In this study the effect of optical feedback in semiconductor laser diodes (LD) has been examined using small signal analysis. The transfer function of LD is given as H(j omega(m))(D) and transfer function of external cavity LD is given as TF(j omega(m))(HD) respectively. The investigated parameters of these transfer functions are external cavity length ( L-ext ), line-width enhancement factor (alpha) and mirror power reflection coefficient (R). The gain change occurring due to optical feedback noise is shown by broadening the bandwidth and narrowing the frequency spectra and the state of chaos (coherence collapse) is determined in each case. By varying the level of reflected optical feedback power ( f(ext) ) the optical feedback system of LD has been improved. In addition to that the system is driven out of chaos by finding reasonable levels for these variables.