costs for  research  and  development  of new  products and
technology are expensed as incurred,  such costs will have a negative  impact on
our reported net operating  results  until such time, if ever,  that we generate
revenue  from   products  or  technology   resulting   from  such  research  and
development.  If we fail to develop and deploy new  cost-effective  products and
technologies or  enhancements  of existing  products on a timely basis, or if we
experience  delays  in  the  development,  introduction  or  enhancement  of our
products and  technologies,  our products may no longer be  competitive  and our
revenue will decline.

        Furthermore, we cannot assure you that our new products will gain market
acceptance  or  that  we  will  be  able  to  respond   effectively  to  product
announcements  by  competitors,   technological  changes  or  emerging  industry
standards.  Our  failure  to respond  to  product  announcements,  technological
changes or industry  changes in standards would likely prevent our products from
gaining market acceptance and harm our competitive position.

Our products may have defects that are not detected  until full  deployment of a
customer's  system.  Any of these  defects  could result in a loss of customers,
damage to our reputation and substantial costs.

        We design our products for large and complex fiber optic  networks,  and
our products must be  compatible  with other  components of the network  system,
both current and future.  We have  experienced  in the past, and may continue to
experience in the future,  defects in our  products.  Defects in our products or
incompatibilities  in our products may appear only when deployed in networks for
an extended  period of time.  In  addition,  our  products  may fail to meet our
customers'  design  specifications,  or our  customers  may change  their design
specifications  after the  production  of our  product.  A  failure  to meet our
customers' design  specification  often results in a loss of the sale due to the
length of time required to redesign the product.  We may also experience defects
in  third  party  components  that we  incorporate  into our  products.  We have
experienced,  and may continue to experience  the following due to our inability
to detect or fix errors:



                                       33
<PAGE>



        o    increased  costs  associated  with  the  replacement  of  defective
             products,   redesign   of   products   to  meet   customer   design
             specifications and/or refund of the purchase price;
        o    diversion of development resources; and
        o    increased service and warranty costs.

Our  products and the systems  into which our  products  are  incorporated  must
comply with  domestic and  international  governmental  regulations,  and if our
products do not meet these regulations, our ability to sell our products will be
restricted.

        Our  products  are subject to various  regulations  of U.S.  and foreign
governmental  authorities,  principally in the areas of radio frequency emission
standards and eye safety.  Radio frequency  emission  standards govern allowable
radio interference with other services. Eye safety standards govern the labeling
and  certification  of laser products to ensure that they are used in a way that
does not create a hazard to the human eye.  Our  products  and the systems  into
which they are incorporated  must also comply with  international  standards and
governmental  standards of the foreign countries where our products are used. In
addition,  under  applicable  EU  regulations,  we along with  other  electronic
component  manufacturers  are  prohibited  from  using  lead and  certain  other
hazardous  materials in our  products.  Our  inability,  or the inability of our
customers,  to  comply  with  existing  or  evolving  standards  established  by
regulatory  authorities,  or to obtain  timely  domestic  or foreign  regulatory
approvals or certificates will restrict our ability to sell our products.

If we are  unable to  generate  adequate  additional  revenue as a result of the
expansion of our sales  operations,  our competitive  position may be harmed and
our revenue or margins may decline.

        Historically,  we have relied primarily on a limited direct sales force,
supported by third party  manufacturers'  representatives  and distributors,  to
sell our  products.  Our sales  strategy  focuses  primarily on  developing  and
expanding   our  direct  sales   force,   manufacturers'   representatives   and
distributors.  We have  incurred  and may  continue to incur  significant  costs
related to the expansion of our sales operations.  If the expansion of our sales
operations does not generate adequate additional revenue,  our operating margins
may decline.  To the extent we are  unsuccessful  in developing our direct sales
force,   we  will  likely  be  unable  to  compete   successfully   against  the
significantly  larger and well-funded sales and marketing  operations of many of
our  current  or  potential  competitors.  In  addition,  if we fail to  develop
relationships with significant  manufacturers'  representatives or distributors,
or if these representatives or distributors are not successful in their sales or
marketing  efforts,  sales of our  products  may  decrease  and our  competitive
position would be harmed. Our representatives or distributors may not market our
products  effectively  or may not continue to devote the resources  necessary to
provide us with effective sales,  marketing and technical support. Our inability
to  effectively  manage our  domestic  and foreign  sales and  support  staff or
maintain   existing   or   establish   new   relationships   with   manufacturer
representatives  and distributors would harm our revenue and result in declining
margins.

If our  customers  do not approve our  manufacturing  processes  and qualify our
products, we will lose significant customer sales and opportunities.

        Customers  generally  will not purchase any of our products  before they
qualify them and approve our manufacturing processes and quality control system.
Our customers may require us to register under international  quality standards,
such as ISO 9001. We are currently  registered  under ISO  9001:2000.  Delays in
product  qualification or loss of ISO 9001  certification may cause a product to
be dropped  from a long-term  supply  program and result in a  significant  lost
revenue opportunity. If particular customers do not approve of our manufacturing
processes, we will lose the sales opportunities with those customers.



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<PAGE>



If we fail to predict our manufacturing  requirements accurately, we could incur
additional  carrying  costs and have excess and  obsolete  inventory or we could
experience  manufacturing  delays,  which  could  cause  us to  lose  orders  or
customers.

        We currently use  historical  data, a backlog of orders and estimates of
future  requirements  to determine our demand for components  and materials.  We
must  accurately  predict  both the demand for our  products  and the  lead-time
required  to obtain  the  necessary  components  and  materials.  Lead times for
components  and materials  vary  significantly  depending on factors such as the
specific  supplier,  the size of the order,  contract  terms and demand for each
component at a given time.  As a result,  we generally  maintain  high levels of
inventories that  periodically  cause us to have excess and obsolete  inventory.
However, if we were to underestimate our purchasing requirements,  manufacturing
could be  interrupted,  resulting  in delays in  shipments,  which could have an
adverse effect on our revenues.

If we do not achieve acceptable manufacturing yields in a cost-effective manner,
or if we are  required to develop  new  manufacturing  processes  to improve our
yields, our operating results would be impaired.

        The manufacture of our products involves complex and precise  processes.
As a result, it may be difficult to cost-effectively  meet our production goals.
In addition,  changes in our manufacturing  processes or those of our suppliers,
or our suppliers'  inadvertent use of defective  materials,  could significantly
reduce our  manufacturing  yields,  increase  our costs and  reduce our  product
shipments.  To increase  our gross  margin,  while  offering  products at prices
acceptable to customers, we will need to develop new manufacturing processes and
techniques that will involve higher levels of automation and costs to meet these
goals that could impair our operating results.

We are  dependent  on a  limited  number  of  suppliers  for  most  of  our  key
components. If these suppliers are unable or unwilling to meet our manufacturing
requirements, if they raise prices of their products, or if they discontinue key
components,  we may experience production delays leading to delays in shipments,
increased costs and cancellation of orders for our products.

        We purchase several key components that we incorporate into our products
from a limited number of suppliers.  We also purchase the majority of our lasers
from Furukawa under a Master Purchase Agreement. We do not have long-term supply
contracts with any of our other key suppliers and our agreement with Furukawa is
only for one year. Our dependence on a small number of suppliers and our lack of
longer  term  supply  contracts  exposes  us to  several  risks,  including  our
potential  inability  to obtain an adequate  supply of quality  components,  the
discontinuance  of key components  from our suppliers,  price increases and late
deliveries.  For example, we face the risk that price increases imposed on us by
our  suppliers  will be higher  than the  price  increases  (or cost  increases)
imposed  on  our  competitors  when  they  purchase  (or  manufacture)   similar
components;  and we face a  corresponding  risk that any price decreases that we
are able to obtain from our suppliers will be less than the price  decreases (or
cost  reductions)   that  our   competitor's   obtain  when  they  purchase  (or
manufacture)  similar  components.  We have experienced  shortages and delays in
obtaining,  and the  discontinuation of key components in the past and expect to
experience  shortages,  delays, and the discontinuation of key components in the
future.

        In the past,  industry  capacity  has been  constrained  and some of our
component  suppliers  placed limits on the number of  components  sold to us. If
industry capacity becomes constrained in the future, our component suppliers may
place  similar  limits on us or choose not to sell to us at all.  We do not have
any control over these limits, and our suppliers may choose to allocate more, or
all, of their production to our competitors.

        A  disruption  in, or  termination  of,  our  supply  relationship  with
Furukawa  or any of our  other  key  suppliers,  or  our  inability  to  develop
relationships  with new suppliers would interrupt and delay the manufacturing of
our  products,  which could result in loss of revenue from the  cancellation  of
orders for



                                       35
<PAGE>



our products,  or otherwise result in declines or delays in revenue.  We may not
be able to identify and integrate  alternative suppliers in a timely fashion, or
at all. Any transition to alternative  suppliers would likely result in the need
to  requalify  our products  with our  customers,  delays in  shipment,  quality
control issues and increased  expenses,  any of which would limit our ability to
deliver products to our customers.  Furthermore, if we are unable to identify an
alternative  source of supply,  we may have to redesign or modify our  products,
which would cause delays in shipments,  increase design and manufacturing  costs
and require us to increase the prices of our products.

        In the last three years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  the laser price  reductions that we
have been able to obtain from Furukawa have been less than the price  reductions
for the  associated  products  that we have given our  customers  in response to
market conditions. As a result, our gross margins have been negatively impacted,
and may be  negatively  impacted in the future.  While we continue to  negotiate
with  Furukawa  with respect to the pricing of the lasers we purchase from them,
we cannot assure you that these  efforts will be  successful in addressing  this
negative  impact on our gross margins.  While we believe that our acquisition of
GigaComm may provide us with a second  source for lasers used within  certain of
our products, potentially reducing our dependence on Furukawa and improving lead
times and current cost  structures,  there can be no  assurance  that we will be
able to achieve these benefits in the near future or at all.

We are moving certain  manufacturing  operations to a  sub-contractor  in China,
which exposes us to risks inherent in doing business in China.

        We have  entered  into an  agreement  with  SAE to  manufacture  certain
product lines in China  commencing in the summer of 2007.  This  agreement  will
allow the Company to move into  high-volume  production  in China to augment our
capabilities  in short-run,  specialized  applications.  If our customers do not
qualify  the  manufacturing  lines of SAE for volume  shipments,  our  operating
results and customer relationships may suffer.

        We  may  experience  delays,  disruption  or  quality  problems  in  the
manufacturing  operations  of SAE,  especially  during  the  initial  startup of
manufacturing with them. As a result, we could incur additional costs that would
adversely affect gross margins,  and product shipments to our customers could be
delayed beyond requested  shipment  schedules,  which could adversely affect our
revenues, competitive position and reputation.

Disruption to our  operations at either our  California or Taiwan  manufacturing
facilities  could require us to lease  alternative  manufacturing  facilities or
limit our manufacturing operations.

        Currently,  our manufacturing operations are conducted in our California
and Taiwan facilities. Due to this geographic concentration, a disruption of our
manufacturing operations, resulting from sustained process abnormalities,  human
error,  government  intervention  or  natural  disasters,  such as  earthquakes,
typhoons,  fires or floods, or other causes,  could require us to cease or limit
our manufacturing operations.

Uncertainties  arising out of terrorist  activities,  resulting military actions
and other factors could adversely affect our business and operating results.

        The September 11, 2001 terrorist attacks in the United States and recent
terrorist  attacks in other parts of the world, as well as continued  threats of
global  terrorism,  current and future  military  response  to them,  the United
States  military  action in Iraq,  and the potential  outbreak of Avian Flu have
created  many  economic  and  political  uncertainties  that  make it  extremely
difficult for us, our  customers  and our  suppliers to accurately  forecast and
plan future business activities. The potential outbreak of Avian Flu, especially
in China,  where we have significant  customer and supply  relationships,  could
also disrupt our operations,  sales, and supply chain or those of our customers,
which  has made it more  difficult  to  predict  and plan  for  future  business
activities.  This  reduced  predictability  challenges  our  ability  to operate



                                       36
<PAGE>



profitably or to grow our business.  In  particular,  it is difficult to develop
and implement strategies,  sustainable business models and efficient operations,
and effectively manage contract manufacturing and supply chain relationships. In
addition,  the continued threats of terrorism,  the heightened security measures
in response to such threats, and the potential outbreak of Avian Flu have caused
and may continue to cause  significant  disruption  to commerce  throughout  the
world.  Disruption in air  transportation in response to these threats or future
attacks,   or  Avian  Flu,  may  result  in   transportation   and  supply-chain
disruptions,  increase our costs for both  receipt of inventory  and shipment of
products  to our  customers,  and  cause  customers  to defer  their  purchasing
decisions.  Disruptions  in commerce  could also cause  consumer  confidence and
spending to decrease or result in increased volatility in the U.S. and worldwide
financial  markets  and  economy.  We may also  become  subject to the risk that
future  restrictions of immigration  controls may adversely affect the residence
status of  non-U.S.-citizen  engineers and other key technical  employees in our
California facility or our ability to hire new non-U.S.-citizen employees in our
California facility.

We could be subjected to  litigation  regarding  intellectual  property  rights,
which may divert  management  attention,  cause us to incur significant costs or
prevent us from selling our products.

        There has been  significant  litigation in the United  States  involving
patents and other  intellectual  property rights in the networking  technologies
industry.  Many  companies  aggressively  use their patent  portfolios  to bring
infringement  claims  against  competitors.  As a  result,  we may be a party to
litigation or be involved in disputes over our alleged  infringement  of others'
intellectual  property in the future. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and prevent us
from making or selling some of our products. These lawsuits, regardless of their
merit,  would likely be time-consuming and expensive to resolve and would divert
management's time and attention.  Any potential intellectual property litigation
also could force us to do one or more of the following:

        o    stop  selling,  incorporating  or using our  products  that use the
             infringed intellectual property;
        o    obtain a license to make, sell or use the relevant  technology from
             the owner of the infringed intellectual property, which license may
             not be available on commercially reasonable terms, if at all; or
        o    redesign  the  products  to  not  use  the  infringed  intellectual
             property, which may not be technically or commercially feasible.

        If we are forced to take any of these actions,  we may be limited in our
ability to execute our business plan.

        We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights.  These claims could result in costly
litigation and the diversion of our technical and management  personnel.  In the
process of asserting our  intellectual  property  rights,  these rights could be
found to be invalid,  unenforceable  or not infringed.  Failure to  successfully
assert our intellectual property rights could result in our inability to prevent
our competitors from utilizing our proprietary rights.

If  we  are  unable  to  protect  our  proprietary   technology,   others  could
misappropriate this technology,  which would make it difficult for us to compete
in our industry.

        Our  success  and  ability  to  compete  is  dependent  in  part  on our
proprietary technology.  We rely primarily on patent,  copyright,  trademark and
trade secret laws, as well as confidentiality  agreements and other methods,  to
establish  and protect  our  proprietary  rights.  Existing  patent,  copyright,
trademark  and trade  secret laws afford only limited  protection.  While we are
pursuing foreign patent  protections,  the laws of some foreign countries do not
protect  us against  the  unauthorized  use of our  proprietary  technology  and
processes to the same extent as do the laws of the United  States,  and policing
the  unauthorized  use of our products is difficult.  Many U.S.  companies  have
encountered substantial infringement problems in some foreign countries. Because
we sell some of our products overseas, we



                                       37
<PAGE>



have exposure to foreign  intellectual  property risks.  Any infringement of our
proprietary  rights  could  result  in costly  litigation,  and any  failure  to
adequately  protect  our  proprietary  rights  could  result in our  competitors
offering  similar  products,  potentially  resulting  in the loss of some of our
competitive advantage and a decrease in our revenue.

We are subject to environmental  laws and other legal requirements that have the
potential to subject us to substantial  liability and increase our cost of doing
business.

        Our properties and business  operations are subject to a wide variety of
federal,  state and local environmental,  health and safety laws and other legal
requirements,  including  those  relating to the  storage,  use,  discharge  and
disposal  of  toxic,  volatile  or  otherwise  hazardous  substances.  We may be
required  to incur  substantial  costs to comply  with  current or future  legal
requirements.  In addition,  if we fail to obtain required  permits or otherwise
fail to operate within these or future legal requirements, we may be required to
pay substantial penalties,  suspend our operations or make costly changes to our
manufacturing  processes  or  facilities.  While we believe our  properties  and
business operations are in compliance with applicable  environmental laws and we
do not anticipate any material capital  expenditures for  environmental  control
facilities for the 2007 fiscal year,  there can be no assurance that we will not
incur substantial expenditures in this regard in the future.

        In  August  2006,  the  Company  filed an action  in the  United  States
District  Court  for the  District  of  Colorado  for  breach  of  contract  and
declaratory relief against Olympia Properties, LLC ("Olympia"),  its landlord at
its former  Colorado  facility.  The action  arose after  Olympia  retained  the
Company's  security  deposit of $93,700 upon  expiration of the lease,  claiming
that the Company  contaminated the leased premises with arsenic, in violation of
the lease.  The Company  denies that the  premises  contained  arsenic at levels
exceeding either those permitted by the lease or any other applicable  authority
and, accordingly, the Company filed suit.

        In  its  complaint,   the  Company   requests  that  the  court  provide
declaratory  relief that the Company has not breached the lease  through any act
or omission, and also requests damages for breach of contract in connection with
Olympia's  retention  of the  security  deposit.  Further,  the Company  alleges
additional breaches of the lease by Olympia.

        Olympia denied the Company's allegations and asserted  counterclaims for
breach of ten affirmative defenses.  Further, Olympia asserted counterclaims for
breach of contract and equitable relief alleging  damages of approximately  $1.2
million. The Company denied Olympia's  counterclaims.  We intend to aggressively
pursue our claims, and vigorously defend against Olympia's counterclaims.

We face risks associated with our international operations that could prevent us
from marketing and distributing our products internationally.

        Although a  significant  portion of our sales has  historically  been in
North  America,  a growing  percentage  of our revenue is  generated  from sales
outside North America. Sales of our products outside North America accounted for
approximately 64.0% and 47.6% of our revenue for the three months ended December
31,  2006 and 2005,  respectively.  We expect  that our sales  outside  of North
America will  continue to  contribute  materially  to our revenue.  Prior to the
acquisition  of  GigaComm,   the  Company  had  no  foreign  denominated  sales.
Fluctuations  in the exchange rate between the New Taiwan dollars and the United
States dollars may significantly impact the financial results of the Company. We
have  limited   experience   in   marketing   and   distributing   our  products
internationally. One of our objectives is to expand our international operations
in the future.  Significant  management  attention and  financial  resources are
needed to develop our international sales, support and distribution channels and
manufacturing.  We may not be able to establish or maintain international market
demand for our products.




                                       38
<PAGE>



        In  addition,  international  operations  are  subject  to other  risks,
including:

        o    greater  difficulty in accounts  receivable  collection  and longer
             collection periods;
        o    difficulties and costs of staffing and managing foreign  operations
             with  personnel  who have  expertise in fiber optic  technology;
        o    unexpected changes in regulatory or certification requirements for
             optical networks; and
        o    political or economic instability.

Our  future  operating  results  may be  subject  to  volatility  as a result of
exposure to fluctuation in foreign currency exchange risks.

        As a  result  of the  GigaComm  acquisition  and our  intention  to move
certain production to a contract  manufacturer in China, a larger portion of our
revenue and expenses are likely to be denominated  in foreign  currencies in the
future.  The impact in the current period was not significant.  Accordingly,  we
may be subject to the risks of fluctuating  currencies  between the U.S. dollar,
New Taiwan  dollar and Chinese Yuan varying  more  significantly  than it has to
date.  The  Company may engage in currency  hedging  activities  in an effort to
cover  any  exposure  to such  fluctuations.  These  factors  could  impact  our
international sales or increase our costs of doing business abroad or impair our
ability to expand into international  markets,  and therefore harm our business.
Under certain  circumstances,  these  transactions can have an adverse effect on
our operating results.

Our  limited  experience  in  acquiring  other  businesses,  product  lines  and
technologies  may make it difficult for us to overcome  problems  encountered in
connection with any acquisition we may undertake.

        We expect to review  opportunities to buy other businesses,  products or
technologies  that would  enhance our  technical  capabilities,  complement  our
current  products or expand the breadth of our markets,  or which may  otherwise
offer growth  opportunities.  Our acquisition of businesses or technologies will
require significant  commitment of resources.  We may be required to pay for any
acquisition with cash, but we cannot be certain that additional  capital will be
available to us on favorable  terms, if at all. In lieu of paying cash, we might
be able to issue stock as consideration  for an acquisition,  which would dilute
existing  stockholders'  percentage  ownership,  or we might be able to incur or
assume substantial debt. We have little experience in acquiring other businesses
and technologies. Potential acquisitions also involve numerous risks, including:

        o    problems assimilating the purchased operations, technologies or
             products;
        o    unanticipated costs associated with the acquisition;
        o    diversion of management's attention from our core business;
        o    adverse effects on existing business  relationships  with suppliers
             and customers;
        o    risks  associated  with  entering  markets  in  which we have no or
             limited prior experience; and
        o    potential loss of key employees of purchased organizations.

Our recent  acquisition  could be difficult to integrate,  disrupt our business,
dilute stockholder value and harm our operating results.

        On August 24,  2006,  we purchased  96.88% of the stock of  GigaComm,  a
Taiwan-based  supplier of passive  optical  network (PON) and  fiber-to-the-home
(FTTH) components. Prior to the acquisition,  GigaComm suffered recurring losses
from operations that raised substantial doubt as to its ability to continue as a
going concern. If we are unable to successfully  integrate and manage our larger
and  geographically  more diverse  organization,  reverse the  recurring  losses
incurred  by  GigaComm,  or if  we  encounter  significant  delay  in  achieving
successful  integration,  the impact could have a material  adverse effect on us
and, as a result, on the market price of our common stock.



                                       39
<PAGE>



Charges to earnings  resulting from the  application  of the purchase  method of
accounting may adversely affect the market value of our common stock.

        We accounted for our  acquisition of GigaComm using the purchase  method
of  accounting.  In  accordance  with GAAP,  we  allocated  the total  estimated
purchase  price to the acquired  company's  net tangible  assets and  intangible
assets based upon  preliminary  estimates of their fair values as of the date of
completion of the  transaction  (August 24, 2006) and recorded the excess of the
purchase  price over the fair values as  goodwill.  We will incur an increase in
the amount of amortization expense over the estimated useful lives of certain of
the intangibles  assets acquired in connection with the acquisition on an annual
basis. To the extent the value of goodwill or intangible  assets with indefinite
lives becomes impaired, we may be required to incur material charges relating to
the  impairment  of those  assets.  We cannot  assure you that we will not incur
charges in the future as a result of any such impairment, which charges may have
an adverse effect on our earnings.

We may incur  additional  charges  beyond  that  originally  anticipated  in the
transition of certain manufacturing operations from California and Taiwan to SAE
in China.

        In connection with the transition of certain manufacturing to SAE during
fiscal 2007, we announced a proposed reduction in workforce in both the U.S. and
Taiwan with anticipated  charges to the statement of operations of approximately
$3.0 million to $3.5 million during fiscal 2007.  These  transition  charges are
primarily estimated severance and retention payments. These workforce reductions
are not  expected  to take place  before  the  summer of 2007.  Should we lose a
significant  portion  of the  workforce  to  attrition  prior to the  move,  our
operations  may be  significantly  impacted  beyond the  anticipated  transition
charges  estimated.  There is a risk that,  during this period of  manufacturing
transition,  management  will  not  sufficiently  coordinate  the  role  of  its
workforce  to  ensure  that all  areas  of our  operations  receive  appropriate
attention. If we are unable to manage our workforce,  manufacturing capacity and
scope of  operations  effectively,  the cost and  quality  of our  products  may
suffer.

Our future  operating  results are likely to fluctuate  from quarter to quarter,
and if we fail to meet the expectations of securities analysts or investors, our
stock price could decline significantly.

        Our historical  quarterly  operating results have varied  significantly,
and our  future  quarterly  operating  results  are likely to  continue  to vary
significantly   from   period  to  period.   As  a  result,   we  believe   that
period-to-period  comparisons of our operating results should not be relied upon
as an indicator of our future performance.  Some of the factors that could cause
our operating results to vary include:

        o    fluctuations  in demand for, and sales of, our  products,  which is
             dependent on the implementation of fiber optic networks;
        o    the  timing  of  customer  orders,  particularly  from our  largest
             customers;
        o    competitive  factors,  including  introductions  of  new  products,
             product  enhancements  and the  introduction of new technologies by
             our competitors,  the entry of new competitors into the fiber optic
             modules market and pricing pressures;
        o    our ability to control expenses;
        o    the mix of our products sold; and
        o    economic  conditions  specific  to the  communications  and related
             industries.

        We incur expenses from time to time that may not generate  revenue until
subsequent quarters. In addition, in connection with new product  introductions,
we incur research and development expenses and sales and marketing expenses that
are not matched with revenue until a subsequent  quarter when the new product is
introduced. We cannot assure you that our expenditures on manufacturing capacity
will  generate  increased  revenue in  subsequent  quarters  or that new product
introduction will generate  sufficient revenue in subsequent quarters to recover
our research  and  development  expenditures.  If growth in our revenue does not
outpace the increase in our expenses,  our quarterly  operating results may fall
below expectations and cause our stock price to decline significantly.



                                       40
<PAGE>

        Due to these and other factors,  we believe that our quarterly operating
results are not an indicator of our future performance. If our operating results
were below the  expectations  of public  market  analysts or investors in future
quarters,  the  trading  price of our  Class A common  stock  would be likely to
decrease significantly.

Our stock price is likely to be volatile and could drop unexpectedly.

        Our Class A common  stock has been  publicly  traded  since  November 3,
2000.  The  market  price  of our  Class A common  stock  has  been  subject  to
significant  fluctuations  since the date of our initial  public  offering.  The
stock  market  has from time to time  experienced  significant  price and volume
fluctuations  that have affected the market prices of  securities,  particularly
securities of  telecommunications  and fiber optic companies.  As a result,  the
market price of our Class A common stock may materially  decline,  regardless of
our operating  performance.  In the past, following periods of volatility in the
market  price of a  particular  company's  securities,  securities  Class Action
litigation has often been brought  against that company.  We may become involved
in this  type of  litigation  in the  future.  Litigation  of this type is often
expensive and diverts management's attention and resources.

Sales of substantial  amounts of our shares by selling  stockholders could cause
the market price of our shares to decline.

        Our three founders  recently left  employment  with the Company.  In the
aggregate,  they  beneficially own  approximately  23.8 million shares of common
stock,  including stock options for  approximately  3.2 million  shares.  During
fiscal 2006 and the first quarter of fiscal 2007, the three  co-founders sold an
aggregate of approximately  6.5 million shares of our common stock. One founder,
Muoi Van Tran, remains a director and Chairman of the Board of the Company.  Dr.
Tran  beneficially  owns  approximately  12.8  million  shares of common  stock,
including stock options for  approximately 1.9 million shares. It is likely that
the other two founders,  who beneficially own approximately  11.0 million shares
of common stock,  including stock options for  approximately 1.3 million shares,
will be free to sell  additional  shares of their  common  stock  without  being
subject to volume  limitation  rules  imposed by federal  securities  laws.  The
average daily trading volume of our common stock during fiscal 2006 was slightly
over 200,000 shares. Sales by our founders in the public or private market could
adversely  affect the market price of our common stock by increasing  the supply
of shares  available  for sale  compared to the demand in the public and private
markets.

We may not be able to maintain our listing on the NASDAQ  Global  Market and, if
we fail to do so,  the  price  and  liquidity  of our  Class A common  stock may
decline.

        The NASDAQ Stock Market has  quantitative  maintenance  criteria for the
continued  listing  of  securities  on the NASDAQ  Global  Market.  The  current
requirements  affecting us include  maintaining a minimum bid price per share of
$1. Our bid price has been below $1 in the past. If the bid price of our Class A
common stock drops below $1 per share and remains at that level for more than 30
consecutive trading days, we will be in violation of NASDAQ's listing standards.
If within 90 days  thereafter,  our Class A common stock does not have a minimum
bid price of $1 per share for 10 consecutive  trading days, NASDAQ will commence
proceedings to delist our Class A common stock from the NASDAQ Global Market. If
we fail to maintain  continued listing on the NASDAQ Global Market and must move
to a market with less liquidity, our stock price would likely decline. If we are
delisted,  it could have a material  adverse  effect on the market price of, and
the liquidity of the trading market for, our Class A common stock.

Our success depends on our key personnel,  including our executive officers, the
loss of any of whom could harm our business.

        Our  success  depends  on the  continued  contributions  of  our  senior
management  and other key  research and  development,  sales and  marketing  and
operations personnel, including Philip F. Otto, our



                                       41
<PAGE>



President  and Chief  Executive  Officer,  Frederic  T.  Boyer,  our Senior Vice
President and Chief Financial Officer,  Dr. Liew-Chuang Chiu, our Vice President
of  Operations  and Jacob Tarn,  General  Manager of GigaComm.  Competition  for
employees in our  industry is intense.  We do not have life  insurance  policies
covering  any of our  executives.  There  can be no  assurance  that  we will be
successful  in retaining  such key  personnel,  or that we will be successful in
hiring  replacements or additional key personnel.  Our loss of any key employee,
the failure of any key  employee to perform in his or her current  position,  or
the inability of our officers and key employees to expand,  train and manage our
employee base may prevent us from executing our growth strategy.

        We will need to attract and retain highly qualified managers,  sales and
marketing and technical  support  personnel.  We have had difficulty  hiring the
necessary engineering, sales and marketing and management personnel in the past.
If we fail to hire and retain  qualified  personnel  when  needed,  our  product
development  efforts and customer  relations  will  suffer.  If we are unable to
manage  our growth  effectively,  we will incur  additional  expenses  that will
negatively impact our operating results.

        We rely upon the ability to use stock  options as a key component in our
executive and employee compensation  structure.  In the past, stock options have
been  significant  in our  ability  to  retain  important  personnel  and  offer
competitive compensation packages.  Without this component, we would be required
to significantly  increase cash  compensation  levels in order to retain our key
employees. SFAS 123(R) updated the accounting treatment for share-based payments
and requires the expensing of equity compensation in the statement of operations
and may cause us to reduce,  modify or even  eliminate  all or  portions  of the
equity compensation program.

We have potential business  conflicts of interest with Furukawa,  the resolution
of  which  may  not  be  as  favorable  to us as if  we  were  dealing  with  an
unaffiliated third party.

        We have  historically  relied on  Furukawa's  research  and  development
capabilities to provide us with technologically  advanced lasers and fiber optic
components that we purchase from Furukawa for inclusion in our products,  and we
expect to continue to rely on Furukawa in the future. We currently  purchase the
majority of lasers from Furukawa under a Master  Purchase  Agreement.  We cannot
assure  you that  Furukawa  will  renew the  Agreement  upon its  expiration  on
September  30,  2007 or  whether  it  will  continue  to  provide  services  and
components  to us, and if not,  whether or on what terms we could find  adequate
alternative sources for these services and components.

        In the last three years,  we have  negotiated  price  reductions for the
lasers we purchase from Furukawa.  However,  the laser price  reductions that we
have been able to obtain from Furukawa have been less than the price  reductions
for the  associated  products  that we have given our  customers  in response to
market conditions. As a result, our gross margins have been negatively impacted,
and may be  negatively  impacted in the future.  While we continue to  negotiate
with  Furukawa  with respect to the pricing of the lasers we purchase from them,
we cannot assure you that these  efforts will be  successful in addressing  this
negative  impact on our gross margins.  While we believe that our acquisition of
GigaComm may provide us with a second  source for lasers used within  certain of
our products, potentially reducing our dependence on Furukawa and improving lead
times and current cost  structures,  there can be no  assurance  that we will be
able to achieve these benefits in the near future or at all.

        Furukawa can control the outcome of any stockholder  votes, as discussed
below.  The  terms  of  future  transactions  with  Furukawa  may or may  not be
comparable to those that would be available from unaffiliated third parties.

        Potential  conflicts  of interest  exist  between  Furukawa  and us in a
number of areas,  including  the nature  and  quality of  services  rendered  by
Furukawa  to  us,   potential   competitive   business   activities,   sales  or
distributions by Furukawa of all or any portion of its ownership interest in us,
or Furukawa's ability to control our management and affairs. It is possible that
business  decisions  made by  management  that are in the best  interest  of our
stockholders may conflict with Furukawa's interests. For example, we may



                                       42
<PAGE>



decide to enter into or acquire a line of business competitive with Furukawa, or
Furukawa may decide to enter into or acquire a line of business competitive with
us. Any of these events may alter or  eliminate  our ability to rely on Furukawa
to supply key  components  to us in the future,  increase our costs of producing
our  products  and result in increased  competition  in our  markets.  We cannot
assure  you that we will be able to  resolve  any  conflicts  we may  have  with
Furukawa or, if we are able to do so, that the  resolution  will be favorable to
us.

Furukawa  will  control  the outcome of  stockholder  voting and there may be an
adverse affect on the price of our Class A common stock due to disparate  voting
rights of our Class A common stock and our Class B common stock.

        Furukawa  beneficially  owns all of our  outstanding  shares  of Class B
common stock,  which as of December 31, 2006  represented  93.3% voting  control
over all stockholder issues. The holders of our Class A common stock and Class B
common  stock have  identical  rights  except that holders of our Class A common
stock are  entitled  to one vote per share  while  holders of our Class B common
stock  are  entitled  to ten  votes  per  share  on  matters  to be  voted on by
stockholders.  The differential in the voting rights of our Class A common stock
and Class B common stock could adversely  affect the price of our Class A common
stock to the extent that  investors  or any  potential  future  purchaser of our
shares of Class A common stock give greater value to the superior  voting rights
of our  Class B common  stock.  Each  share of our  Class B  common  stock  will
automatically  convert  into  one  share  of  Class  A  common  stock  if  it is
transferred to any entity,  other than an entity  controlling,  controlled by or
under common control with Furukawa.  In addition,  our Class B common stock will
automatically  convert  into  shares  of our  Class A common  stock if the total
number of  outstanding  shares of Class B common  stock falls below 20% of total
number of  outstanding  shares of our common  stock.  As long as Furukawa  has a
controlling  interest,  it will continue to be able to elect our entire board of
directors  and  generally  be able to  determine  the  outcome of all  corporate
actions  requiring  stockholder  approval.  As a result,  Furukawa  will be in a
position to continue to control all matters affecting us, including:

        o    a change of control, including a merger;
        o    our acquisition or disposition of assets;
        o    our future issuances of common stock or other securities;
        o    our incurrence of debt; and
        o    our payment of dividends on our common stock.

        Three members of our board of directors are also executives of Furukawa.
These individuals have obligations to both our company and Furukawa and may have
conflicts of interest with respect to matters  potentially or actually involving
or affecting us, such as acquisitions and other corporate opportunities that may
be suitable for both Furukawa and us.

Our exploration of strategic alternatives may not be successful.

        We have a special  committee  of our board of directors  that  evaluates
strategic alternatives.  The special committee,  which is comprised of our three
independent  directors,  engaged  Bear,  Stearns  & Co.  Inc.  to  advise  it in
evaluating  strategic   alternatives,   including  a  special  dividend,   share
repurchase, strategic merger or sale of the Company.

        We are uncertain as to what strategic  alternatives  may be available to
us or what impact any particular  strategic  alternative  will have on our stock
price if  accomplished.  Uncertainties  and risks relating to our exploration of
strategic alternatives include:

        o    the exploration of strategic  alternatives  may disrupt  operations
             and distract management, which could have a material adverse effect
             on our operating results;



                                       43
<PAGE>


        o    the process of exploring  strategic  alternatives  may be more time
             consuming and expensive than we currently anticipate;
        o    we may not be able to  successfully  achieve  the  benefits  of the
             strategic alternative undertaken by us; and
        o    perceived  uncertainties  as to the future direction of the Company
             may result in the loss of employees or business partners.

Our  internal  controls  over  financial  reporting  may not be adequate and our
independent  auditors  may not be able to  certify as to their  adequacy,  which
could have a significant and adverse effect on our business and reputation.

        We are  evaluating  our internal  controls over  financial  reporting in
order to allow  management to report on, and our independent  auditors to attest
to, our internal controls over financial  reporting,  as required by Section 404
of the  Sarbanes-Oxley  Act  of  2002  and  rules  and  regulations  of the  SEC
thereunder,  which we refer to as Section 404.  Section 404 requires a reporting
company such as ours to, among other things,  annually  review and report on its
internal controls over financial reporting, and evaluate and disclose changes in
its internal controls over financial reporting quarterly.  We may be required to
comply with Section 404 as of September 30, 2007.  We are  currently  performing
the system and  process  evaluation  and  testing  required  (and any  necessary
remediation)  in an effort to comply with management  certification  and auditor
attestation requirements of Section 404.

        In the course of our ongoing evaluation, we have identified areas of our
internal controls requiring  improvement,  and plan to design enhanced processes
and  controls to address  these and any other  issues  that might be  identified
through this review.  As a result,  we expect to incur  additional  expenses and
diversion  of  management's  time.  We cannot  be  certain  as to the  timing of
completion of our evaluation,  testing and remediation  actions or the impact of
the same on our  operations  and may not be able to ensure  that the  process is
effective  or that the  internal  controls  are or will be effective in a timely
manner.  If we are not able to implement  the  requirements  of Section 404 in a
timely manner or with adequate  compliance,  our independent auditors may not be
able to certify as to the  effectiveness  of our internal control over financial
reporting  and we may be subject to sanctions  or  investigation  by  regulatory
authorities,  including the SEC. As a result, there could be an adverse reaction
in the financial  markets due to a loss of confidence in the  reliability of our
consolidated  financial  statements.  In  addition,  we may be required to incur
costs in improving  our  internal  control  system and the hiring of  additional
personnel. Any such action could have a material effect on our business, results
of operations and financial condition.



                                       44
<PAGE>



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

        On or about  December 28, 2006,  our proxy  statement  and  accompanying
proxy card were mailed to those  stockholders who were stockholders of record as
of December 12, 2006.

        (a) Our 2007 Annual Meeting of Stockholders was held on January 24, 2007
in Woodland Hills, California.

        (b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14  under  the  Securities  Exchange  Act of  1934,  as  amended,  there  was no
solicitation in opposition to the  management's  nominees as listed in the proxy
statement, and all of such nominees were elected.

        (c) At the Annual  Meeting,  the following  matters were  considered and
voted upon:

        (i)     The election of eight  directors to serve on the Company's Board
                of Directors until the 2008 Annual

                Meeting  of  Stockholders  or until  their  successors  are duly
                elected  and  qualified.  The  vote  for  each  director  was as
                follows:

<TABLE>
<CAPTION>
                                    Class A                    Class B
                         Class A     Shares       Class B       Shares      Class B      Total
       Name               Votes     Withheld       Shares      Withheld      Votes       Votes
                       ----------   ---------    ----------    --------   -----------  -----------
<S>                    <C>          <C>          <C>                <C>   <C>          <C>
Muoi Van Tran          32,434,170   7,908,890    66,000,000         0     660,000,000  692,434,170

Philip F. Otto         32,579,099   7,763,961    66,000,000         0     660,000,000  692,579,099

Stewart D.             37,487,449   2,855,611    66,000,000         0     660,000,000  697,487,449
Personick

Hobart Birmingham      32,221,214   8,121,846    66,000,000         0     660,000,000  692,221,214

David Warnes           32,373,410   7.969,650    66,000,000         0     660,000,000  692,373,410

Yukimasa Shiga         27,309,035   13,034,025   66,000,000         0     660,000,000  687,309,035

Haruki Ogoshi          32,522,244   7,820,816    66,000,000         0     660,000,000  692,522,244

Arinobu Sato           32,520.945   7,822,115    66,000,000         0     660,000,000  692,520,945

</TABLE>

        (ii)    The  amendment to the  Company's  2000 Stock  Incentive  Plan to
                increase the aggregate  number of Class A common stock  reserved
                for  issuance   under  the  Plan  by  10,000,000   shares  (from
                12,121,680  to   22,121,680).   At  the  Annual   Meeting,   our
                stockholders  approved  this  proposal  by the  votes  indicated
                below:
<TABLE>
<CAPTION>
                  Class A Votes        Class B Shares       Class B Votes         Total Votes
                -----------------    ------------------   -----------------     ----------------
<S>                    <C>                   <C>                <C>                  <C>
For                    18,196,712            66,000,000         660,000,000          678,196,712
Against                 9,174,170                     0                   0            9,174,170
Abstain                    46,817                     0                   0               46,817

</TABLE>

        (iii)   To approve a special grant of stock options  covering  1,500,000
                shares  of our  Class A common  stock to  Philip  F.  Otto,  the
                Company's Chief Executive  Officer and President.  At the Annual
                Meeting,  our  stockholders  approved this proposal by the votes
                indicated below:
<TABLE>
<CAPTION>
                  Class A Votes        Class B Shares       Class B Votes         Total Votes
                -----------------    ------------------   -----------------     ----------------
<S>                    <C>                   <C>                <C>                  <C>
For                    24,459,756            66,000,000         660,000,000          684,459,756
Against                 2,905,132                     0                   0            2,905,132
Abstain                    52,811                     0                   0               52,811

</TABLE>



                                       45
<PAGE>



        (iv)    To  ratify  the  appointment  of  Deloitte  & Touche  LLP as our
                independent  auditors for the fiscal year ending  September  30,
                2007.  At the Annual  Meeting,  our  stockholders  approved this
                proposal by the votes indicated below:
<TABLE>
<CAPTION>
                  Class A Votes        Class B Shares       Class B Votes         Total Votes
                -----------------    ------------------   -----------------     ----------------
<S>                    <C>                   <C>                <C>                  <C>
For                    39,863,730            66,000,000         660,000,000          699,863,730
Against                   426,829                     0                   0              426,829
Abstain                    52,500                     0                   0               52,500

</TABLE>

ITEM 6.        EXHIBITS

<TABLE>
<CAPTION>

Exhibit Number         Description
--------------------------------------------------------------------------------------------------
<S>                   <C>
31.1                  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2                  Certification  of Chief Financial  Officer  pursuant to 18
                      U.S.C. Section 1350, as adopted pursuant to Section 302 of
                      the Sarbanes-Oxley Act of 2002.
32.1                  Certification of Chief Executive Officer and Chief Financial Officer
                      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                      the Sarbanes-Oxley Act of 2002.
10.1                  Separation Agreement, dated December 11, 2006, by and between the Registrant
                      and Muoi Van Tran
10.2                  Consulting Agreement, dated October 10, 2006, by and between the Registrant
                      and Mohammad Ghorbanali
</TABLE>




                                       46
<PAGE>






                                   SIGNATURES

    Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, the
    Registrant  has duly  caused  this  report to be signed on its behalf by the
    undersigned thereunto duly authorized.


                             OPTICAL COMMUNICATION PRODUCTS, INC.,
                             a Delaware corporation


Date:    February 14, 2007          By:    /s/ Philip F. Otto
        ------------------                 ----------------------
                                    Name:  Philip F. Otto
                                    Title: Chief Executive Officer and President
                                           (principal executive officer)

Date:    February 14, 2007          BY:    /s/ Frederic T. Boyer
        ------------------                 -----------------------------
                                    Name:  Frederic T. Boyer
                                    Title: Chief Financial Officer (principal
                                           financial and accounting officer)





                                       47
<PAGE>



                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

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

<S>                  <C>
31.1                 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
                     1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                     2002.
31.2                 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
                     1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                     2002.
32.1                 Certification   of  Chief   Executive   Officer  and  Chief
                     Financial  Officer  pursuant to 18 U.S.C.  Section 1350, as
                     adopted pursuant to Section 906 of the  Sarbanes-Oxley  Act
                     of 2002.
10.1                 Separation Agreement, dated December 11, 2006, by and between the
                     Registrant and Muoi Van Tran
10.2                 Consulting Agreement, dated October 10, 2006, by and between the
                     Registrant and Mohammad Ghorbanali
</TABLE>