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10-27-2006 AFOP - Alliance Fiber Optic Products Inc.

CURRENT PRICE: $1.85

TYPE OF PLAY: EARNINGS GROWTH /TECHNICAL ANALYSIS/TURNAROUND

Alliance Fiber Optic Products, Inc. (AFOP) designs, manufactures and markets a range of high-performance fiber optic components, and integrated modules incorporating these components, for communications equipment manufacturers. The Company's passive optical products support the needs of existing and next-generation optical network systems applications. Its Optical Path Management Solution (OPMS) product family provides a line of optical interconnect devices, couplers and splitters, and related optical products, as well as customized integrated modules incorporating these devices. AFOP's Wavelength Management Solutions (WMS) include wavelength division multiplexing (WDM) and dense wavelength division multiplexing (DWDM) components and modules that utilize thin-film filter technologies to separate optical signals. The Company also offers advanced optical devices, which include all-fiber optical depolarizer, automatic variable optical attenuator and switchable optical drop/add module.

The past two quarters' results lead us to believe that Alliance is showing exceptional bottom line improvements. Revenues for the third quarter of 2006 totaled $7,573,000, a 44% increase compared with $5,269,000 for the year ago quarter and 21% increase from revenues of $6,252,000 recorded in the second quarter of 2006. Gross margin in the quarter improved to 29% from 21% in the year ago quarter and 26% in the second quarter of 2006.

Peter Chang, President and Chief Executive Officer, commented, "Besides repeated double digit revenue growth and continuous gross margin improvement, the third quarter of 2006 marked another important milestone in AFOP's quarterly financial results -- AFOP achieved both positive operating margin and positive operating cash flow in Q3, 2006, after returning to positive earnings per share in the previous quarter." "Based on input from our customers and current backlog, we expect that revenues in the fourth quarter of 2006 will continue growing. Additionally, with continued focus on operational efficiencies, we believe that earnings in the coming quarter will improve over the previous quarter, and the Company will return to profitability on annual basis in 2006 as well," concluded Mr. Chang.

From a technical analysis perspective, the chart showed a high volume break-away gap coming off of a solid base as well as a break of the late August highs from earlier this year. The stock traded as high as $2.70 in April.

The fiber optics segment of the market has remained very strong and as the CEO's comments indicate, should remain so for the immediate future. The company has about $30 million in cash and negligible debt. We think that Alliance is a turnaround play and will soon attract the attention of institutional investors and regain favor with analysts.

LINKS FOR FURTHER READING:
AFOP Homepage
Last Earnings Release
SEC filings for AFOP