Over the past several years, telecommunications networks have undergone significant changes as network service providers pursue more profitable service offerings and lower operating costs.

Network service providers continue to add high speed network access such as Wi-Fi, WiMAX, 3G, DSL, cable and FTTx, and are converging traditionally separate networks for delivering voice, video and data into IP-based integrated networks. Concurrent with these trends, a growing demand for high bandwidth applications by both consumers and enterprises is driving increased network utilization across the core and at the edge of wireline, wireless and cable networks as well as the data communications networks and storage networks of enterprises and large institutions.

Both telecommunications and data communications networks are utilizing optical networking technologies capable of supporting higher speeds, additional features and greater interoperability to accommodate higher bandwidth requirements and achieve the lowest cost. Today, both telecommunications network systems vendors such as Alcatel and data communications network systems vendors such as Cisco are producing optical systems increasingly based on 10Gbps and 40Gbps speeds.

The increasing complexity of the components, industry consolidation and the need to increase the pace of innovation while reducing costs have led the network systems vendors to reduce their number of module and component suppliers and favor vendors with more comprehensive product portfolios and deeper product expertise. Suppliers who can successfully meet these challenges may become involved early in network system vendors’ product development and become a strategic part of their product planning process.

The Company’s product portfolio includes a broad range of solutions that vary by level of integration, communications protocol, form factor and performance level. The Company’s portfolio primarily consists of 10Gbps and 40Gbps transceiver modules, including tunable transceivers, a broad line of 2.5Gbps and lower speed SFP transceiver modules, and new or planned products for emerging MSAs such as SFP+ and XMD.

The primary components that comprise all of the Company’s products are laser diodes and photodetectors. The laser diode provides the light source for communication over fiber optic cables. The Company’s current communications laser diode product offering includes DFB lasers and EA-DFB lasers at selected 2.5Gbps and 10Gbps data rates and 1310nm and 1550nm wavelengths. Photodetectors receive the optical signal; the Company offers high performance avalanche photodiodes, or APDs, that operate at the same data rates and wavelengths of the lasers.

For the industrial and commercial markets, the Company offers lasers and infrared LEDs for a variety of specialized applications. The Company’s products include visible lasers around the 635nm, 650nm and 670nm wavelengths for applications such as laser printing, industrial barcode scanning, medical imaging and professional contractor tools; lasers around the 780nm and 830nm wavelengths for scientific measurement, night vision, and other infrared applications, and infrared LEDs around the 760nm, 840nm and 880nm wavelengths for sensors used in robotics and other industrial applications.

Gross margin increased $9.7 million or 270.9% to $13.3 million in the three months ended June 30, 2006 from $3.6 million in 2005.

Selling, general and administrative expenses remained constant at $8.3 million in the three months ended June 30, 2006 and 2005.

Interest income, net decreased by approximately $0.3 million or 25.7% to $0.8 million in the three months ended June 30, 2006 from $1.0 million in 2005.

Other (expense), net was $1.1 million for the three months ended June 30, 2006 and other income was $0.2 million for the three months ended June 30, 2005.