UNITED
STATES
  SECURITIES
AND EXCHANGE COMMISSION
  WASHINGTON,
D.C. 20549
  ____________________
  FORM
10-Q
  (Mark
One)
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended March 31, 2010
  Commission
File Number 0-31857
     ALLIANCE
      FIBER OPTIC PRODUCTS, INC.(Exact
      name of registrant as specified in its charter)Delaware
            
            77-0554122(State
      or other jurisdiction of
            
            (I.R.S.
      employerIncorporation
      or organization)
            
            identification
      number)275 Gibraltar
      Drive, Sunnyvale, California 94089(Address
      of Principal Executive Offices)(408)
      736-6900(Issuer's
      telephone number)
    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 þ No o
   Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).    Yes oNoþ
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of "accelerated filer", "large
accelerated filer", and "smaller reporting company" in Rule 12b-2 of the
Exchange Act).  (Check one):
 
 Large
accelerated filer o   Accelerated
Filer o  Non-accelerated filer o
   Smaller reporting company þ
 (Do
not check if a smaller reporting company)
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes oNo þ
 
 On April
30, 2010, 42,539,162 shares of the registrant's Common Stock, $0.001 par value
per share, were outstanding.
   
  ALLIANCE
FIBER OPTIC PRODUCTS, INC.
  FORM 10-Q
  QUARTERLY
PERIOD ENDED MARCH 31, 2010
  INDEX
  PagePART
      I: FINANCIAL INFORMATION
              1ITEM
      1: FINANCIAL STATEMENTS
              1Condensed Consolidated Balance
      Sheets at March 31, 2010 (unaudited) andDecember 31,
      2009
              1Condensed
      Consolidated Statements of Income for theThree
      Months Ended March 31, 2010 (unaudited) and 2009
              2Condensed
      Consolidated Statements of Cash Flows for theThree
      Months Ended March 31, 2010 (unaudited) and 2009
              3Notes
      to Condensed Consolidated Financial Statements (unaudited)
              4ITEM
      2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
              12ITEM
      3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
              17ITEM
      4: CONTROLS AND PROCEDURES
              17PART
      II: OTHER INFORMATION
              18ITEM
      1A: RISK FACTORS
              18ITEM 6:
      EXHIBITS
              29SIGNATURE
              30
  PART
I:  FINANCIAL INFORMATION
  ITEM
1:  FINANCIAL
STATEMENTS
  ALLIANCE FIBER
OPTIC PRODUCTS, INC.
 Condensed
Consolidated Balance Sheets
 (in thousands,
except share data)
 March
      31,
                
                December
      31,2010
                
                2009Assets
                
                
                
                (Unaudited)Current
      assets:Cash and cash equivalents
                
                
                $
                7,011
                
                
                $
                8,525Short-term
      investments
                
                
                
                32,407
                
                
                
                31,968Other
      current assets
                
                
                
                1,762
                
                
                
                1,778Accounts receivable, net
                
                
                
                5,430
                
                
                
                4,952Inventories,
      net
                
                
                
                5,861
                
                
                
                4,984Prepaid expense and other current assets
                
                
                
                615
                
                
                
                515Total current assets
                
                
                
                53,086
                
                
                
                52,722Property
      and equipment, net
                
                
                
                4,797
                
                
                
                4,434Other
      assets
                
                
                
                126
                
                
                
                233Total
      assets
                
                
                $
                58,009
                
                
                $
                57,389Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable
                
                
                $
                4,611
                
                
                $
                3,701Accrued
      expenses
                
                
                
                2,700
                
                
                
                3,822Current
      portion of bank loans
                
                
                
                104
                
                
                
                114Total current liabilities
                
                
                
                7,415
                
                
                
                7,637Other
      Long-term liabilities:Bank loans
                
                
                
                286
                
                
                
                305Other long-term liabilities
                
                
                
                526
                
                
                
                508Total long-term liabilities
                
                
                
                812
                
                
                
                813Total liabilities
                
                
                
                8,227
                
                
                
                8,450Commitments
      and contingencies (Note 8)Stockholders'
      equityCommon
      stock, $0.001 par value: 250,000,000 shares authorized;42,520,162and 42,447,112 shares issued and outstanding
    atMarch 31, 2010 and December 31, 2009, respectively
                
                
                
                43
                
                
                
                42Additional paid-in-capital
                
                
                
                112,226
                
                
                
                112,131Accumulated deficit
                
                
                
                (63,162
                )
                
                
                (63,796
                )Accumulated other comprehensive income
                
                
                
                675
                
                
                
                562Stockholders'
      equity
                
                
                
                49,782
                
                
                
                48,939Total liabilities and stockholders' equity
                
                
                $
                58,009
                
                
                $
                57,389
  
 The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
  1
  
   ALLIANCE FIBER
OPTIC PRODUCTS, INC.
 Condensed
Consolidated Statements of Income
 (Unaudited, in
thousands, except per share data)
  Three
      Months Ended March 31,2010
                
                2009Revenues
                
                
                $
                8,406
                
                
                $
                7,643Cost
      of revenues
                
                
                
                5,711
                
                
                
                5,345Gross profit
                
                
                
                2,695
                
                
                
                2,298Operating
      expenses:Research and development
                
                
                
                709
                
                
                
                729Sales and marketing
                
                
                
                561
                
                
                
                634General and administrative
                
                
                
                933
                
                
                
                845Total operating expenses
                
                
                
                2,203
                
                
                
                2,208Income
      from operations
                
                
                
                492
                
                
                
                90Interest
      and other income, net
                
                
                
                150
                
                
                
                222Net
      income before tax
                642
                
                
                312Income
      tax
                1
                
                
                
                10Net
      income
                
                
                $
                641
                
                
                
                302Net
      income per share:Basic
                
                
                $
                0.02
                
                
                $
                0.01Diluted
                
                
                $
                0.01
                
                
                $
                0.01Shares
      used in computing net income per share:Basic
                
                
                
                42,467
                
                
                
                41,872Diluted
                
                
                
                43,241
                
                
                
                41,897
   The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
  2
 
   ALLIANCE FIBER
OPTIC PRODUCTS, INC.
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited, in
thousands)
 Three Months
      Ended March 31,2010
                  
                  2009Cash
      flows from operating activities:Net
      income
                  
                  
                  $
                  641
                  
                  
                  $
                  302Adjustments to reconcile net income to net cash used inoperating
      activities:Depreciation
                  
                  
                  
                  248
                  
                  
                  
                  263Amortization of stock-based compensation
                  
                  
                  
                  33
                  
                  
                  
                  28Loss
      on disposal of property and equipment
                  
                  
                  
                  -
                  
                  
                  
                  4Provision for inventory valuation
                  
                  
                  
                  (102
                  )
                  
                  
                  (58
                  )Changes in assets and liabilities:Accounts receivable
                  
                  
                  
                  (478
                  )
                  
                  
                  (459
                  )Inventories
                  
                  
                  
                  (775
                  )
                  
                  
                  704Prepaid expenses and other current assets
                  
                  
                  
                  (100
                  )
                  
                  
                  (113
                  )Other assets
                  
                  
                  
                  106
                  
                  
                  
                  (162
                  )Accounts payable
                  
                  
                  
                  910
                  
                  
                  
                  (688
                  )Accrued
      expense
                  
                  
                  
                  (1,122
                  )
                  
                  
                  11Other long-term liabilities
                  
                  
                  
                  19
                  
                  
                  
                  (15
                  )Net cash used in operating activities
                  
                  
                  
                  (620
                  )
                  
                  
                  (183
                  )Cash
      flows from investing activities:Purchase of short-term investments
                  
                  
                  
                  (2,583
                  )
                  
                  
                  (5,798
                  )Proceeds
      from sales and maturities of short-term investments
                  
                  
                  
                  2,155
                  
                  
                  
                  498Purchase
      of property and equipment
                  
                  
                  
                  (576
                  )
                  
                  
                  (71
                  )Net cash used in investing activities
                  
                  
                  
                  (1,004
                  )
                  
                  
                  (5,371
                  )Cash
      flows from financing activities:Proceeds
      from the exercise of common stock options
                  
                  
                  
                  62
                  
                  
                  
                  -Payment of bank loans
                  
                  
                  
                  (36
                  )
                  
                  
                  (39
                  )Net cash provided by (used in) financing activities
                  
                  
                  
                  26
                  
                  
                  
                  (39
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  
                  84
                  
                  
                  
                  (94
                  )Net
      decrease in cash and cash equivalents
                  
                  
                  
                  (1,514
                  )
                  
                  
                  (5,687
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  
                  8,525
                  
                  
                  
                  12,185Cash
      and cash equivalents at end of period
                  
                  
                  $
                  7,011
                  
                  
                  $
                  6,498Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                  
                  
                  $
                  (3
                  )
                  
                  $
                  (3
                  )
  
 The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
  3
 
 
 
 ALLIANCE
FIBER OPTIC PRODUCTS, INC.
 Notes
to Condensed Consolidated Financial Statements
  (Unaudited)
 
 1.
Summary of Significant Accounting Policies
 
 The
Company
 
 Alliance
Fiber Optic Products, Inc. (the "Company") was incorporated in California on
December 12, 1995 and reincorporated in Delaware on October 19,
2000.  The Company designs, manufactures and markets fiber optic
components for communications equipment manufacturers.  The Company's
headquarters are located in Sunnyvale, California, and it has operations in
Taiwan and China.
 
 Basis
of Presentation
 
 The
accompanying condensed consolidated balance sheet as of December 31, 2009, which
has been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements as of March 31, 2010 have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") and include the accounts of Alliance Fiber Optic
Products, Inc. and its wholly-owned subsidiaries. All inter-company accounts and
transactions have been eliminated. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") have been condensed or omitted pursuant to such rules and
regulations.
 
 These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2009 and filed with the SEC on March 19, 2010. The unaudited
condensed consolidated financial statements as of March 31, 2010, and for
the three months ended March 31, 2010 and 2009, reflect, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for any subsequent interim period or for an entire
year. The December 31, 2009 balance sheet was derived from audited financial
statements at that date, but does not include all disclosures required by U.S.
GAAP.
 
 There
have been no significant changes in the Company's critical accounting policies
during the three months ended March 31, 2010 as compared to what was previously
disclosed in the Company's Form 10-K for the fiscal year ended December
31,  2009 as filed with the SEC.
 
 Revenue
Recognition
 
 The
Company recognizes revenue upon shipment of its products to its customers,
provided that the Company has received a purchase order, the price is fixed,
collection of the resulting receivable is reasonably assured and transfer of
title and risk of loss has occurred.  Subsequent to the sale of its
products, the Company has no obligation to provide any modification or
customization upgrades, enhancements or post contract customer
support.
 
 Allowances
are provided for estimated returns. A provision for estimated sales return
allowances is recorded at the time revenue is recognized based on historical
returns, current economic trends and changes in customer demand. Such allowances
are adjusted periodically to reflect actual and anticipated
experience.  Such adjustments, which are recorded against revenue in
the period, could be material.
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid instruments with a maturity of three months
or less when purchased to be cash equivalents.  Cash equivalents
consist primarily of market rate accounts, corporate bonds, certificates of
deposit, and auction rate securities that are stated at cost, which approximates
fair value.
 
  
 
 
 Concentrations
of Risk
 
 Our
connectivity products (formerly named optical path multiplexing solution)
contributed 66.9% and 56.4% of our revenues for the quarters ended March 31,
2010 and 2009, respectively. Our optical passive products (formerly named dense
wavelength division multiplexing) contributed 33.1% and 43.6% of our revenues
for the quarters ended March 31, 2010 and 2009, respectively.
 
 In the
quarters ended March 31, 2010 and 2009, our top 10 customers comprised 67.8% and
70.3% of our revenues, respectively.  For the three months ended March
31, 2010, three customers accounted for 14.3%, 11.9% and 10.1% of our total
revenues.  Amounts due from these customers were $1.4 million $0.6
million, and $0.6 million at March 31, 2010, respectively.  For the
three months ended March 31, 2009, two customers accounted for 21.1% and 20.7%
of our total revenues.  Amounts due from these customers were $0.9
million and $1.5 million at March 31, 2009, respectively.
 
 2. Recent Accounting
Pronouncements
 
 In August
2009, the FASB issued Update No. 2009-05, "Fair Value Measurements and
Disclosures (Topic 820) ¡V Measuring Liabilities at Fair Value" ("ASU 2009-05").
ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures to provide
further guidance on how to measure the fair value of a liability. It primarily
does three things: 1) sets forth the types of valuation techniques to be used to
value a liability when a quoted price in an active market for the identical
liability is not available, 2) clarifies that when estimating the fair value of
a liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability and 3) clarifies that both a quoted price
in an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. This standard was effective beginning the
fourth quarter of 2008 for the Company. The adoption of this standard update is
not expected to impact the Company's financial results.
  In June
2009, the FASB issued ASC 105, Generally Accepted Accounting Principles, which
establishes the FASB Accounting Standards Codification (the "Codification") as
the source of authoritative accounting principles to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. ASC 105 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Codification
supersedes all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification became non-authoritative. Following ASC 105, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting Standards
Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right. Accounting Standards Updates will serve only
to update the Codification, provide background information about the guidance
and provide the bases for conclusions on the change(s) in the Codification. The
Company adopted ASC 105 in its Form 10-K for the year ended December 31,
2009.   The adoption did not have an impact on the Company's
consolidated results of operations and financial condition for the quarter ended
March 31, 2010.
 
 3.
Stock-based Compensation
 
 Effective
January 1, 2006, the Company adopted ASC 718, "Share-Based Payment", which
establishes accounting for share-based payment ("SBP") awards exchanged for
employee services and requires companies to expense the estimated fair value of
these awards over the requisite employee service period.
 
 ASC 718
requires companies to record compensation expense for stock options measured at
fair value, on the date of grant, using an option-pricing model. The fair value
of stock options is determined using the Binomial Lattice Model instead of the
Black-Scholes Model previously utilized under ASC 718. The Company believes that
the revised model represents a more likely projection of actual
outcomes.
    
 
 As of
March 31, 2010, there were $0.02 million of total unrecognized compensation cost
related to share-based compensation arrangements granted under the Company's
option plans.
 
 At March
31, 2010, the Company had two stock-based compensation plans. They are: (a) 1997
Stock Option Plan and (b) 2000 Stock Incentive Plan, which are described
below.
 
 (a) 1997
Stock Option Plan
 
 In May
1997, the Company adopted its 1997 Stock Plan under which 3,000,000 shares of
common stock were reserved for issuance to eligible employees, directors and
consultants upon exercise of stock options and stock purchase
rights.  During the year ended December 31, 2000, an additional
5,200,000 shares were reserved for issuance under the 1997 Stock
Plan.  Incentive stock options are granted at a price not less than
100% of the fair market value of the Company's common stock and at a price of
not less than 110% of the fair market value for grants to any person who owned
more than 10% of the voting power of all classes of stock on the date of
grant.  Nonstatutory stock options are granted at a price not less
than 85% of the fair market value of the common stock and at a price not less
than 110% of the fair market value for grants to a person who owned more than
10% of the voting power of all classes of stock on the date of the
grant.  Options granted under the 1997 Stock Plan generally vest over
four years and are exercisable for not more than ten years (five years for
grants to any person who owned more than 10% of the voting power of all classes
of stock on the date of the grant).  In November 2000, the 1997 Stock
Plan was replaced by the 2000 Stock Incentive Plan.
 
 (b) 2000
Stock Incentive Plan
 
 In
November 2000, the Company adopted its 2000 Stock Incentive Plan under which
1,500,000 shares of common stock were reserved for issuance to eligible
employees, directors and consultants upon exercise of stock options and stock
purchase rights.    On January 1 of each year,
beginning on January 1, 2001, the number of shares available for grant will
automatically increase by the lesser of:  (i) 1,700,000 shares;
(ii) 5% of the fully diluted outstanding shares of stock on that date; or
(iii) a lesser amount as may be determined by the Board of
Directors.  The Board of Directors determined not to increase the
number of shares available under the Plan on January 1, 2010 and 2009,
respectively.  Incentive stock options and nonstatutory stock options
are granted at 100% of the fair market value of the Company's common stock on
the date of grant.
 
 Options
granted under the 2000 Stock Incentive Plan generally vest over four years and
are exercisable for not more than ten years.  However, most options
granted in the past four years have been fully vested at the time of grant.
Options are exercisable for not more than ten years.
 
 The
following information relates to the stock option activity for the three months
ended March 31, 2010:
 Options
            Shares
            Weighted
              Average
              Exercise
              Price
            Weighted
              Average
              Remaining
              Contractual
              Life
            Aggregate
              Intrinstc
              ValueOutstanding
      at December 31, 2009
            
            
            4,863,333
            $
            1.40Granted
            
            
            -
            
            0Exercised
            
            
            (73,050)
            
            0.85Forfeited
            
            
            (47,000)
            
            1.70Outstanding
      at March 31, 2010
            
            
            4,743,283
            $
            1.40
            
            4.6 Years
            $
            1,439,952Vested
      and expected to vest at March 31, 2010
            
            
            4,733,680
            $
            1.40
            
            4.6
      Years
            $
            1,437,769Exercisable
      at March 31, 2010
            
            
            4,581,447
            $
            1.40
            
            4.4 Years
            $
            1,411,651
 
 
 The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Company's closing stock price on the
last trading day of the first quarter of fiscal 2010 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their options on March
31, 2010.  This amount changes based on the fair market value of the
Company's stock. The total intrinsic value of options exercised for the three
months ended March 31, 2010 was $43,000.  No options were exercised
for the three months ended March 31, 2009.
    
 
 There
were no options granted during the quarters ended March 31, 2010 or 2009,
respectively.
 
 Expected
dividend rate is 0% for both three month periods ended March 31, 2010 and 2009
respectively.
 
 Cash
received from option exercises during the three months ended March 31, 2010
was $62,000.  Such amounts are included within the financing
activities section in the accompanying consolidated statements of cash flows.
There was no cash received from option exercises during the three months ended
March 31, 2009.
 
 The
following table summarizes employee stock-based compensation expense resulting
from stock options and the Company's employee stock purchase plan (in
thousands):
  Three
      Months Ended March 31,2010
              
              2009Included
      in cost of revenue
              
              
              $
              12
              
              $
              14Included
      in operating expense:Research and development
              
              
              
              5
              
              
              6Sales and marketing
              
              
              
              4
              
              
              4General and administrative
              
              
              
              12
              
              
              4Total
              
              
              
              33
              
              
              28
 4.
Inventories, net (in thousands)
 March 31,
            
            December 31,2010
            
            2009Finished
      goods
            
            
            $
            1,329
            
            $
            1,595Work-in-process
            
            
            
            2,124
            
            
            1,721Raw
      materials
            
            
            
            2,408
            
            
            1,668Total
            
            
            $
            5,861
            
            $
            4,984
 
 5.
Net Income Per Share
 
 Basic net
income per share is computed by dividing net income for the period by the
weighted average number of shares of common stock outstanding during the
period.  Diluted net income per share is computed by dividing net
income for the period by the combination of dilutive common share equivalents,
comprised of shares issuable under the Company's stock-based compensation plans,
and the weighted average number of common shares outstanding during the
period.  There were no incremental dilutive common share equivalents
in the periods presented.
  The
following table sets forth the computation of basic and diluted net income per
share for the periods indicated (in thousands, except per share
data):
    
 
 Three
      Months Ended March 31,2010
              
              2009Numerator:Net income
              
              
              $
              641
              
              $
              302Denominator:Weighted
      average of common shares outstanding usedin
      computing net income per share:Basic
              
              
              
              42,467
              
              
              41,872Diluted
              
              
              
              43,241
              
              
              41,897Net
      income per share:Basic
              
              
              $
              0.02
              
              $
              0.01Diluted
              
              
              $
              0.01
              
              $
              0.01
 The total
number of shares excluded from the calculation of diluted net income per share
is as follows (in thousands):
 
 Three
      Months Ended March 31,2010
            
            2009Options
      to purchase common stock
            
            
            
            774
            
            
            25
 
 6.
Comprehensive Income (Loss)
 
 Comprehensive
income (loss) is defined as the change in equity of a company during a period
resulting from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to
owners.  The difference between net income and comprehensive income
for the Company is due to foreign exchange translations adjustments and
unrealized loss on available-for-sale securities.
 
 The
components of comprehensive income (loss) are as follows (in
thousands):
  Three
      Months Ended March 31,2010
            
            
            2009Net
      income
            
            
            $
            641
            
            
            $
            302Cumulative
      translation adjustments
            
            
            
            113
            
            
            
            (182
            )Unrealized
      loss on investments
            
            
            
            (6
            )
            
            
            (165
            )Total comprehensive income (loss)
            
            
            
            748
            
            
            
            (45
            )
  7.
Income Taxes
 
  The
Company adopted ASC 740,
Accounting for Uncertainty in
Income Taxes on January 1, 2007.  It is the Company's
accounting policy to record income tax interest and penalties in the income tax
provision.  The Company did not have any material unrecognized tax benefits
or uncertain tax positions at March 31, 2010.
 
 8.
Commitments and Contingencies
 
 Litigation:
 
 From time
to time, the Company may be involved in litigation in the normal course of
business.  As of the date of these financial statements, the Company
is not aware of any material legal proceedings pending or threatened against the
Company.
    
 
 Indemnification
and Product Warranty:
 
 The
Company indemnifies certain customers, suppliers and subcontractors for attorney
fees and damages and costs awarded against these parties in certain
circumstances in which products are alleged to infringe third party intellectual
property rights, including patents, trade secrets, trademarks or
copyrights.  In all cases, there are limits on and exceptions to the
potential liability for indemnification relating to intellectual property
infringement claims.  The Company cannot estimate the amount of
potential future payments, if any, that it might be required to make as a result
of these agreements.  To date, the Company has not paid any claim or
been required to defend any action related to indemnification obligations, and
accordingly, the Company has not accrued any amounts for such indemnification
obligations.  However, the Company may record charges in the future as
a result of these indemnification obligations.
 
 The
Company generally warrants products against defects in materials and workmanship
and non-conformance to specifications for varying lengths of time.  If
there is a material increase in customer claims compared with historical
experience, or if costs of servicing warranty claims are greater than expected,
the Company may record a charge against cost of revenues.
 
 Operating
Leases:
 
 The
Company leases certain office space under long-term operating leases expiring at
various dates through 2014.
 
 The
Company's aggregate future minimum facility lease payments are as follows (in
thousands):
  Nine
      months ending December 31, 2010
            $
            455Years
      ending December 31,2011
            
            
            
            2012012
            
            
            
            1822013
            
            
            
            1672014
            
            
            
            124Total
            
            
            
            1,129
 
 9.  Bank
Loans
 
 In
November 2004, the Company entered into a ten-year loan of $0.5 million in
Taiwan with an interest rate of 2.3% for the first two years and 3.6% for the
remaining years.   In November 2006, the Company entered into a
seven-year loan of $0.2 million in Taiwan with an interest rate of
2.8%.  Both loans are secured by the Company's building in
Taiwan.  The net book value of the building was $0.5 million as of
March 31, 2010.
  In April
2005, the Company entered into a five-year equipment loan of $0.2 million in
Taiwan with an interest rate of 2.9% for the first year and 3.7% for the
following years.  In September 2007, the Company entered into a
three-year equipment loan of $0.04 million and a five-year equipment loan of
$0.1 million with an interest rate of 3.68% for the first year for both loans
and 2.61% for the following years.
  Payments
due under bank loans as of March 31, 2010 are as follows (in
thousands):
  Years
      ending December 31,2010
              
              
              $
              862011
              
              
              
              1022012
              
              
              
              952013
              
              
              
              762014
      and after
              
              
              
              49Total
      payment
              
              
              
              408Less:
      Amounts representing interest
              
              
              
              (18
              )Present
      value of net remaining payments
              
              
              
              390Less:
      current portion
              
              
              
              (104
              )Long-term
      portion
              
              
              $
              286
  
 
 10.
Related Party Transactions
 
 As of
March 31, 2010, based on information filed with the SEC, Foxconn Holding Limited
was a holder of 18.9% of the Company's common stock.  In the normal
course of business, the Company sells products to and purchases raw materials
from Hon Hai Precision Company Limited, who is the parent company of Foxconn
Holding Limited.  These transactions were made at prices and terms
consistent with those of unrelated third parties.  Sales of products
to Hon Hai Precision Industry Company Limited were $0 and $0.01 million in the
quarters ended March 31, 2010 and 2009, respectively.  Purchases of
raw materials from Hon Hai Precision Company Limited were $0.6 million and $0.4
million in the quarters ended March 31, 2010 and 2009,
respectively.  Amounts due from Hon Hai Precision Company Limited were
$0 million and $0.01 million at March 31, 2010 and 2009,
respectively.  Amounts due to Hon Hai Precision Company Limited were
$0.7 million and $0.4 million at March 31, 2010 and 2009,
respectively.
  11.
Fair Value of Financial instruments
 
 Effective
January 1, 2008, the Company adopted ASC 820 which provides a definition of
fair value, establishes a hierarchy for measuring fair value under generally
accepted accounting principles, and requires certain disclosures about fair
values used in the financial statements.  ASC 820 does not extend the
use of fair value beyond what is currently required by other pronouncements, and
it does not pertain to stock-based compensation under ASC 718, Share-Based Payments or to
leases under ASC 840, Accounting for
Leases.
 
 In
February 2008, FASB ASC 820 was issued.  This FSP provides a
one year deferral of the effective date of ASC 820 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually.  Therefore, the
Company has adopted the provisions of ASC 820 with respect to financial assets
and liabilities only.
 
 ASC 820
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  Valuation techniques
used to measure fair value under ASC 820 must maximize the use of observable
inputs and minimize the use of unobservable inputs.  The standard
describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used
to measure fair value, which are the following:
 
 o
            Level
      1 - Quoted prices in active markets for identical assets or
      liabilities.
 
 o
            Level
      2 - Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.
 
 o
            Level
      3 - Unobservable inputs that are supported by little or no market
      activity and that are significant to the fair value of the assets or
      liabilities.
 
 The
Company measures the following financial assets at fair value on a recurring
basis.  The fair value of these financial assets at March 31, 2010 (in
thousands) was as follows:
    
 
 Reporting
      Date UsingBalance
      at
              March 31,
      2010
            
            Quoted
      Prices
              in
      Acive
              Markets
      for
              Identical
      Assets
              (Level
      1)
            
            Significant
              Other
              Observable
              Inputs
              (Level
      2)
            
            Significant
              Unobservable
              Inputs
              (Level
      3)Cash
      equivalents:Money market mutual funds
            
            $
            5,161
            
            $
            5,161
            
            $
            -
            
            $
            -Marketable
      SecuritiesTime deposits
            
            
            12,882
            
            
            12,882
            
            
            -
            
            
            -Corporate
      bonds
            
            
            5,337
            
            
            -
            
            
            5,337
            
            
            -Auction rate securities
            
            
            14,188
            
            
            -
            
            
            
            
            
            14,188Auction rate securities - Rights
            
            
            1,762
            
            
            -
            
            
            -
            
            
            1,762Total
            
            $
            39,330
            
            $
            18,043
            
            $
            5,337
            
            $
            15,950
  As of
March 31, 2010, the Company held investments in corporate bonds, certificates of
deposit, money market securities, and auction rate securities ("ARS"). The
Company's cash and cash equivalents are comprised of investments with original
maturities of 90 days or less from the date of purchase and these investment
instruments are classified within Level 1 of the fair value hierarchy because
they are valued based on quoted market prices in active markets.  The
Company's short-term investments are comprised of corporate bonds, certificates
of deposit and ARS with original maturities of 91 days or more from the date of
purchase.  These investment instruments are classified within Level 1
of the fair value hierarchy because they are valued based on quoted market
prices in active markets with the exception of corporate bonds which are
classified as Level 2 and ARS which are classified as Level 3.
 
 As of
March 31, 2010, the Company held investments in ARS that are required to be
measured at fair value on a recurring basis.  Since February 2008, all
ARS investments in the Company's portfolio have experienced failed auctions. The
Company's ARS investments have been classified within Level 3 as their valuation
requires substantial judgment and estimation of factors that are not currently
observable in the market due to the lack of trading. This valuation may be
revised in future periods as market conditions evolve.  The Company
estimated the fair value of its ARS based on estimates contained in broker
statements that were compiled utilizing Level 3 inputs including, but not
limited to factors such as tax status, credit quality, duration, insurance wraps
and the portfolio composition of The Federal Family Education Loan Program
loans.
 
 As of
March 31, 2010, the Pennsylvania Higher Education Assistance Agency completed
four partial calls of the ARS at par and the Company received settlement of
$150,000 in total.
  In
November 2008, the Company accepted an offer from UBS, the Company's investment
advisor, granting the Company the right to require UBS to purchase the Company's
ARS at their par value of $16.3 million anytime during the two-year period
beginning June 30, 2010 ("Right").  UBS has also established a program
which allows the Company to establish a no net cost line of credit and borrow up
to 75 percent of the market value of the ARS at interest rates equal to the
return the Company would receive on the underlying ARS
securities.  Management reviewed the UBS offer, credit rating, and
financial stability and believed that UBS will purchase the Company's ARS at par
value beginning on June 30, 2010.  The Right represents an instrument
by which the Company may require UBS to repurchase its ARS at par value. The
Company has valued the Right as the difference between the par value and the
fair value of its ARS as adjusted for any bearer risk associated with UBS'
financial ability to repurchase the Company's ARS beginning on June 30,
2010.  Upon election for fair value option for the Right under ASC
825-10, the Company will continue to measure the value of the Right at the
difference between par value and fair value in subsequent periods.
  In
conjunction with the adoption of ASC 825, the Company elected the fair value
option for its ARS and the Right.  Since the Right is directly related
to the Company's ARS investments, the Company elected the fair value option for
these financial assets and they have been classified within Level 3 as ARS
investments.In
conjunction with the adoption of ASC 825,the Company
elected a one-time transfer of ARS subject to settlements from
available-for-sale to the trading category. As of March 31, 2010, the Company
has recognized the Right as other current assets on the balance sheet and
recorded a loss of $0.02 million as other expense.
    
  The
following table provides a reconciliation of the beginning and ending balance
for the assets measured at fair value using significant unobservable inputs
(Level 3) (in thousands):
 
 Significant
                  Unobservable
                  Inputs
                  (Level
      3)Fair
      value December 31, 2009
                $
                16,100Gain
      on short-term investments
                
                17Loss
      on other assets
                
                (17)Sale
      of short-term investments
                
                (150)Fair
      value March 31, 2010
                $
                15,950
 
 12.
Geographic Segment Information
 
 The
Company operates in a single industry segment.  This industry segment
is characterized by rapid technological change and significant
competition.
 
 The
following is a summary of the Company's revenues generated by geographic
segments, revenues generated by product lines and identifiable assets located in
these segments (in thousands):
  Three
      Months Ended March 31,2010
              
              2009RevenuesNorth America
              
              
              $
              4,235
              
              
              $
              3,015Europe
              
              
              
              1,894
              
              
              
              2,261Asia
              
              
              
              2,277
              
              
              
              2,367Total
              
              
              $
              8,406
              
              
              $
              7,643
   Three
      Months Ended March 31,2010
              
              2009RevenuesConnectivity Products
              
              
              $
              5,621
              
              
              $
              4,307Optical Passive Products
              
              
              
              2,785
              
              
              
              3,336Total
              
              
              $
              8,406
              
              
              $
              7,643
   March
      31,
              
              December
      31,2010
              
              2009Property
      and EquipmentUnited
      States
              
              
              $
              79
              
              
              $
              93Taiwan
              
              
              
              2,407
              
              
              
              2,321China
              
              
              
              2,311
              
              
              
              2,020Total
              
              
              $
              4,797
              
              
              $
              4,434
 
 ITEM
2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
  When used
in this Report, the words "expects," "anticipates," "believes", "estimates,"
"plans," "intends," "could," "will," "may" and similar expressions are intended
to identify forward-looking statements.  These are statements that
relate to future periods and include statements as to our operating results,
revenues, sources of revenues, cost of revenues, gross profit, profitability,
the amount and mix of anticipated investments, expenditures and expenses, our
liquidity and the adequacy of our capital resources, our auction rate securities
and associated rights, exposure to interest rate or currency fluctuation,
anticipated working capital and capital expenditures, reliance on our
connectivity products, our cash flow, trends in average selling prices, our
reliance on the commercial success of our optical passive products, plans for
future products and enhancements of existing products, features, benefits and
uses of our products, demand for our products, our success being tied to
relationships with key customers, industry trends and market demand, our efforts
to protect our intellectual property, potential indemnification agreements,
increases in the number of possible license offers and patent infringement
claims, our competitive position, sources of competition, consolidation in our
industry, our international strategy, inventory management, our employee
relations, the adequacy of our internal controls, the effect of recent or future
accounting pronouncements and our critical accounting policies, estimates,
models and assumptions.  Forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected.  These risks and uncertainties include, but are
not limited to, those risks discussed in Item 1A and elsewhere in this report,
as well as risks related to the development of the metropolitan, last mile
access, and enterprise networks, customer acceptance of our products, our
ability to retain and obtain customers, industry-wide overcapacity and shifts in
supply and demand for optical components and modules, our ability to meet
customer demand and manage inventory, fluctuations in demand for our products,
declines in average selling prices, development of new products by us and our
competitors, increased competition, inability to obtain sufficient quantities of
a raw material product, loss of a key supplier, integration of acquired
businesses or technologies, financial stability in foreign markets, foreign
currency exchange rates, interest rates, costs associated with being a public
company, delisting from the Nasdaq Capital Market, failure to meet customer
requirements, our ability to license intellectual property on commercially
reasonable terms, economic stability, and the risks set forth below under Part
II, Item 1A, "Risk Factors."  These forward-looking statements
speak only as of the date hereof.  The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
  12
  
 
 The
following discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and Notes thereto.
 
 Critical
Accounting Policies and Estimates
 
 Stock-based
Compensation Expense
 
 On
January 1, 2006, we adopted ASC718, which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
our employees and directors including employee stock options and employee stock
purchases pursuant to our Employee Stock Purchase Plan ("ESPP") based on
estimated fair values. We adopted ASC 718 using the modified prospective
transition method, which requires the application of the accounting standard as
of January 1, 2006, the first day of our 2006 fiscal year.
 
 Stock-based
compensation expense recognized under ASC 718 was $0.03 million for the three
months ended March 31, 2010  and 2009, respectively as determined by
the Binomial Latticevaluation model, and
represents stock-based compensation expense related to share based compensation
arrangements under our stock option plan and our ESPP.
 
 Management's
discussion and analysis of financial condition and results of operations is
based on our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  On an ongoing basis, we evaluate
our estimates, including those related to revenue recognition, bad debts,
inventories, asset impairments, income taxes, contingencies, and
litigation.  We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values for assets and liabilities that are not readily apparent
from other sources.  Actual results may differ from these estimates
under different assumptions or conditions.
 
 For
additional information regarding our critical accounting policies and estimates,
see the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
year ended December 31, 2009.
    
 
 Overview
 
 We were
founded in December 1995 and commenced operations to design, manufacture and
market fiber optic interconnect products, which we call our connectivity
products.  We started selling our optical passive products in July
2000.  Since introduction, sales of optical passive products have
fluctuated with the overall market for these products.
 
 Our
connectivity products contributed revenues of $5.6 million and $4.3 million for
the three months ended March 31, 2010 and 2009, respectively. Our optical
passive products contributed revenues of $2.8 million and $3.3 million for the
three months ended March 31, 2010 and 2009, respectively.  Our
connectivity products contributed 66.9% and 56.4% of our revenues for the three
months ended March 31, 2010 and 2009, respectively.  Our optical
passive products contributed 33.1% and 43.6% of our revenues for the three
months ended March 31, 2010 and 2009, respectively.
 
 In the
three months ended March 31, 2010 and 2009, our top 10 customers comprised 67.8%
and 70.3% of our revenues, respectively.  For the three months ended
March 31, 2010, three customers accounted for 14.3%, 11.9% and 10.1% of our
total revenues, respectively.   For the three months ended March
31, 2009, two customers accounted for 21.1%, and 20.7% of our total revenues,
respectively.  We market and sell our products predominantly through
our direct sales force.
 
 Our cost
of revenues consists of raw materials, components, direct labor, manufacturing
overhead and production start-up costs.  We expect that our cost of
revenues as a percentage of revenues will fluctuate from period to period based
on a number of factors including:
 
 o
            changes
      in manufacturing volume;
 
 o
            costs
      incurred in establishing additional manufacturing lines and
      facilities;
 
 o
            inventory
      write-downs and impairment charges related to manufacturing
      assets;
 
 o
            mix
      of products sold;
 
 o
            changes
      in our pricing and pricing from our
competitors;
 
 o
            mix
      of sales channels through which our products are sold;
  and
 
 o
            mix
      of domestic and international
sales.
 
 Research
and development expenses consist primarily of salaries and related personnel
expenses, fees paid to outside service providers, materials costs, test units,
facilities, overhead and other expenses related to the design, development,
testing and enhancement of our products.  We expense our research and
development costs as they are incurred.  We believe that a significant
level of investment for product research and development is required to remain
competitive.
 
 Sales and
marketing expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales and technical support
functions, as well as costs associated with trade shows, promo­tional
activities and travel expenses.  We intend to continue to invest in
our sales and marketing efforts, both domestically and internationally, in order
to increase market awareness and to generate sales of our
products.  However, we cannot be certain that our expenditures will
result in higher revenues.  In addition, we believe that our future
success depends upon establishing successful relationships with a variety of key
customers.
 
 General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance, administrative, accounting and human resources
personnel, insurance and professional fees for legal and accounting
support.
    
 
 Results
of Operations
 
 The
following table sets forth the relationship between various components of
operations, stated as a percentage of revenues for the periods
indicated:
  Three Months Ended March
      31,2010
            
            
            2009Revenues
            
            100.0
            %
            
            100.0
            %Cost
      of revenues
            
            67.9
            
            
            69.9Gross profit
            
            32.1
            
            
            30.1Operating
      expenses:Research and development
            
            8.4
            
            
            9.5Sales and marketing
            
            6.7
            
            
            8.3General and administrative
            
            11.1
            
            
            11.1Total operating expenses
            
            26.2
            
            
            28.9Income
      from operations
            
            5.9
            
            
            1.2Interest
      and other income, net
            
            1.7
            
            
            2.9Net
      income before tax
            
            7.6
            %
            
            4.1
            %Income
      tax
            
            -
            
            
            0.1Net
      income
            
            7.6
            %
            
            4.0
            %
 
 Revenues.Revenues
were $8.4 million and $7.6 million for the three months ended March 31,
2010 and 2009, respectively.  Revenues increased 10.0% in the quarter
ended March 31, 2010 from the same period in 2009, primarily due to increased
volume shipments of telecom and cable television applications related
products.
 
 Cost of
Revenues.Cost of revenues was $5.7 million and $5.3 million
for the three months ended March 31, 2010 and 2009,
respectively.  Cost of revenues as a percentage of revenues was 67.9%
and 69.9% in the three months ended March 31, 2010 and 2009,
respectively.  The lower percentage cost of revenues was from
increased factory utilization due to higher revenues.
 
 Gross
Profit.Gross profit increased in dollars to $2.7 million, or
32.1% of revenues, for the three months ended March 31, 2010 from
$2.3 million, or 30.1% of revenues, for the same period in
2009.  For the period ended March 31, 2010, higher customer demand and
higher utilization of our factories as a result of increased volume shipments of
our products resulted in an improved gross margin.  We expect our
gross profit as a percentage of revenues to continue to improve with higher
production volumes, which we anticipate will result in improved absorption of
overhead expenses.  However, decreasing average selling prices will
negatively impact our gross profit and may offset any benefits from improved
absorption.
 
 Research and Development
Expenses.  Research and development expenses remained at $0.7
million for the three months ended March 31, 2010 and for the same period in
2009.  As a percentage of revenues, research and development expenses
decreased to 8.4% in the three months ended March 31, 2010 from 9.5% for the
same period in 2009.  We expect research and development expenses will
increase as we intend to continue to invest in our research and product
development efforts.
 
 Sales and Marketing
Expenses.  Sales and marketing expenses decreased to $0.56
million for the three months ended March 31, 2010 from $0.63 million for the
same period in 2009.  As a percentage of revenues, sales and marketing
expenses decreased to 6.7% in the three months ended March 31, 2010 from 8.3% in
the three months ended March 31, 2009.  We expect sales and marketing
expenses to decline slightly in the next few quarters as a result of fewer
trade- show activities.
 
 General and Administrative
Expenses.  General and administrative expenses increased to
$0.9 million for the three months ended March 31, 2010 from $0.8 million for the
same period in 2009.  As a percentage of revenues, general and
administrative expenses remained at 11.1% in the three months ended March 31,
2010 and for the same period in 2009.  The increase was mainly due to
higher franchise and property tax.  We expect general and
administrative expenses will remain relatively flat in the next quarter due in
part to continued emphasis on expense control.  However, we expect
general and administrative expenses will increase in the second half of the year
due to costs associated with Section 404 compliance.
    
 
 Stock-Based
Compensation.  Total stock based compensation increased to
$33,000 for the three months ended March 31, 2010 from $28,000 for the same
period in 2009.  This increase was due to the higher common stock
price as of March 31, 2010 and resulted in higher stock based compensation cost
related to our option plan.
 
 Interest and Other Income,
Net.Interest and other income, net, was $0.15 million and
$0.22 million for the three months ended March 31, 2010 and 2009,
respectively.  These amounts consisted primarily of interest income
which fluctuated based on cash balances and changes in interest
rates.
 
 Income tax
expense.Income tax expense was $0.001 million and $0.01
million for the three months ended March 31, 2010 and 2009,
respectively.
 
 Liquidity
and Capital Resources
 
 At March
31, 2010, we had cash and cash equivalents of $7.0 million and short-term
investments of $18.2 million.  We also hold $16.0 million in ARS
and associated Right which are not saleable by us at the date
hereof.  Accordingly, we do not consider the ARS or the Right as
sources of liquidity at this time.
 
 Net cash
used in operating activities was $0.6 million for the three months ended March
31, 2010. Net cash used in operating activities was primarily due to $0.5
million increase in accounts receivable, $0.8 million increase in inventory, and
$1.1 million decrease in accrued expenses, which were offset by net income of
$0.6 million, an increase in accounts payable of $0.9 million, and depreciation
of $0.2 million. Net cash used in operating activities was $0.2 million for the
three months ended March 31, 2009. Net cash used in operating activities was
primarily due to a $0.5 million increase in accounts receivable and a $0.7
million decrease in accrued expenses, which was partially offset by net income
of $0.3 million, a $0.7 million decrease in inventory, and total depreciation
and amortization expenses of $0.3 million.
 
 Net cash
used in investing activities was $1.0 million for the three months ended March
31, 2010. In the three months ended March 31, 2010, we spent a net of $0.4
million for the purchase of short-term securities, and we used $0.6 million to
purchase equipment.  Cash used in investing activities was $5.4
million for the three months ended March 31, 2009.  In the three
months ended March 31, 2009, we spent a net of $5.3 million for the purchase of
short-term securities, and we used $0.07 million to purchase
equipment.
 
 Cash
provided by financing activities was $0.03 million for the three months ended
March 31, 2010, and was comprised of $0.06 million proceeds from the exercise of
options to purchase our common stock, which was offset by $0.4 million for
repayment of bank borrowings.  Cash used in financing activities was
$0.03 million for the three months ended March 31, 2009, and was used for the
repayment of bank borrowings.
 
 We
believe that our current cash, cash equivalents and short-term investments will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.  However, our future
growth, including any potential acquisitions, may require additional
funding.  If cash generated from operations is insufficient to satisfy
our long-term liquidity requirements, we may need to raise capital through
additional equity or debt financings, additional credit facilities, strategic
relationships or other arrangements.  If additional funds are raised
through the issuance of securities, these securities could have rights,
preferences and privileges senior to holders of common stock, and the terms of
any debt facility could impose restrictions on our operations.  The
sale of additional equity or debt securities could result in additional dilution
to our stockholders, and additional financing may not be available in amounts or
on terms acceptable to us, if at all.  If we are unable to obtain
additional financing, we may be required to reduce the scope of our planned
product development and marketing efforts.  Strategic arrangements, if
necessary to raise additional funds, may require us to relinquish our rights to
certain of our technologies or products.  Our failure to raise capital
when needed could harm our business, financial condition and operating
results.
  Off balance Sheet
Arrangements
    
   
 Contractual
Obligations
 
 Our
long-term debt obligations are for principal and interest on mortgage and
equipment loans from financial institutions in Taiwan.
  In July
2004, we moved into our corporate headquarters in Sunnyvale,
California.  The lease has a six-year term commencing on July 22,
2004. We are currently in the process of evaluating our future facility
requirements in California, and we have begun lease negotiations on specific
properties.
  In
Taiwan, we lease a total of approximately 38,800 square feet in one facility
located in Tu-Cheng City, Taiwan.  This lease expires at various times
from May 2010 to December 2011.  In December 2000, we purchased
approximately 8,200 square feet of space immediately adjacent to the leased
facility for $0.8 million, bringing the total square footage to approximately
47,000 square feet.
  In August
2009, we moved into a 132,993 square foot facility in Shenzhen area of China,
This lease will expire in October 2014.
  Recent
Accounting Pronouncements
  See Note
2 of our Notes to Unaudited Condensed Consolidated Financial Statements included
with this Quarterly Report on Form 10-Q for information on recent accounting
pronouncements.
  ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Not
required.
  ITEM
4:  CONTROLS AND PROCEDURES
  (a)  Evaluation of disclosure controls
and procedures.  We maintain "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Acting Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.  In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met.  Our disclosure controls and procedures have been
designed to meet reasonable assurance standards.  Additionally, in
designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefitrelationship of possible
disclosure controls and procedures.  The design of any disclosure
controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly
Report on Form 10-Q, our Chief Executive Officer and Acting Chief Financial
Officer have concluded that, as of such date, our disclosure controls and
procedures were effective to ensure that material information relating to us,
including our consolidated subsidiaries, is made known to them by others within
those entities, particularly during the period in which this Quarterly Report on
Form 10-Q was being prepared.
 
 (b)  Changes in internal
controls.  There was no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
identified in connection with the evaluation described in Item 4(a) above that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
    
  
 PART II: OTHER INFORMATION
  
 ITEM
1A: RISK FACTORS
  We
have a history of losses, may experience future losses and may not be able to
generate sufficient revenues in the future to sustain
profitability.
 
 We had
net income of approximately $0.6 million and $0.3 million in the first quarter
of fiscal 2010 and 2009, respectively.  Although we generated a profit
in the first quarter of fiscal 2010 and 2009, we may not be able to sustain
profitability in the future and our cash flows may be negative again in the
future.  As of March 31, 2010, we had an accumulated deficit of
approximately $63.2 million.
 
 We
continue to experience fluctuating demand for our products. If demand for our
products increases in the future, we expect to incur significant and increasing
expenses for expansion of our manufacturing operations, research and
development, sales and marketing, and administration, and in expanding direct
sales and distribution channels.  Given the rate at which competition
in our industry intensifies and the fluctuations in demand for our products, we
may not be able to adequately control our costs and expenses or achieve or
maintain adequate operating margins.  As a result, to maintain
profitability, we will need to generate and sustain substantially higher
revenues while maintaining reasonable cost and expense levels.  We may
not be able to sustain profitability on a quarterly or an annual
basis.
 
 Our
connectivity products have historically represented a significant part of our
revenues, and if we are unsuccessful in commercially selling our optical passive
products, our business will be seriously harmed.
 
 Sales of
our connectivity products accounted for over 66.9% of our revenues in the
quarter ended March 31, 2010 and a majority of our historical
revenues.  We expect to substantially depend on these products for the
majority of our near-term revenues.  Any significant decline in the
price of, or demand for, these products, or failure to increase their market
acceptance, would seriously harm our business.  In addition, we
believe that our future growth and a significant portion of our future revenues
will depend on the commercial success of our optical passive products, which we
began shipping commercially in July 2000.  Demand for these products
has fluctuated over the past few years, declining sharply starting in mid fiscal
2001 and then increasing beginning in 2003.  If demand for these
products does not continue to increase and our target customers do not continue
to adopt and purchase our optical passive products, our revenues may decline and
we may have to write-off additional inventory that is currently on our
books.
 
 Declining
general economic or business conditions may have a negative impact on our
business.
  Continuing
concerns over inflation, deflation, energy costs, geopolitical issues, the
availability and cost of credit, the Federal stimulus package and budget
process, the U.S. mortgage market and a declining real estate market in the U.S.
have contributed to increased volatility and diminished expectations for the
global economy and expectations of slower global economic growth going forward.
These factors, combined with volatile oil prices, declining business and
consumer confidence, a volatile stock market and increased unemployment, have
precipitated an economic slowdown and recession. If the economic climate in the
U.S. and abroad does not improve or continues to deteriorate, our business,
including our customers and our suppliers, could be negatively affected,
resulting in a negative impact on our revenues.
 
 We
depend on a small number of customers for a significant portion of our
total revenues and the loss of, or a significant reduction in orders from, any
of these customers, would significantly reduce our revenues and harm our
operating results.
 
 In the
quarters ended March 31, 2010 and 2009, our top 10 customers comprised 67.8% and
70.3% of our revenues, respectively.  For the three months ended March
31, 2010, three customers accounted for 14.3%, 11.9%, and 10.1% of our total
revenues, respectively.  For the three months ended March 31, 2009,
two customers accounted for 21.1% and 20.7% of our total revenues,
respectively.
    
 
 We derive
a significant portion of our revenues from a small number of customers, and we
anticipate that we will continue to do so in the foreseeable future. These
customers may decide not to purchase our products at all, to purchase fewer
products than they did in the past, or to alter their purchasing patterns in
some other way.  The loss of any significant customer, a significant
reduction in sales we make to them, or any problems collecting receivables from
them would likely harm our financial condition and results of
operations.
 
 Our
quarterly and annual financial results have historically fluctuated due
primarily to introduction of, demand for, and sales of our products, and future
fluctuations may cause our stock price to decline.
 
 We
believe that period-to-period comparisons of our operating results are not a
good indication of our future performance.  Our quarterly operating
results have fluctuated in the past and are likely to fluctuate significantly in
the future due to a number of factors.  For example, the timing and
expenses associated with product introductions and establishing additional
manufacturing lines and facilities, changes in manufacturing volume, declining
average selling prices of our products, the timing and extent of product sales,
the mix of domestic and international sales, the mix of sales channels through
which our products are sold, the mix of products sold and significant
fluctuations in the demand for our products have caused our operating results to
fluctuate in the past.  Because we incur operating expenses based on
anticipated revenue trends, and a high percentage of our expenses are fixed in
the short term, any delay in generating or recognizing revenues or any decrease
in revenues could significantly harm our quarterly results of
operations.  Other factors, many of which are more fully discussed in
other risk factors below, may also cause our results to fluctuate. Many of the
factors that may cause our results to fluctuate are outside of our
control.  If our quarterly or annual operating results do not meet the
expectations of investors and securities analysts, the trading price of our
common stock could significantly decline.
 
 Uncertainty in the credit markets has
and may continue to impact the value and liquidity of our auction-rate
securities, or ARS.
 
 Credit
concerns in the capital markets have significantly reduced our ability to
liquidate $16.0 million in ARS
that we classify as current assets on our balance sheet.  All ARS we
hold have failed to sell at auction since February 2008 due to an
insufficient number of bidders. As of March 31, 2010, one of the issuers of the
ARS completed four partial calls at par and we received settlement of $150,000
in total.  In November 2008, we accepted the right to require UBS to
repurchase our ARS investment at par value beginning on June 30, 2010, or the
"Right".  We cannot assure you that UBS will have the ability to
purchase our ARS at par or at any other price in the
future.  Accordingly, we may not be able to exercise the Right or
liquidate these securities and use the cash to finance our
business.  In future periods, the estimated fair value of our ARS and
the Right could decline based on market conditions, which could result in
impairment charges.
 
 If
we cannot attract more optical communications equipment manufacturers to
purchase our products, we may not be able to increase or sustain our
revenues.
 
 Our
future success will depend on our ability to migrate existing customers to our
new products and our ability to attract additional customers.  Some of
our present customers are relatively new companies.  The growth of our
customer base could be adversely affected by:
 
 o
            customer
      unwillingness to implement our
products;
 
 o
            any
      delays or difficulties that we may incur in completing the development and
      introduction of our planned products or product
    enhancements;
 
 o
            the
      success of our customers;
 
 o
            excess
      inventory in the telecommunications
industry;
 
 o
            new
      product introductions by our
competitors;
 
 o
            any
      failure of our products to perform as expected;
  or
   
 
 o
            any
      difficulty we may incur in meeting customers' delivery requirements or
      product specifications.
 
 The
fluctuations in the economy have affected the telecommunications industry.
Telecommunications companies have cut back on their capital expenditure budgets,
which has and may continue to further decrease demand for equipment and parts,
including our products.  This decrease has had and may continue to
have an adverse effect on the demand for fiber optic products and negatively
impact the growth of our customer base.
 
 We are exposed to risks and increased
expenses and business risk as a result of Restriction on Hazardous Substances,
or RoHS directives.
 
 Following
the lead of the European Union, or EU, various governmental agencies have either
already put into place or are planning to introduce regulations that regulate
the permissible levels of hazardous substances in products sold in various
regions of the world. For example, the RoHS directive for EU took effect on July
1, 2006.  The labeling provisions of similar legislation in China went
into effect on March 1, 2007. Consequently, many suppliers of products sold into
the EU have required their suppliers to becompliant with the new
directive. Many of our customers have adopted this approach and have required
our full compliance. Though we have devoted a significant amount of resources
and effort planning and executing our RoHS program, it is possible that some of
our products might be incompatible with such regulations. In such event, we
could experience the following consequences: loss of revenue, damaged
reputation, diversion of resources, monetary penalties, and legal
action.
 
 The
market for fiber optic components is increasingly competitive, and if we are
unable to compete successfully our revenues could decline.
 
 The
market for fiber optic components is intensely competitive.  We
believe that our principal competitors are the major manufacturers of optical
components and integrated modules, including vendors selling to third parties
and business divisions within communications equipment suppliers.  Our
principal competitors in the components market include Avanex Corp., DiCon
Fiberoptics, Inc., JDS Uniphase Corp., Oplink Communications Inc., Stratos
International, Inc. and Tyco Electronics Corporation.  We believe that
we primarily compete with diversified suppliers for the majority of our product
line and to a lesser extent with niche companies that offer a more limited
product line.  Competitors in any portion of our business may also
rapidly become competitors in other portions of our business.
 
 Many of
our current and potential competitors have significantly greater financial,
technical, marketing, purchasing, manufacturing and other resources than we
do.  As a result, these competitors may be able to respond more
quickly to new or emerging technologies and to changes in customer requirements,
to devote more resources to the development, promotion and sale of products, to
negotiate lower prices on raw materials and components, or to deliver
competitive products at lower prices.
 
 Several
of our existing and potential customers are also current and potential
competitors of ours.  These companies may develop or acquire
additional competitive products or technologies in the future and subsequently
reduce or cease their purchases from us.  In light of the
consolidation in the optical networking industry, we also believe that the size
of suppliers will be an increasingly important part of a purchaser's
decision-making criteria in the future.  We may not be able to compete
successfully with existing or new competitors, and we cannot ensure that the
competitive pressures we face will not result in lower prices for our products,
loss of market share, or reduced gross margins, any of which could harm our
business.
 
 New and
competing technologies are emerging due to increased competition and customer
demand.  The introduction of products incorporating new or competing
technologies or the emergence of new industry standards could make our existing
products noncompetitive.  For example, there are technologies for the
design of wavelength division multiplexers that compete with the technology that
we incorporate in our products.  If our products do not incorporate
technologies demanded by customers, we could lose market share causing our
business to suffer.
 
 If
we fail to effectively manage our operations, specifically given the past
history of sudden and dramatic downturn in demand for our products, our
operating results could be harmed.
  20
  
 
 As of
March 31, 2010, we had a total of 35 full-time employees in Sunnyvale,
California, 321 full-time employees in Taiwan, and 551 full-time employees in
China.  Matching the scale of our operations with demand fluctuations,
combined with the challenges of expanding and managing geographically dispersed
operations, has placed, and will continue to place, a significant strain on our
management and resources.  To manage the expected fluctuations in our
operations and personnel, we will be required to:
 
 o
            improve
      existing and implement new operational, financial and management controls,
      reporting systems and procedures;
 
 o
            hire,
      train, motivate and manage additional qualified personnel, especially if
      we experience a significant increase in demand for our
      products;
 
 o
            effectively
      expand or reduce our manufacturing capacity, attempting to adjust it to
      customer demand; and
 
 o
            effectively
      manage relationships with our customers, suppliers, representatives and
      other third parties.
 
 In
addition, we will need to coordinate our domestic and international operations
and establish the necessary infrastructure to implement our international
strategy.  If we are not able to manage our operations in an efficient
and timely manner, our business will be severely harmed.
 
 Our
success also depends, to a large degree, on the efficient and uninterrupted
operation of our facilities.   We have expanded our manufacturing
facilities in Taiwan and manufacture many of our products there.  Our
facility in China also houses a substantial portion of our manufacturing
operations.  There is significant political tension between Taiwan and
China.  If there is an outbreak of hostilities between Taiwan and
China, our manufacturing operations may be disrupted or we may have to relocate
our manufacturing operations.  Tensions between Taiwan and China may
also affect our facility in China.  Relocating a portion of our
employees could cause temporary disruptions in our operations and divert
management's attention.
 
 Because
of the time it takes to develop fiber optic components, we incur substantial
expenses for which we may not earn associated revenues.
 
 The
development of new or enhanced fiber optic products is a complex and uncertain
process.  We may experience difficulties in design, manufacturing,
marketing and other areas that could delay or prevent the development,
introduction or marketing of new products and
enhancements.  Development costs and expenses are incurred before we
generate revenues from sales of products resulting from these
efforts.  Our total research and development expenses were
approximately $0.7 million each for the quarters ended March 31, 2010 and
2009.  We intend to continue to invest in our research and product
development efforts and the amount of our investment may be substantial, which
could have a negative impact on our earnings in future periods if we do not earn
associated revenue from such efforts.
 
 If
we are unable to develop new products and product enhancements that achieve
market acceptance, sales of our fiber optic components could decline, which
could reduce our revenues.
 
 The
communications industry is characterized by rapidly changing technology,
frequent new product introductions, changes in customer requirements, evolving
industry standards and, more recently, significant variations in customer
demand.  Our future success depends on our ability to anticipate
market needs and develop products that address those needs.  As a
result, our products could quickly become obsolete if we fail to predict market
needs accurately or develop new products or product enhancements in a timely
manner.  Our failure to predict market needs accurately or to develop
new products or product enhancements in a timely manner will harm market
acceptance and sales of our products.  If the development or
enhancement of these products or any other future products takes longer than we
anticipate, or if we are unable to introduce these products to market, our sales
will not increase.  Even if we are able to develop and commercially
introduce them, these new products may not achieve the widespread market
acceptance necessary to provide an adequate return on our
investment.
    
 
 Current
and future demand for our products depends on the continued growth of the
Internet and the communications industry, which is experiencing consolidation,
realignment, oversupply of product inventory and fluctuating demand for fiber
optic products.
 
 Our
future success depends on the continued growth of the Internet as a widely used
medium for communications and commerce, and the growth of optical networks to
meet the increased demand for capacity to transmit data, or
bandwidth.  If the Internet does not continue to expand as a medium
for communications and commerce, the need to significantly increase bandwidth
across networks and the market for fiber optic components may not continue to
develop.  If this growth does not continue, sales of our products may
decline, which would adversely affect our revenues.  Our customers
have experienced an oversupply of inventory due to fluctuating demand for their
products that has resulted in inconsistent demand for our
products.  Future demand for our products is uncertain and will depend
heavily on the continued growth and upgrading of optical networks, especially in
the metropolitan, last mile, and enterprise access segments of the
networks.
 
 Inconsistent
spending by telecommunication companies over the past several years has resulted
in fluctuating demand for our products.  The rate at which
communication service providers and other fiber optic network users have built
new fiber optic networks or installed new systems in their existing fiber optic
networks has fluctuated in the past and these fluctuations may continue in the
future.  These fluctuations may result in reduced demand for new or
upgraded fiber optic systems that utilize our products and therefore, may result
in reduced demand for our products.  Declines in the development of
new networks and installation of new systems have resulted in the past in a
decrease in demand for our products, an increase in our inventory, and erosion
in the average selling prices of our products.
 
 The
communications industry is experiencing consolidation and realignment, as
industry participants seek to capitalize on the rapidly changing competitive
landscape developing around the Internet and new communications technologies
such as fiber optic networks.  As the communications industry
consolidates and realigns to accommodate technological and other developments,
our customers may consolidate or align with other entities in a manner that
results in a decrease in demand for our products.
 
 We
are experiencing fluctuations in market demand due to overcapacity in our
industry and an economy that is stymied by international terrorism, war and
political instability.
 
 The
United States economy has experienced and continues to experience significant
fluctuations in consumption and demand.  During the past several
years, telecommunication companies have mostly decreased their spending, which
has resulted in excess inventory, overcapacity and a decrease in demand for our
products.  We may experience further decreases in the demand for our
products due to a weak domestic and international economy as the fiber optics
industry copes with the effects of oversupply of products, international
terrorism, war and political instability.  Even if the general economy
experiences a recovery, the activity of the United States telecommunications
industry may lag behind the recovery of the overall United States
economy.
  The
optical networking component industry has in the past, is now, and may in the
future experience declining average selling prices, which could cause our gross
margins to decline.
 
 The
optical networking component industry has in the past experienced declining
average selling prices as a result of increasing competition and greater unit
volumes as communication service providers continue to deploy fiber optic
networks.  Average selling prices are currently decreasing and may
continue to decrease in the future in response to product introductions by
competitors, price pressures from significant customers, greater manufacturing
efficiencies achieved through increased automation in the manufacturing process
and inventory build-up due to decreased demand.  Average selling price
declines may contribute to a decline in our gross margins, which could harm our
results of operations.
 
 We
will not attract new orders for our fiber optic components unless we can deliver
sufficient quantities of our products to optical communications equipment
manufacturers.
 
 Communications
service providers and optical systems manufacturers typically require that
suppliers commit to provide specified quantities of products over a given period
of time.  If we are unable to commit to deliver quantities of our
products to satisfy a customer's anticipated needs, we will lose the order and
the opportunity for significant sales to that customer for a lengthy period of
time.  In addition, we would be unable to fill large orders if we do
not have sufficient manufacturing capacity to enable us to commit to provide
customers with specified quantities of products.  However, if we build
our manufacturing capacity and inventory in excess of demand, as we have done in
the past, we may produce excess inventory that may have to be reserved or
written off.
    
 
 We
depend on a limited number of third parties to supply key materials, components
and equipment, such as ferrules, optical filters and lenses, and if we are not
able to obtain sufficient quantities of these items at acceptable prices, our
ability to fill orders would be limited and our operating results could be
harmed.
 
 We depend
on third parties to supply the raw materials and components we use to
manufacture our products.  To be competitive, we must obtain from our
suppliers, on a timely basis, sufficient quantities of raw materials and
components at acceptable prices.  We obtain most of our critical raw
materials and components from a single or limited number of suppliers and
generally do not have long-term supply contracts with them.  As a
result, our suppliers could terminate the supply of a particular material or
component at any time without penalty.  Finding alternative sources
may involve significant expense and delay, if these sources can be found at
all.  One component, GRIN lenses, are only available from one
supplier.  Difficulties in obtaining raw materials or components in
the future may delay or limit our product shipments, which could result in lost
orders, increase our costs, reduce our control over quality and delivery
schedules and require us to redesign our products.  If a supplier
became unable or unwilling to continue to manufacture or ship materials or
components in required volumes, we would have to identify and qualify an
acceptable replacement.  A delay or reduction in shipments or any need
to identify and qualify replacement suppliers would harm our
business.
  Because
we experience long lead times for materials and components, we may not be able
to effectively manage our inventory levels and manufacturing capacity, which
could harm our operating results.
 
 Because
we experience long lead times for materials and components and are often
required to purchase significant amounts of materials and components far in
advance of product shipments, we may not effectively manage our inventory
levels, which could harm our operating results.  Alternatively, if we
underestimate our raw material requirements, we may have inadequate inventory,
which could result in delays in shipments and loss of customers.  If
we purchase raw materials and increase production in anticipation of orders that
do not materialize or that shift to another quarter, we will, as we have in the
past, have to carry or write off excess inventory and our gross margins will
decline.  Both situations could cause our results of operations to be
below the expectations of investors and public market analysts, which could, in
turn, cause the price of our common stock to decline.  The time our
customers require to incorporate our products into their own can vary
significantly and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our
forecasts.  Even if we receive these orders, the additional
manufacturing capacity that we add to meet our customer's requirements may be
underutilized in a subsequent quarter.
 
 We are exposed to risks and increased
expenses as a result of legislation requiring companies to evaluate internal
controls over financial reporting.
 
 Section
404 of the Sarbanes-Oxley Act of 2002 requires our management to perform an
assessment of our internal controls as of the end of each fiscal year, and our
independent auditors to attest to the effectiveness of our internal controls
over financial reporting beginning with our year ending December 31,
2010.  We have implemented an ongoing program to perform the system
and process evaluation and testing we believe to be necessary to comply with
these requirements, however, we cannot assure you that we will be successful in
our efforts.  We expect to incur increased expenses and to devote
additional management resources to Section 404 compliance.  In the
event that our chief executive officer or acting chief financial officer
determines that our internal controls over financial reporting are not effective
as defined under Section 404, or our auditors are not able to provide us with an
unqualified report as to the effectiveness of our internal control over
financial reporting in the future, investor perceptions of our company may be
negatively affected and this could cause a decline in our stock
price.
 
 We
depend on key personnel to operate our business effectively in the rapidly
changing fiber optic components market, and if we are unable to hire and retain
appropriate management and technical personnel, our ability to develop our
business could be harmed.
  23
  
 
 Our
success depends to a significant degree upon the continued contributions of the
principal members of our technical sales, marketing, engineering and management
personnel, many of whom perform important management functions and would be
difficult to replace.  We particularly depend upon the continued
services of our executive officers, particularly Peter Chang, our President and
Chief Executive Officer; David Hubbard, our Vice President, Sales and Marketing;
Wei-shin Tsay, our senior Vice President of Product Development; Anita Ho, our
Acting Chief Financial Officer; and other key engineering, sales, marketing,
finance, manufacturing and support personnel.  In addition, we depend
upon the continued services of key management personnel at our Taiwanese
subsidiary and at our facility in China.  None of our officers or key
employees is bound by an employment agreement for any specific term, and may
terminate their employment at any time.  In addition, we do not have
"key person" life insurance policies covering any of our employees.
 
 Our
ability to continue to attract and retain highly skilled personnel will be a
critical factor in determining whether we will be successful in the
future.  We may have difficulty hiring skilled engineers at our
manufacturing facilities in the United States, Taiwan, and China.  If
we are not successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs, our business may be
harmed.
 
 If
we are not able to achieve acceptable manufacturing yields and sufficient
product reliability in the production of our fiber optic components, we may
incur increased costs and delays in shipping products to our customers, which
could impair our operating results.
 
 Complex
and precise processes are required for the manufacture of our
products.  Changes in our manufacturing processes or those of our
suppliers, or the inadvertent use of defective materials, could significantly
reduce our manufacturing yields and product reliability.  Because the
majority of our manufacturing costs are relatively fixed, manufacturing yields
are critical to our results of operations.  Lower than expected
production yields could delay product shipments and impair our operating
results.  We may not obtain acceptable yields in the
future.
 
 In some
cases, existing manufacturing techniques, which involve substantial manual
labor, may not allow us to cost-effectively meet our production goals so that we
maintain acceptable gross margins while meeting the cost targets of our
customers.  We may not achieve adequate manufacturing cost
efficiencies.
 
 Because
we plan to introduce new products and product enhancements, we must effectively
transfer production information from our product development department to our
manufacturing group and coordinate our efforts with our suppliers to rapidly
achieve volume production.  In our experience, our yields have been
lower during the early stages of introducing new product to
manufacturing.  If we fail to effectively manage this process or if we
experience delays, disruptions or quality control problems in our manufacturing
operations, our shipments of products to our customers could be
delayed.
 
 Because
the qualification and sales cycle associated with fiber optic components is
lengthy and varied, it is difficult to predict the timing of a sale or whether a
sale will be made, which may cause us to have excess manufacturing capacity or
inventory and negatively impact our operating results.
 
 In the
communications industry, service providers and optical systems manufacturers
often undertake extensive qualification processes prior to placing orders for
large quantities of products such as ours, because these products must function
as part of a larger system or network.  This process may range from
three to six months and sometimes longer.  Once they decide to use a
particular supplier's product or component, these potential customers design the
product into their system, which is known as a design-in
win.  Suppliers whose products or components are not designed in are
unlikely to make sales to that customer until at least the adoption of a future
redesigned system.  Even then, many customers may be reluctant to
incorporate entirely new products into their new systems, as this could involve
significant additional redesign efforts.  If we fail to achieve
design-in wins in our potential customers' qualification processes, we will lose
the opportunity for significant sales to those customers for a lengthy period of
time.
    
 
 In
addition, some of our customers require that our products be subject to
standards-based qualification testing, which can take up to nine months or more.
While our customers are evaluating our products and before they place an order
with us, we may incur substantial sales and marketing and research and
development expenses, expend significant management efforts, increase
manufacturing capacity and order long lead-time supplies.  Even after
the evaluation process, it is possible a potential customer will not purchase
our products.  In addition, product purchases are frequently subject
to unplanned processing and other delays, particularly with respect to larger
customers for which our products represent a very small percentage of their
overall purchase activity.  Accordingly, our revenues and operating
results may vary significantly and unexpectedly from quarter to
quarter.
 
 If
our customers do not qualify our manufacturing lines for volume shipments, our
optical networking components may be dropped from supply programs and our
revenues may decline.
 
 Customers
generally will not purchase any of our products, other than limited numbers of
evaluation units, before they qualify our products, approve our manufacturing
process and approve our quality assurance system.  Our existing
manufacturing lines, as well as each new manufacturing line, must pass through
various levels of approval with our customers.  For example, customers
may require that we be registered under international quality
standards.  Our products may also have to be qualified to specific
customer requirements.  This customer approval process determines
whether the manufacturing line achieves the customers' quality, performance and
reliability standards.  Delays in product qualification may cause a
product to be dropped from a long-term supply program and result in significant
lost revenue opportunity over the term of that program.
 
 Our
fiber optic components are deployed in large and complex communications networks
and may contain defects that are not detected until after our products have been
installed, which could damage our reputation and cause us to lose
customers.
 
 Our
products are designed for deployment in large and complex optical
networks.  Because of the nature of these products, they can only be
fully tested for reliability when deployed in networks for long periods of
time.  Our fiber optic products may contain undetected defects when
first introduced or as new versions are released, and our customers may discover
defects in our products only after they have been fully deployed and operated
under peak stress conditions.  In addition, our products are combined
with products from other vendors.  As a result, should problems occur,
it may be difficult to identify the source of the problem.  If we are
unable to fix defects or other problems, we could experience, among other
things:
 
 o
            loss
      of customers;
 
 o
            damage
      to our reputation;
 
 o
            failure
      to attract new customers or achieve market
  acceptance;
 
 o
            diversion
      of development and engineering resources;
and
 
 o
            legal
      actions by our customers.
 
 The
occurrence of any one or more of the foregoing factors could negatively impact
our revenues.
 
 The
market for fiber optic components is new and unpredictable, characterized by
rapid technological changes, evolving industry standards, and significant
changes in customer demand, which could result in decreased demand for our
products, erosion of average selling prices, and could negatively impact our
revenues.
 
 The
market for fiber optic components is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards.  Because this market is
new, it is difficult to predict its potential size or future growth
rate.  Widespread adoption of optical networks, especially in the
metropolitan, last mile, and enterprise access segments of the networks, is
critical to our future success.  Potential end-user customers who have
invested substantial resources in their existing copper lines or other systems
may be reluctant or slow to adopt a new approach, such as optical
networks.  Our success in generating revenues in this market will
depend on:
    
 
 o
            the
      education of potential end-user customers and network service providers
      about the benefits of optical networks;
and
 
 o
            the
      continued growth of the metropolitan, last mile, and enterprise access
      segments of the communications
network.
 
 If we
fail to address changing market conditions, sales of our products may decline,
which would adversely impact our revenues.
 
 We
may be unable to successfully integrate acquired businesses or assets with our
business, which may disrupt our business, divert management's attention and slow
our ability to expand the range of our proprietary technologies and
products.
 
 To expand
the range of our proprietary technologies and products, we may acquire
complementary businesses, technologies or products, if appropriate opportunities
arise.  We may be unable to identify other suitable acquisitions at
reasonable prices or on reasonable terms, or consummate future acquisitions or
other investments, any of which could slow our growth strategy.  We
may have difficulty integrating the acquired products, personnel or technologies
of any company or acquisition that we may make.  Similarly, we may not
be able to attract or retain key management, technical or sales personnel of any
other companies that we acquire or from which we acquire
assets.  These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses.
 
 If
our common stock is not relisted on the Nasdaq Global Market, we will be subject
to certain provisions of the California General Corporation Law that may affect
our charter documents and result in additional expenses.
 
 Beginning
at the commencement of trading on November 8, 2002, the listing of our common
stock was transferred from the Nasdaq Global Market to the Nasdaq Capital
Market.  As a result, we may become subject to certain sections of the
California General Corporation Law that will affect our charter documents if our
common stock is not returned to being listed on the Nasdaq Global
Market.  A recent Delaware decision has called into question the
applicability of the California General Corporation Law to Delaware
corporations.  However, if the California General Corporation Law
applies to our Company, we will not be able to continue to have a classified
board or continue to eliminate cumulative voting by our stockholders. In
addition, certain provisions of our Certificate of Incorporation that call for
supermajority voting may need to be approved by stockholders every two years or
be eliminated.  Also, in the event of a reorganization, stockholders
will have dissenting stockholder rights under both California and Delaware
law.  Any of these changes will result in additional expense as we
will have to comply with certain provisions of the California General
Corporation Law as well as the Delaware General Corporation Law.  We
included these provisions in our charter documents in order to delay or
discourage a change of control or changes in our management.  Because
of the California General Corporation Law, we may not be able to avail ourselves
of these provisions.
 
 If
we are unable to maintain our listing on the Nasdaq Capital Market, the price
and liquidity of our common stock may decline.
  There can
be no assurance that we will be able to satisfy all of the quantitative
maintenance criteria for continued listing on the Nasdaq Capital Market,
including a requirement that we maintain a continued minimum bid price of $1.00
per share. Accordingly, if the closing bid price of our common stock falls and
remains below $1.00 for 30 consecutive trading days, as it has for significant
periods of time in the past, our common stock may not remain listed on the
Nasdaq Capital Market. If we fail to maintain continued listing on the Nasdaq
Capital Market and must move to a market with less liquidity, our financial
condition could be harmed and our stock price would likely decline. If we are
delisted, it could have a material adverse effect on the market price of our
common stock as well as the liquidity of the trading market for our common
stock.
  Many
companies that face delisting as a result of closing bid prices that are below
the Nasdaq Capital Market's continued listing standards seek to maintain the
listing of their securities by effecting reverse stock splits. However, reverse
stock splits do not always result in a sustained closing bid price per share. We
may consider the merits of implementing a reverse split and evaluate other
courses of action as we believe may be appropriate.
    
  If
we fail to protect our intellectual property rights, competitors may be able to
use our technologies, which could weaken our competitive position, reduce our
revenues or increase our costs.
 
 The fiber
optic component market is a highly competitive industry in which we, and most
other partici­pants, rely on a combination of patent, copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect proprietary rights.  The competitive nature of
our industry, rapidly changing technology, frequent new product introductions,
changes in customer requirements and evolving industry standards heighten the
importance of protecting proprietary technology rights.  Since the
United States Patent and Trademark Office keeps patent applications confidential
until a patent is issued, our pending patent applications may attempt to protect
proprietary technology claimed in a third party patent
application.  Our existing and future patents may not be sufficiently
broad to protect our proprietary technologies as it is difficult to police the
unauthorized use of our products and we cannot be certain that the steps we have
taken will prevent the misappropriation or unauthorized use of our technologies,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as United States laws.  Our competitors and suppliers
may independently develop similar technology, duplicate our products, or design
around any of our patents or other intellectual property.  If we are
unable to adequately protect our proprietary technology rights, others may be
able to use our proprietary technology without having to compensate us, which
could reduce our revenues and negatively impact our ability to compete
effectively.
 
 Litigation
may be necessary to enforce our intellectual property rights or to determine the
validity or scope of the proprietary rights of others.  As a result of
any such litigation, we could lose our proprietary rights and incur substantial
unexpected operating costs.  Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention.  In addition, failure to adequately
protect our trademark rights could impair our brand identity and our ability to
compete effectively.
 
 We
may be subject to intellectual property infringement claims that are costly to
defend and could limit our ability to use some technologies in the
future.
 
 Our
industry is very competitive and is characterized by frequent intellectual
property litigation based on allegations of infringement of intellectual
property rights.  Numerous patents in our industry have already been
issued, and as the market further develops and participants in our industry
obtain additional intellectual property protection, litigation is likely to
become more frequent.  From time to time, third parties may assert
patent, copyright, trademark and other intellectual property rights to
technologies or rights that are important to our business.  In
addition, we have and we may continue to enter into agreements to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties.  Any litigation
arising from claims asserting that our products infringe or may infringe the
proprietary rights of third parties, whether the litigation is with or without
merit, could be time-consuming, resulting in significant expenses and diverting
the efforts of our technical and management personnel.  We do not have
insurance against our alleged or actual infringement of intellectual property of
others.  These claims could cause us to stop selling our products,
which incorporate the challenged intellectual property, and could also result in
product shipment delays or require us to redesign or modify our products or to
enter into licensing agreements.  These licensing agreements, if
required, would increase our product costs and may not be available on terms
acceptable to us, if at all.
 
 Although
we are not aware of any intellectual property lawsuits filed against us, we may
be a party to litigation regarding intellectual property in the
future.  We may not prevail in any such actions, given their complex
technical issues and inherent uncertainties.  Insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed.  If there is a successful claim of
infringement or we fail to develop non-infringing technology or license the
proprietary rights on a timely basis, our business could be harmed.
    
 
 Because
our manufacturing operations are located in active earthquake fault zones in
California and Taiwan, and our Taiwan locations are susceptible to the effects
of a typhoon, we face the risk that a natural disaster could limit our ability
to supply products.
  Two of
our primary manufacturing operations in Taiwan and our headquarters in
California are located in active earthquake fault zones.  These
regions have experienced large earthquakes in the past and may likely experience
them in the future.  In September 2001, a typhoon hit Taiwan causing
businesses, including our manufacturing facility, and the financial markets to
close for two days.  Because the majority of our manufacturing
operations are located in Taiwan, a large earthquake or typhoon in Taiwan could
disrupt our manufacturing operations for an extended period of time, which would
limit our ability to supply our products to our customers in sufficient
quantities on a timely basis, harming our customer relationships.
  
 ITEM
6:  EXHIBITS
  Exhibits
 
 ExhibitNumber
            
            Title31.1
            
            Rule
      13a-14(a) certification of Chief Executive Officer31.2
            
            Rule
      13a-14(a) certification of Acting Chief Financial
  Officer32.1*
            
            Statement
      of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of
      2002 (18 U.S.C. SS 1350).32.2*
            
            Statement
      of Acting Chief Financial Officer under Section 906 of the Sarbanes-Oxley
      Act of 2002 (18 U.S.C. SS
1350).
 ___________________
 ** In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No.
34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are
deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes
of Section 18 of the Exchange Act.  Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
    
 
  
 SIGNATURE
  In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Dated:  May
12, 2010
 ALLIANCE
FIBER OPTIC PRODUCTS, INC.
 
 
 
 By  /s/
Anita K.
Ho
 Anita K.
Ho
 Acting
Chief Financial Officer
 (Principal
Financial and Accounting Officer and Duly
 Authorized
Signatory)
  
 
  Exhibit
31.1
 Certification
of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 for the Period Ended March 31, 2010
 
 CERTIFICATION
 
 I, Peter
C. Chang, certify that:
 
 1. I have
reviewed this quarterly report on Form 10-Q of Alliance Fiber Optic Products,
Inc.;
 
 2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
 
 3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
 
 4. The
registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
 
 a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
 
 b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
 
 c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
 
 d) Disclosed
in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
 
 5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
 
 a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
 
 b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.
 
 Date May
12, 2010
 
 By  /s/Peter C.Chang
 Peter C.
Chang
 Chief
Executive Officer
 (Principal
Executive Officer)
    
 
 
 Exhibit
31.2
 Certification
of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 for the Period Ended March 31, 2010
 
 CERTIFICATION
 
 I, Anita
K. Ho, certify that:
 
 1. I have
reviewed this quarterly report on Form 10-Q of Alliance Fiber Optic Products,
Inc.;
 
 2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
 
 3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
 
 4. The
registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
 
 a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
 
 b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
 
 c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
 
 d) Disclosed
in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
 
 5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
 
 a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
 
 b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.
 
 Date May
12, 2010
 
 By  /s/Anita K.
Ho
 Anita K.
Ho
 Acting
Chief Financial Officer
 (Principal
Accounting Officer)
    
 
 
 
 Exhibit
32.1
 
 STATEMENT
OF CHIEF EXECUTIVE OFFICER UNDER 18 U.S.C. SS 1350
 
 I, Peter
C. Chang, the chief executive officer of Alliance Fiber Optic Products, Inc.
(the "Company"), certify for the purposes of section 1350 of chapter 63 of
title 18 of the United States Code that, to the best of my
knowledge,
 
 (i)           the
Quarterly Report of the Company on Form 10-Q for the period ended March
31, 2010 (the "Report"), fully complies with the requirements of section
13(a) of the Securities Exchange Act of 1934, and
 
 (ii)           the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
 
 
 
 /s/ Peter C. Chang
 Peter C.
Chang
 
 May 12, 2010
 
 
  
  Exhibit
32.2
 
 STATEMENT
OF ACTING CHIEF FINANCIAL OFFICER UNDER 18 U.S.C. SS 1350
 
 I, Anita
K. Ho, the acting chief financial officer of Alliance Fiber Optic Products, Inc.
(the "Company"), certify for the purposes of section 1350 of chapter 63 of
title 18 of the United States Code that, to the best of my
knowledge,
 
 (i)           the
Quarterly Report of the Company on Form 10-Q for the period ended March
31, 2010 (the "Report"), fully complies with the requirements of section
13(a) of the Securities Exchange Act of 1934, and
 
 (ii)           the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
 
 
 
  /s/Anita K. Ho
 Anita K.
Ho
  May
12, 2010