Telecommunications service providers currently operate and manage separate and independent networks, the public switched telephone network, or PSTN, and IP networks, also referred to as the Internet. In order to reduce costs and generate new revenue opportunities, both telecommunications service providers and cable TV operators are developing and deploying a single, converged IP network capable of offering voice, video and data services. These next generation high-bandwidth converged IP networks are being designed to scale with voice, video and data traffic volume growth, simplify network management and offer increased levels of service and enhanced content to consumers and enterprises.

Optical subsystems provide critical transmission, reception and switching functions for the network systems that provide these solutions. To address this challenge, carriers have adopted network systems that support 10Gb/s transmission rates and are deploying new technologies that provide increased capacity, bandwidth efficiency and manageability, such as ROADMs.

According to CIR, an independent market research firm, worldwide sales of telecommunications transceivers with speeds of ten gigabits per second, or 10Gb/s, or greater are expected to grow from approximately $478.7 million in 2006 to approximately $1.73 billion in 2011, a compound annual growth rate of 29%, and the market for ROADMs is expected to grow from approximately $47.4 million in 2006 to approximately $291.9 million in 2011, a compound annual growth rate of 44%.

CIR also predicts that ports for data transfer sold with speeds of approximately 10Gb/s or greater will increase from approximately 880,800 in 2006 to approximately 17.3 million in 2010, a compounded annual growth rate in the number of ports sold of 111%. Dell\\\\\\\'Oro Group, another independent market research firm, forecasted in January 2006 that revenues for the optical systems markets will grow from approximately $8.4 billion in 2005 to $11.0 billion in 2010, a compound annual growth rate of 5%.

The Company has also recently distributed demonstration units of a technologically innovative reconfigurable optical add/drop multiplexer, or ROADM, that enables dynamic wavelength processing, which it refers to as DWP ROADM.

The Company delivers products which enable access networks to be upgraded for advanced voice, video and other data services. As with long haul and metro networks, the Company sells transceiver and transmitter products that enable carriers to transport increasing network traffic volume.

The Company’s products are also used in metro networks, many of which are currently being upgraded to operate at transmission speeds of approximately 10Gb/s. Additionally, the Company’s products provide dense wavelength division multiplexing, or DWDM, technology which is an advanced form of wavelength division multiplexing, or WDM, which is a technique that combines multiple wavelengths on a single optical fiber.

DWDM systems enable both bandwidth optimization and increased wavelength agility throughout the network. The Company supplies transceiver products to metro networks and have recently launched its DWP ROADM.

The Company also provides transceiver subsystems to network systems vendors, for integration into long haul networks. These networks transmit data over optical fiber with distances ranging from hundreds of meters to thousands of kilometers. The Company’s products provide both time division multiplexed, or TDM, a technique that places multiple data streams in a single link at varying time intervals, and DWDM capabilities.

The Company sells a product line of serial optical 10Gb/s transceivers, including products that support all variants for the 300 pin, XENPAK, and XFP standards.

Gross profit increased 99.4% to approximately $17.5 million for the fiscal year ended July 29, 2006 from approximately $8.8 million for the fiscal year ended July 30, 2005.

Research and development expenses increased 48.3% to approximately $8.5 million for the fiscal year ended July 29, 2006 from approximately $5.7 million for the fiscal year ended July 30, 2005.

Selling, general and administrative expenses increased 30.8% to approximately $6.1 million for the fiscal year ended July 29, 2006 from approximately $4.6 million for the fiscal year ended July 30, 2005.

Interest and other income (expense), net, increased to approximately $211,000 for the fiscal year ended July 29, 2006 from approximately $119,000 for the fiscal year ended July 30, 2005.