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 and availability of our capital resources, exposure to interest rate or currency fluctuations, 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, the potential benefit of 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 value of our investments, and the effect of recent and changing accounting pronouncements and our critical accounting policies, estimates, models, judgments and assumptions on our financial results. 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 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 component, 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, failure to meet customer requirements, our ability to license intellectual property on commercially reasonable terms, economic stability, the impact and extent of the economic and financial crisis, 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.

The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes included elsewhere in this Report.

Critical Accounting Policies and Estimates

Stock-based Compensation Expense

Stock-based compensation expense recognized under SFAS 123(R) for the three and nine months ended September 30, 2008 was $34,000 and $131,000, respectively, determined by the Binomial Lattice valuation model, and represents stock-based compensation expense related to employee stock options. As of September 30, 2008, total unrecognized compensation costs related to unnvested stock options was three thousand dollars, which is expected to be recognized as an expense over a weighted average period of approximately 1.25 years.

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, 2007.

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 optical passive products contributed revenues of $3.9 million and $3.0 million for the three months ended September 30, 2008 and 2007, respectively. In the three months ended September 30, 2008 and 2007, our top 10 customers comprised 62.3% and 51.8% of our revenues, respectively. One customer accounted for 14.1% and 13.3% of our total revenues for the three months ended September 30, 2008 and 2007, respectively. In the nine months ended September 30, 2008 and 2007, our top 10 customers comprised 64.1% and 54.5% of our revenues, respectively. Two customers accounted for 15.9% and 10.3% of our total revenues for the nine months ended September 30, 2008, respectively. One customer accounted for 18.2% of our total revenues for the nine months ended September 30, 2007. 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:

· costs incurred in establishing additional manufacturing lines and facilities;

· inventory write-downs and impairment charges related to manufacturing assets;

· mix of products sold;

· changes in our pricing and pricing from our competitors;

· mix of sales channels through which our products are sold; and

· 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               Nine Months
                                     Ended September 30,       Ended September 30,
                                   -----------------------   -----------------------
                                       2008         2007         2008         2007
                                   -------------   -------   -------------   -------
Revenues                                  100.0%    100.0%          100.0%    100.0%
Cost of revenues                            68.4     68.6             68.5      68.5
                                   -------------   -------   -------------   -------
   Gross profit                             31.6     31.4             31.5      31.5

Operating expenses:
   Research and development                  8.2      9.5              8.7       9.8
   Sales and marketing                       5.6       6.1             6.3       7.2
   General and administrative                8.2       8.9             8.8      10.5
                                   -------------   -------   -------------   -------
     Total operating expenses               22.0      24.5            23.8      27.5

Income from operations                       9.6       6.9             7.7       4.0
Interest and other income, net               3.0       4.7             3.2       5.4
                                   -------------   -------   -------------   -------
Net income before tax                      12.6%     11.6%           10.9%      9.4%
Inome tax                                    0.2         -             0.3         -
                                   -------------   -------   -------------

Net income                                 12.4%    11.6%            10.6%      9.4%
                                   -------------   -------   -------------   -------

Revenues. Revenues were $10.8 million and $9.2 million for the three months ended September 30, 2008 and 2007, respectively. Revenues increased 18.1% in the quarter ended September 30, 2008 from the same period in 2007, as a result of a broadbased increase in demand from our customers, especially for our Multi-fiber Data Center product lines. Revenues were $30.6 million and $24.6 million for the nine months ended September 30, 2008 and 2007, respectively. Revenues increased 24.3% in the nine months ended September 30, 2008 from the same period in 2007, mainly due to a large telecom product contract for our optical passive and connectivity products and increased volume shipments of our optical passive and connectivity products for telecom and cable television applications.

Gross Profit. Gross profit increased to $3.4 million, or 31.6% of revenues, for the three months ended September 30, 2008 from $2.9 million, or 31.4% of revenues, for the same period in 2007. Gross profit increased in dollars to $9.6 million, or 31.5% of revenues, for the nine months ended September 30, 2008 from $7.8 million, or 31.5% of revenues, for the same period in 2007. For the period ended September 30, 2008, the utilization of our factories as a result of increased volume shipments of our products were offset to some extent by increased sales of optical passive products which have lower gross margins.

Research and Development Expenses. Research and development expenses remained at $0.9 million for the three months ended September 30, 2008 and for the same period in 2007. Research and development expenses increased to $2.7 million for the nine months ended September 30, 2008 from $2.4 million for the same period in 2007. The increase was primarily due to costs associated with new product development. As a percentage of revenues, research and development expenses decreased to 8.2% in the three months ended September 30, 2008 from 9.5% for the same period in 2007. As a percentage of revenues, research and development expenses decreased to 8.7% in the nine months ended September 30, 2008 from 9.8% for the same period in 2007. We expect research and development expenses on our product development efforts to increase in the near term as we intend to continue to invest in our research and product development efforts.

Sales and Marketing Expenses. Sales and marketing expenses remained at $0.6 million for the three months ended September 30, 2008 and 2007. Sales and marketing expenses increased to $1.9 million for the nine months ended September 30, 2008 from $1.8 million for the same period in 2007. As a percentage of revenues, sales and marketing expenses decreased to 5.6% in the three months ended September 30, 2008 from 6.1% for the same period in 2007. As a percentage of revenues, sales and marketing expenses decreased to 6.3% in the nine months ended September 30, 2008 from 7.2% for the same period in 2007. We expect sales and marketing expenses will remain relatively flat in the next quarter as a result of no trade show activities.

General and Administrative Expenses. General and administrative expenses increased to $0.9 million for the three months ended September 30, 2008 from $0.8 million for the same period in 2007. General and administrative expenses increased to $2.7 million for the nine months ended September 30, 2008 from $2.6 million for the same period in 2007. As a percentage of revenues, general and administrative expenses decreased to 8.2% in the three months ended September 30, 2008 from 8.9% for the same period in 2007. As a percentage of revenues, general and administrative expenses decreased to 8.8% in the nine months ended September 30, 2008 from 10.5% for the same period in 2007. We expect general and administrative expenses will remain relatively flat in the next quarter.

Stock-Based Compensation. Total stock based compensation decreased to $34,000 for the three months ended September 30, 2008 from $91,000 for the same period in 2007. Total stock based compensation decreased to $131,000 for the nine months ended September 30, 2008 from $318,000 for the same period in 2007. These decreases were due to the lower market price of our common stock.

Interest and Other Income, Net. Interest and other income, net, was $0.3 million and $0.4 million for the three months ended September 30, 2008 and 2007, respectively. Interest and other income, net, was $1.0 million and $1.3 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease in interest and other income is due to lower interest rates on our investments.

At September 30, 2008, we had cash and cash equivalents of $21.2 million and short-term investments of $2.0 million. On March 31, 2008, we reclassified $15.6 million of auction rate securities collateralized by student loans and substantially guaranteed by the U.S. Department of Education from short-term investments into long-term investments. During the three months ended September 30, 2008, the Company recorded an unrealized loss of $0.4 million on these securities. At September 30, 2008, we had long-term investments of $15.0 million. Continued auction failures could adversely impact our liquidity as we may not be able to sell these securities when we want to and may have to hold them until maturity between 2032 and 2046. In October 2008, we received an offer from UBS AG to purchase our ARS at par value (approximately $16.3 million) in accordance with the terms of the offer. The offer is non-transferable and expires on November 14, 2008. We are in the process of evaluating the offer and its impact on the Company.

Net cash provided by operating activities was $3.4 million for the nine months ended September 30, 2008. The cash provided was primarily due to net income of $3.2 million, an increase in accounts payable of $0.8 million, and total depreciation and amortization expenses of $0.9 million, which was offset by $0.2 million inventory provision and $1.1 million increase in inventory. Net cash provided by operating activities was $3.3 million for the nine months ended September 30, 2007. Net cash provided by operating activities was primarily due to net income of $2.3 million, an increase in accounts payable of $0.7 million, an increase in accrued expenses of $0.5 million, and total depreciation and amortization expenses of $1.2 million, which was offset by a $1.1 million increase in accounts receivable, a $0.4 million decreased in inventory provision and a $0.3 million decrease in inventory.

Net cash provided by investing activities was $12.4 million for the nine months ended September 30, 2008. This resulted from $13.2 million in net proceeds from sales of short-term investments offset by $0.8 million spent on equipment. Cash used in investing activities was $3.0 million for the nine months ended September 30, 2007. In the nine months ended September 30, 2007, we spent a net $2.3 million for the purchase of short-term securities, and we used $0.7 million to acquire property and equipment.

Cash provided by financing activities was $0.2 million and $0.5 million for the nine months ended September 30, 2008 and 2007, respectively, and was comprised of proceeds from exercise of options to purchase common stock and common stock issued through our Employee Stock Purchase Plan. Cash provided for the nine months ended September 30, 2007 also included net proceeds from borrowings under an equipment loan of $0.2 million, offset by 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 or we are not able to access our long-term investments, 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, particularly in light of the current economic environment, 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.

Contractual Obligations

Our corporate headquarters are in Sunnyvale, California where we lease a 34,800 square foot facility for a current monthly rent of approximately $33,000. The lease has a six-year term commencing on July 22, 2004.

In December 2000, we purchased approximately 8,200 square feet of space immediately adjacent to our leased facility in Tu-Cheng City, Taiwan for $0.8 million. Additionally, in February 2006, we entered into a lease for a total of 21,600 square feet in a facility located in Hu-Kou, Taiwan. This lease expires in January 2009 and has been terminated by the Company as of November 6, 2008.

In July 2007, we renewed the lease for our 62,000 square feet facility in the Shenzhen area of China, which will expire in July 2012. Additionally, in February 2007, we entered into a lease for an 8,200 square feet dormitory in Shenzhen, which lease will expire in January 2012.