<PAGE>

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

<Table>
<C>          <S>
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
</Table>

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
<Table>
<C>          <S>
                                   OR



    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
</Table>

        FOR THE TRANSITION PERIOD FROM  ___________  TO  ___________  .

                        COMMISSION FILE NUMBER: 0-31857

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<Table>
<S>                                            <C>
                   DELAWARE                                      77-0554122
       (STATE OR OTHER JURISDICTION OF                         (IRS EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

735 NORTH PASTORIA AVENUE, SUNNYVALE, CA 94085                 (408) 736-6900
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)    (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
                                                                   CODE)
</Table>

            SECURITIES REGISTERED TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.001 PER SHARE

             SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS

     Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  [ ]

     The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on March 1, 2002) was
approximately $39,192,751.

     As of March 1, 2002 there were 35,629,774 shares of Common Stock, $0.001
per share par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting
Compliance), 11, 12 and 13 of Part III incorporate by reference information from
the registrant's proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the registrant's
2002 Annual Meeting of Stockholders to be held on May 17, 2002.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

                               TABLE OF CONTENTS

                                 2001 FORM 10-K

<Table>
<Caption>
                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
PART I..................................................................    1
  Item 1.   Business....................................................    1
  Item 2.   Properties..................................................    7
  Item 3.   Legal Proceedings...........................................    8
  Item 4.   Submission of Matters to a Vote of Security Holders.........    8

PART II.................................................................    9
  Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.........................................    9
  Item 6.   Selected Consolidated Financial Data........................   10
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   11
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk........................................................   28
  Item 8.   Financial Statements and Supplementary Data.................   30
  Item 9.   Changes In and Disagreements With Accountants on Accounting
            and Financial Disclosure....................................   50

PART III................................................................   51
  Item 10.  Directors and Executive Officers of the Registrant..........   51
  Item 11.  Executive Compensation......................................   51
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   52
  Item 13.  Certain Relationships and Related Transactions..............   52

PART IV.................................................................   52
  Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.........................................................   52
</Table>

                                        i
<PAGE>

                                     PART I

ITEM 1. BUSINESS

     When used in this Report, the words "expects," "anticipates," "believes",
"estimates," "plans," and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods
and include statements as to our marketing and commercialization of products
under development, plans for enhancements of existing products, plans for future
products, features and uses of our products under development, our patent
applications and intellectual property, increases in possible license offers and
patent infringement claims, expansion of our domestic sales force, the
establishment of an international distribution network, differentiating factors
in the fiber optic market, our competitive advantages, our ability to compete,
the source of our competition, consolidation in our industry, effects of
competition on our operating results, our plans in China, and our anticipated
investments and expenditures. 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 below, as well as risks related to the development of the
metropolitan, last mile access, and enterprise networks, acceptance of our
products by our customers, our backlog as a reliable indicator of actual sales
for any succeeding period, development of new products by us and our
competitors, our ability to retain and obtain customers, increased competition
in our markets, and our ability to license intellectual property on commercially
reasonable terms; and the risks set forth below under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results." 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.

     In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results," all references to "Alliance
Fiber Optic Products," "AFOP," "we," "us," "our" or the "Company" mean Alliance
Fiber Optic Products, Inc. and its subsidiaries, except where it is made clear
that the term means only the parent company.

     OPIS is our trademark. We also refer to trademarks of other corporations
and organizations in this document.

OVERVIEW

     Alliance Fiber Optic Products designs, manufactures and markets a broad
range of high performance fiber optic components, and integrated modules
incorporating these components, for leading and emerging communications
equipment manufacturers. We offer a broad range of products including
interconnect devices that are used to connect optical fibers and components,
couplers and splitters that are used to divide and combine optical power, and
dense wavelength division multiplexing, or DWDM, devices that separate and
combine multiple specific wavelengths. Our emphasis on design for manufacturing
and our comprehensive manufacturing expertise enable us to produce our products
efficiently and in volume quantities. Our product scope and ability to integrate
our components into optical modules enable us to satisfy a wide range of
customer requirements throughout the optical networking market. Our customers
deploy our products in long-haul networks that connect cities, metropolitan
networks that connect areas within cities, last mile access networks that
connect to individual businesses and homes, and enterprise within businesses.

     We were incorporated in California in December 1995. In October 2000, prior
to our initial public offering, we reincorporated in Delaware as Alliance Fiber
Optic Products, Inc.

                                        1
<PAGE>

INDUSTRY BACKGROUND

     The popularity of the Internet and the growing number of data intensive
Internet-based applications and services has fueled a significant increase in
the volume of data traffic. This traffic growth has increased the demands on
communication networks originally developed to primarily transport voice
traffic. To meet this demand, many communications service providers are
designing and installing new networks based on fiber optic technology, which
provides greater data-carrying capacity, or bandwidth, and increased
transmission speeds compared to existing communications networks. Until
recently, most of the fiber deployed had been dedicated to long-haul networks.
However, the demands for high-speed network access and bandwidth are shifting
the focus towards more complex metropolitan networks and last mile access
networks, which require an increasing number of connections and components.

     Optical fiber is currently being deployed across the following segments of
communications networks: long-haul, metropolitan, last mile access, and
enterprise.

     Long-haul networks. Long-haul networks connect the communications networks
of cities around the world and transport large amounts of data and voice
traffic. To solve congestion problems, service providers have invested
significant resources in the deployment of optical infrastructure. As a result,
current long-haul networks provide high bandwidth for transmitting data over
very long distances. The build-out of long-haul networks represents an important
step in improving network infrastructure to support increased demand for new
services and greater traffic volumes.

     Metropolitan networks. Metropolitan networks connect long-haul networks to
last mile access networks within urban areas. Due to the increase in data
traffic and the demand for enhanced services, the existing metropolitan network
infrastructure has become a bottleneck for the provision of communications
services to business and residential end users. As a result, service providers
are making investments in infrastructure to reduce capacity constraints in
metropolitan networks.

     Last mile access networks. Last mile access networks connect business and
residential end users to their service provider in order to provide increased
bandwidth to the end user. Traditional access networks use the existing copper
wire based infrastructure, which is slow compared to the high-speed networks
commonly used within businesses. Established and new service providers are
beginning to deploy fiber technologies in the last mile access network in order
to provide high bandwidth connectivity to the end user.

     Enterprise networks. Local area networks serving the business community
have utilized fiber optic links for over a decade. Historically these links have
connected vertical backbone requirements between various floors of copper-based
networks within office buildings. Over the last several years, as the bandwidth
of local networks has increased, optical fiber has become a pervasive medium for
horizontal network links especially in the storage network environment.

     Service providers are seeking to maximize the performance and capacity of
both new and existing optical networks through advances in optical technology.
Wavelength division multiplexing, or WDM, has been used for several years to
increase system capacity by combining different light signals at different
wavelengths, on a single optical fiber. Each wavelength represents a separate
high-bandwidth channel that can carry data. Multiplexing devices combine, or
multiplex, these different wavelengths at one end of the optical network, and
demultiplexing devices, or demultiplex, separate them at the other end. WDM
technology has been enhanced with the introduction of dense wavelength division
multiplexing, or DWDM, which permits the wavelengths to be spaced more closely
together. The tighter spacing allows even more wavelengths to be transmitted on
one optical fiber. The use of WDM and DWDM technology is well established in the
long-haul market and is increasingly utilized in the metropolitan and last mile
access markets.

     Fiber optic components are used within optical networks to create, combine,
isolate, amplify, split, direct and perform various other functions on the
optical signals. Fiber optic components are divided into two broad categories,
active and passive components. Active components require power to operate and

                                        2
<PAGE>

use electrical signals to create, modulate or amplify optical signals. Passive
optical components guide, mix, filter, route, adjust and stabilize optical
signals transmitted through an optical network.

PRODUCTS

     Our passive optical products support the needs of current and next
generation optical network systems applications. Our Optical Path Management
Solution, or OPMS (formerly known as Optical Path Integration Solution, or
OPIS), product family provides a comprehensive line of optical interconnect
devices, couplers and splitters and related optical products, as well as
customized integrated modules incorporating these devices. Our Wavelength
Management Solutions, or WMS, include WDM and DWDM components and modules that
utilize thin film filter technologies to separate optical signals. Our advanced
optical devices include our all-fiber optical depolarizer, which reduces the
degree of polarization of a light source, our automatic variable optical
attenuator, which controls the amount of power in an optical fiber, and our
switchable optical drop/add module, which inserts or extracts specific
wavelengths in a DWDM system.

     The following is a discussion of our product offerings and the products we
are developing.

     OPMS PRODUCTS. In nearly all fiber optic networks, the optical fiber,
passive optical components and active optical devices must be joined using
optical interconnection systems. Our OPMS platform provides fundamental
component support for these applications as well as standard and custom value
added integrated solutions that address the need for higher functionality and
modularity.

     OPMS Modules. The evolution of optical components is driven by the
increasing need for packaging density, module performance and overall cost
effectiveness. We design and package our various OPMS components to provide
integrated modules for our customers. Our integrated modules are designed to
reduce our customers' system design requirements and ease implementation.

     Optical Connectors, Adapters and Cable Assemblies. Optical connectors and
adapters are precision devices that connect fibers together. Optical cable
assemblies are used to bridge relatively short distances with optical paths. We
offer a broad range of industry standard connection products that support a wide
range of fiber and fiber cable types. Further, with our integrated design and
manufacturing capability, we are able to customize these products to meet our
customers' needs for compact size and special features. We specialize in
providing our customers with high performance custom cable assemblies to serve
in conjunction with our optical interconnection solutions at all interface
points in the optical communications network.

     Fused Fiber Optical Splitters and Couplers. Fused fiber optical splitters
and couplers are branching devices that are used to split optical power from a
single fiber, or set of fibers, into a different set of fibers. They are often
used to distribute optical signals to multiple locations for processing. These
devices utilize signal and power sharing features to reduce the total cost of
delivering bandwidth to end-users. Our optical splitters and couplers reduce
insertion loss, or the power loss incurred when inserting components into an
optical path, and deliver high performance, including uniform optical wavelength
splitting.

     Optical Tap Couplers and Ultra Low Polarization Dependent Loss Tap
Couplers. Optical tap couplers are fused fiber branching devices that split off
a portion of light to allow for optical monitoring and feedback. These devices
are used extensively in fiber amplifier power control. They are also utilized in
transmission equipment for performance monitoring and control. Our ultra low
polarization dependent loss devices offer low levels of sensitivity to
polarization, which is a characteristic of light that can cause a reduction in
the power of optical signals. These devices enable more effective monitoring and
management of optical networks.

     Amplifier WDM Couplers. Amplifier WDM couplers are used with specialized
fibers to combine or separate specific wavelengths of light associated with
standard telecommunications optical amplifier requirements. Our amplifier WDM
couplers are stable low power loss components with high power handling
capability.

                                        3
<PAGE>

     Optical Fixed Attenuators. Optical fixed attenuators diminish the optical
power within a given optical path without interference or reduction in optical
signal quality. Typically this function is embedded in an optical connector or
adapter element to simplify optical network installation. We utilize attenuated
fiber that reduces power while preserving performance characteristics, including
optical signal quality and reliability.

     Fused Fiber WDM Couplers. Fused fiber WDM couplers are used to combine and
separate optical signals transmitted on different wavelengths. This function
provides the first level of bandwidth expansion for a network by increasing a
fiber's signal carrying capacity. Fused fiber WDM couplers may also be used to
add additional functionality to the network such as network status monitoring.
Our fused fiber WDM couplers provide a cost effective way to minimize loss and
maximize wavelength isolation.

     FILTER-BASED WAVELENGTH MANAGEMENT PRODUCTS. In recent years, wavelength
division multiplexing has become the preferred method of increasing bandwidth
throughout optical networks. Our filter-based products serve WDM and DWDM
systems as core passive elements that direct and manage larger numbers of
optical signal channels. Our wavelength management products also enable network
DWDM systems to manage and monitor a large number of optical signals by
separating these signals into different paths that can be processed
individually.

     Filter WDMs. Our thin film filter based WDMs are used to combine and
separate optical signals. Our filter-based products allow for higher isolation
and narrower wavelength separations than fused fiber technology. Our filter WDMs
are designed for a range of network applications including combining active and
passive components and wavelength monitoring, splitting and separating tasks.

     Amplifier Filter WDMs. Amplifier filter WDMs utilize thin film filter
technology to maintain wavelength separation in demanding applications. In
addition, filter technology allows for narrow wavelength separation. Our
amplifier filter WDMs are designed for a range of applications, such as
splitting wavelengths and connecting lasers used in wavelength amplification.

     DWDMs. Dense wave division multiplexers, or DWDMs, are integrated optical
modules that combine, or multiplex, and separate, or demultiplex, multiple
optical signals of different wavelengths on a single fiber. The separation of
wavelengths are so narrow, or dense, that a large number of channels (greater
than 10) can be combined within the band of usable wavelengths of the fiber
itself. We utilize proprietary thin film technology in the development and
manufacture of our DWDM products. This technology delivers excellent performance
characteristics, including narrow channel separation and wide channel bandpass,
which is the range of frequencies that will pass through a filter. Thin film
filter technology allows for a range of solutions for 200 GHz, 100 GHz and 50
GHz International Telecom Union wavelength spacing applications, which permit 40
channels, 80 channels, and 160 channels, respectively, to be transmitted across
a single fiber. Our DWDMs directly address the scalable channel plans found in
metropolitan and last mile access network applications.

     Add/Drop DWDM Filters. Add/drop DWDM filter products are used to insert or
extract specific wavelengths in a DWDM system. While a large number of channels
can be transmitted through a single fiber network, often only selected channels
of information are required at a particular location. Our 200 GHz, 100 GHz and
50 GHz add/drop components use high performance filter technology and operate
with very little optical power loss in order to provide high channel separation
and high stability.

     ADVANCED OPTICAL DEVICES. As the capacity and complexity of optical
networks increases, future systems face significant challenges. Performance
characteristics such as stability, channel balance and power loss due to
polarization become difficult to manage without the addition of optical control
devices. Our advanced optical devices serve to add further control in next
generation networks and network measurement equipment.

     All-Fiber Depolarizers. Depolarizers are devices that reduce the degree of
polarization of a light source. As polarization effects become a more
significant limiting factor in next generation network

                                        4
<PAGE>

performance, depolarization becomes an increasingly important tool in developing
solutions to design constraints. We have developed and patented an all-fiber
depolarizer, which can significantly depolarize light from a range of sources,
including those used in communications networks and fiber optic test and
measurement equipment.

     Automatic Variable Optical Attenuators. Automatic variable optical
attenuators are designed to control the optical power in a fiber. They are often
combined with an active system component to maintain optical power on a network
even if the input signal is changing power. Our automatic variable optical
attenuators are specifically designed for application in DWDM networks for use
with individual channel source elements such as add/drop transmitters. The cost
and performance characteristics of our automatic variable optical attenuators
are specifically targeted to allow for the use of these devices in volume as
principal DWDM channel stabilization components.

INTELLECTUAL PROPERTY

     We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. As of December 31, 2001, we had 12
U.S. patents issued or assigned to us and had 27 U.S. patents pending. The 12
U.S. patents expire between May 2017 and August 2019. We also had 14 foreign
patents issued, and 18 foreign patents pending. Our foreign patents issued will
expire between September 2010 and July 2021. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
them.

     From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functions of products overlap. Patents of third parties may be
determined to be valid, or some of our products may ultimately be determined to
infringe them. Other companies may pursue litigation with respect to those or
other claims. The results of any litigation are inherently uncertain. In the
event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we
could be required to obtain licenses to the infringing technology, to pay
substantial damages under applicable law, to cease the manufacture, use and sale
of infringing products or to expend significant resources to develop
non-infringing technology. Licenses may not be available from third parties
either on commercially reasonable terms or at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, any
infringement claim or litigation against us could significantly harm our
business, operating results, financial condition, or cash flows. As of December
31, 2001, there are no infringement claims or litigation pending against us.

CUSTOMERS

     We sell our products to communications equipment manufacturers that
incorporate our products into their systems that they in turn sell to network
service providers. In certain cases, we sell our products to other component
manufacturers for resale or inclusion in their products. In the year ended
December 31, 2001, we sold our products to more than 250 customers. In the year
ended December 31, 1999, one customer accounted for 11.2% of our revenue. In the
years ended December 31, 2000 and 2001, no individual customer accounted for 10%
or more of our revenues.

     Information regarding geographic areas is included in Note 12 to the
Consolidated Financial Statements.

BACKLOG

     Backlog is defined as orders for which we expect to recognize revenues
within the succeeding twelve months. Sales are made pursuant to purchase orders,
which are frequently subject to revision or cancellation. Due to the adverse
market conditions for fiber optic components, the possibility of changes in

                                        5
<PAGE>

delivery or acceptance schedules, cancellations of orders, and price reductions,
we do not believe that our backlog, as of any particular date, is a reliable
indicator of actual sales for any succeeding period.

SALES, MARKETING AND TECHNICAL SUPPORT AND PRODUCT MANAGEMENT

     Sales. Our direct sales force markets and sells our products primarily in
the United States. We also maintain a sales support staff in Taiwan to service
customers based in the Asia Pacific region. Our direct sales force and technical
marketing personnel maintain close contact with our customers and provide
technical support. We are planning to expand our sales force in the United
States and to establish an international distribution network.

     Marketing. We have a number of marketing programs to support the sale and
distribution of our products and to inform existing and potential customers
about the capabilities and benefits of our products. Our marketing efforts
include participating in industry trade shows and technical conferences,
advertising in trade journals and communicating through our corporate website
and direct mail.

     Technical Support and Product Management. We maintain a technically
knowledgeable support staff that is critical to our development of long-term
customer relationships. Our technical support and product management staff works
closely with our customers to understand their product requirements, to assist
customers with utilizing our product line, and to develop customized product
solutions.

COMPETITION

     The fiber optic component industry is highly competitive and subject to
rapid technological change. We believe that the principal differentiating
factors in the fiber optic component market are support for multiple optical
interfaces, high optical power, wavelength selection, manufacturing capacity,
reliable and compact packaging, price, product innovation and reliability. Based
on our assessment of the performance and price of similar competitive offerings,
we believe that our products compare favorably, although we cannot assure that
they will continue to do so.

     Our principal competitors in the components market include Avanex
Corporation, Corning, Inc., DiCon Fiberoptics, Inc., Gould Electronics Inc., JDS
Uniphase, which acquired E-TEK Dynamics in 2000 and SDL, Lucent Technologies
Inc., Luminent, Inc., a subsidiary of MRV Communications, Inc., New Focus, Inc.,
Nortel Networks Corporation, Oplink, Inc., Stratos Lightwave, Inc. and Tyco
Electronics Corporation. We believe that we primarily compete with diversified
suppliers for the majority of our product line and to a lesser extent with a
large number of niche companies that offer a more limited product line.
Competitors throughout the optical component industry, including those who sell
active components, may rapidly become competitors in portions of our business.
Competitors who provide both active and passive components may have a
competitive advantage because they provide a more complete product solution than
we provide. In addition, our industry has recently experienced significant
consolidation, and we anticipate that further consolidation will occur. This
consolidation has further increased competition. We expect significant pricing
pressure from our competitors that may negatively affect our margins. We cannot
assure you that we will be able to compete successfully with existing or future
competitors or that competitive pressures will not seriously harm our business,
operating results and financial condition.

PRODUCT DEVELOPMENT

     As of December 31, 2001, we had 60 engineers and technicians directly
involved in research and development of our products both in the United States
and in Taiwan. Our engineering team has extensive design, packaging, processing
and software experience in optical components, interfaces and systems.

     Our primary product development center is located in Sunnyvale, California,
where we opened our Photonics Technology Center in March 2001. Our Taiwanese
subsidiary also engages in product development. Our research and development
expense, excluding non-cash compensation expense, was $1.5 million, $4.3
million, and $7.2 million for the years ended December 31, 1999, 2000 and 2001,

                                        6
<PAGE>

respectively. We have increased, and intend to continue to increase, our
research and development budget and staff to enhance our current product lines
and to develop new technologies and products to serve the next generation
communication markets.

SOURCES AND AVAILABILITY OF RAW MATERIALS

     We make significant purchases of key materials, components and equipment,
including ferrules, graded index lenses, or GRIN lenses, filters and other
components from third party suppliers. We obtain most of our critical raw
materials and components from a single or limited number of suppliers. When
possible, we also develop and maintain alternative sources for essential
materials and components. However, there is only one supplier of GRIN lenses.
The inability to obtain sufficient quantities of these materials or components
may result in delays, increased costs, and reductions in our product shipments.

MANUFACTURING

     We currently manufacture the majority of our OPMS (formerly OPIS) and
optical amplifier products at our facility in Tu-Cheng City, Taiwan. We
manufacture our filter-based and advanced products at our headquarters in
Sunnyvale, California. In addition, we are currently expanding our production
capabilities in China, where we plan to manufacture some components of our OPMS
and DWDM-related products.

     Each of our facilities maintains comprehensive in-house manufacturing
processes, including component and integrated module design, integration,
production, and testing. We plan to continue to invest resources in
manufacturing management, engineering and quality control.

     We have established a quality management system, which is designed to
ensure that the products we provide to our customers meet or exceed industry
standards. This system is based on international standard ISO 9000. Our Taiwan
facility has been ISO 9002 certified in manufacturing since June 1997. Our
United States facility has been ISO 9001 certified in manufacturing since August
2000.

EMPLOYEES

     As of December 31, 2001, we had 376 full-time employees, including 149
located in the United States, 202 in Taiwan and 25 in mainland China. The total
full-time employees included 60 engaged in product development, 255 in
manufacturing production, 21 in sales, marketing, application support and
customer service, and 40 in general and administration. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
we consider our relations with our employees to be good.

ITEM 2. PROPERTIES

     In the United States, we lease a total of approximately 32,800 square feet
in three buildings located in Sunnyvale, California. Of the 32,800 square feet:

     - we lease 11,700 square feet of administrative, sales, marketing, and
       manufacturing space pursuant to a lease that expires in May 2004; and

     - we lease a 10,500 square foot manufacturing facility pursuant to a lease
       that expires in July 2004.

     - we lease an additional 10,600 square feet of space near our current
       headquarters in Sunnyvale, California in December 2000 pursuant to a
       lease that commenced in February 2001 and expires in July 2004. We use
       the facility for product development activities.

     In Taiwan, we lease a total of approximately 38,800 square feet in one
facility located in Tu-Cheng City, Taiwan. These leases expire at various times
from April 2001 to May 2003. Additionally, in December 2000, we purchased
approximately 8,200 square feet of space immediately adjacent to the leased
facility for $797,000, bringing the total square footage to approximately 47,000
square feet. Of this total, 33,400 square feet is used for manufacturing and
13,600 square feet is used for administration and product development.

                                        7
<PAGE>

     In mainland China, we entered into a lease for a facility in April 2001 but
cancelled the lease, without penalty, in the third quarter of 2001. As of
December 31, 2001, we had a lease for a facility in the Shenzhen area totaling
approximately 12,000 square feet that commenced in January 2002 and expires in
December 2002. We will manufacture some of our products in these facilities.

ITEM 3. LEGAL PROCEEDINGS

     From time to time we may be involved in litigation relating to claims
arising in the ordinary course of business. As of the date of this Form 10-K,
there are no material legal proceedings pending against us or, to the best of
our knowledge, threatened against us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth
quarter of the year covered by this report.

                                        8
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock, par value $0.001, is traded on the Nasdaq
National Market under the symbol "AFOP." The following table sets forth, for the
periods indicated, the range of high and low sales prices for our common stock
on Nasdaq, since November 21, 2000, our IPO date, as reported in Nasdaq's
consolidated transaction reporting system.

<Table>
<Caption>
                                               HIGH      LOW
                                              ------    -----
<S>                                           <C>       <C>
2000
  Fourth Quarter 2000.......................  $11.38    $4.63
2001
  First Quarter 2001........................  $14.00    $5.75
  Second Quarter 2001.......................  $ 9.61    $3.02
  Third Quarter 2001........................  $ 4.97    $0.61
  Fourth Quarter 2001.......................  $ 2.48    $0.70
</Table>

     As of March 1, 2002, the Company's common stock was held by 107
stockholders of record. The Company has never declared or paid dividends on its
capital stock and does not anticipate paying any dividends in the foreseeable
future.

                                        9
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data set forth below with respect to
our consolidated statements of operations data for each of the three years in
the period ended December 31, 2001, and with respect to our consolidated balance
sheet at December 31, 2000 and 2001, are derived from our Consolidated Financial
Statements and related Notes that have been audited by PricewaterhouseCoopers
LLP, independent accountants, which are included in this Form 10-K. The selected
consolidated statements of operations data for the years ended December 31, 1997
and 1998, and our consolidated balance sheet data at December 31, 1997, 1998 and
1999, are derived from our audited Consolidated Financial Statements not
included in this Form 10-K. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes included in this Form 10-K.

<Table>
<Caption>
                                                  YEARS ENDED DECEMBER 31,
                                    ----------------------------------------------------
                                     1997       1998      1999        2000        2001
                                    -------    ------    -------    --------    --------
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>        <C>       <C>        <C>         <C>
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Revenues..........................  $ 5,263    $4,906    $ 7,551    $ 22,223    $ 20,388
                                    =======    ======    =======    ========    ========
Gross profit (loss)...............  $ 1,701    $2,149    $ 2,640    $  7,899    $ (6,862)
                                    =======    ======    =======    ========    ========
Net income (loss) attributable to
  common stockholders.............  $    68    $ (388)   $(1,271)   $(22,869)   $(24,133)
                                    =======    ======    =======    ========    ========
Net income (loss) per share
  attributable to common
  stockholders(1):
  Basic...........................  $  0.02    $(0.11)   $ (0.31)   $  (2.71)   $  (0.73)
                                    =======    ======    =======    ========    ========
  Diluted.........................  $    --    $(0.11)   $ (0.31)   $  (2.71)   $  (0.73)
                                    =======    ======    =======    ========    ========
Shares used in computing net
  income (loss) per share(1):
  Basic...........................    3,600     3,600      4,080       8,452      33,286
  Diluted.........................   19,972     3,600      4,080       8,452      33,286
</Table>

---------------
(1) See Notes 1 and 7 to the Consolidated Financial Statements for a detailed
    explanation of the determination of the shares used in computing basic and
    diluted net income (loss) per share.

<Table>
<Caption>
                                                        DECEMBER 31,
                                      -------------------------------------------------
                                       1997      1998      1999       2000       2001
                                      ------    ------    -------    -------    -------
                                                       (IN THOUSANDS)
<S>                                   <C>       <C>       <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
  short-term investments............  $2,820    $3,985    $ 6,139    $66,677    $50,065
Working capital.....................   2,986     4,881      7,875     73,761     58,176
Total assets........................   5,139     8,107     12,142     88,525     69,376
Long-term liabilities, less current
  portion...........................      --        68        317        181        182
Mandatorily redeemable convertible
  preferred stock...................   3,416     6,115      9,835         --         --
Total stockholders' equity..........     565       994        396     82,499     65,950
</Table>

                                        10
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     When used in this discussion, the words "expects," "anticipates,"
"believes", "estimates," "plans," and similar expressions are intended to
identify forward-looking statements. These statements, which include statements
as to critical accounting policies, our sources of revenue, anticipated revenue
levels, our profitability, the fluctuation of our cost of revenues as a
percentage of revenues, our net losses, the amount and mix of our anticipated
expenditures and expenses, increase or decrease of our expenses in absolute
dollars or as a percentage of revenue, our plans to expand our product
development efforts, our reliance on our OPMS products, our success being tied
to relationships with key customers, our plans to expand our operations
domestically and internationally, our plans to hire additional employees, our
deferred stock-based compensation, the adequacy of our capital resources, our
plans in China, the impact of recent accounting pronouncements, period-to-period
comparisons of our operating results, our ability to obtain raw materials and
components and maintain and develop supplier relationships, our ability to
establish and maintain relationships with key customers, our plans to expand our
manufacturing capacity, our ability to maintain appropriate inventory, factors
that affect a customer's decision to choose a supplier, our exposure to currency
rate fluctuations, our need for additional financing, investments of our
existing cash, our exposure to interest rate risk, and the continued
denomination of our international revenues in predominately United States
dollars, 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 below, as well as
competition including the impact of competitive products and pricing, timely
design acceptance by our customers, our success attracting new customers, our
customers adopting our new products, timely introduction of new technologies,
our ability to ramp new products into volume production, our ability to attract
and retain highly skilled personnel, industry wide shifts in supply and demand
for optical components and modules, industry overcapacity, financial stability
in foreign markets and the matters discussed in "Factors That May Affect
Results." 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
Consolidated Financial Statements and Notes thereto.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     Management's discussion and analysis of our financial conditions and
results of operations are based on our 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 form these
estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect management's
more significant judgments and estimates used in the preparation of the
Company's Consolidated Financial Statements:

     We recognize revenues upon the shipment of our products to our customers
provided that we have received a purchase order, the price is fixed, and the
collection of the resulting receivable is probable. Subsequent to the sale of
the products, we have no obligation to provide any modification or
customization, upgrades, enhancements, or post-contract customer support.

                                        11
<PAGE>

     We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

     Our inventory write-downs for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market values are based on assumptions about future demand and market
conditions. If actual demand or market conditions are less favorable than those
projected by management, additional inventory write-downs may be required. Based
on reduced demand and revenue projections for our DWDM-related products, we took
a charge of $6.5 million for excess DWDM inventory in the quarter ended June 30,
2001.

     We review the valuation of long-lived assets and assess the impairment of
the assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable due to: significant underperformance
relative to expected or historical or projected future operating results;
significant changes in the manner of our use of the assets or the strategy for
the overall business; and significant negative industry or economic trends. When
we determine that the carrying value of long-lived assets may not be recoverable
based on the existence of one or more of the above indicators of impairment, we
measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk
inherent in our current business model. In the second quarter ended June 30,
2001, we recorded an impairment charge of $5.2 million for the property and
equipment used to manufacture our DWDM-related products.

     We estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in our Consolidated Balance
Sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations. To
date, we have recorded a full allowance against our deferred tax assets.

OVERVIEW

     We were founded in December 1995 and commenced operations to design,
manufacture and market fiber optic interconnect products, which we called our
Optical Path Integration Solution, or OPIS, products, recently renamed to
Optical Path Management Solution, or OPMS. We also distributed a cable
television transmission product line, which we discontinued in 1997. Since 1997,
we have broadened our OPMS product line which now includes attenuators and fused
fiber products. Most of these new products were introduced between 1997 and
2000. In early 1999, we started developing our dense wavelength division
multiplexing, or DWDM, and other wavelength management products, forming a new
product line based in part on our proprietary technology. We started selling our
DWDM devices in July 2000. Since introduction, sales of DWDM-related products
have fluctuated with the overall market for these products.

     From our inception through December 31, 2001, we derived substantially all
of our revenues from our OPMS product line. Our DWDM-related products
contributed revenues of $1.9 million and $1.8 million for the years ended
December 31, 2000 and 2001, respectively. In the years ended December 31, 2000
and 2001, our top 10 customers comprised 45.5% and 35.5% of our revenues,
respectively, and no individual customer accounted for 10% or more of our
revenues in either 2000 or 2001. One customer accounted for 11.2% of our
revenues in the year ended December 31, 1999.

     We market and sell our products predominantly through our direct sales
force, which we began building in early 1998. Although we derived a significant
portion of our revenues between 1996 and 1998 from overseas customers, an
increasing percentage of our sales since early 1999 have been in North America.
The percentages of our revenues derived from sales outside of North America were
28.7%, 20.9%, and 17.8% in the years ended December 31, 1999, 2000 and 2001,
respectively.

                                        12
<PAGE>

     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:

     - changes in manufacturing volume;

     - 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. We plan to expand our product development efforts, and expect our
research and development expenses to increase in absolute dollars in the
foreseeable future.

     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 expand 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 any increased
expenditures will result in higher revenues. In addition, we believe our future
success depends upon establishing successful relationships with a variety of key
customers. We believe that continued investment in sales and marketing functions
is critical to our success and expect these expenses to increase in absolute
dollars in the foreseeable future.

     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. We expect these expenses to increase in absolute dollars as we continue
to incur costs related to the growth of our business and our operations.

     In connection with the grant of stock options to employees and consultants,
we recorded deferred stock-based compensation of approximately $24.4 million in
stockholders' equity through December 31, 2001, representing the difference
between the estimated fair market value of our common stock and the exercise
price of these options at the date of grant. Deferred stock-based compensation
is being amortized using the graded vesting method, under which each option
grant is separated into portions based on its vesting terms which results in
acceleration of amortization expense for the overall award. We expect that the
deferred stock-based compensation balance of $7.3 million as of December 31,
2001 will be amortized on an accelerated basis over the vesting periods of the
option grants, which are generally four years. Accordingly, we expect non-cash
compensation expense, which was $7.1 million in the year ended December 31,
2001, to decrease in future periods.

     In July 2000, we issued 4,700,000 shares of Series C convertible preferred
stock at a price of $5.50 per share. The difference between the issuance price
and the deemed fair value of the preferred stock on the date of the transaction
resulted in a deemed preferred stock dividend, which was fully recognized in the
quarter ended September 30, 2000.

     In November 2000, we completed our initial public offering by issuing
4,500,000 shares of common stock at a price of $11.00 per share. The proceeds of
the offering, net of costs associated with the registration and issuance of the
shares, totaled $44.4 million. Subsequent to the offering and in accor-

                                        13
<PAGE>

dance with the terms of the agreement with the underwriters, we repurchased
approximately 76,000 shares of common stock at an aggregate purchase price of
$782,000.

     In October 1997, we acquired 97% of the outstanding common stock of
Transian Technology Ltd. Co. ("Transian"), a Taiwan corporation, for $512,000 to
expand our design and manufacturing capacity. In April 1998, we invested an
additional $152,000 in cash in Transian, increasing our ownership to 98.5% of
the common stock of Transian.

     In August 2001, we repurchased 199,000 shares of our common stock from John
M. Harland when he resigned as our chief financial officer. The 199,000 shares
represent the unvested portion of a stock option grant that Mr. Harland early
exercised in July 2000. We issued a promissory note in the principle amount of
$330,000 to Mr. Harland in connection with such early exercise. In August the
note was extended and will become due and payable in full in May 2002. The
promissory note is secured by 131,000 shares of our common stock and bears
interest at 7.00% per year.

     In December 2000, we established a subsidiary, Alliance Fiber Optic
Products, under the laws of the People's Republic of China. The subsidiary will
be developed as a manufacturing facility to support our expanding manufacturing
operations for both our OPMS and DWDM-related products.

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.

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                              1999     2000      2001
                                                              -----    -----    ------
<S>                                                           <C>      <C>      <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues....................................................  100.0%   100.0%    100.0%
Cost of revenues:...........................................   64.7     60.2     125.6
  Non-cash compensation expense.............................    0.3      4.3       8.0
                                                              -----    -----    ------
          Total cost of revenues............................   65.0     64.5     133.7
                                                              -----    -----    ------
  Gross profit (loss).......................................   35.0     35.5     (33.7)
                                                              -----    -----    ------
Operating expenses:
  Research and development..................................   20.3     19.3      35.2
  Non-cash compensation expense.............................    0.8     10.3      15.7
                                                              -----    -----    ------
          Total research and development....................   21.1     29.6      50.9
  Sales and marketing.......................................   12.8      8.9      13.3
  Non-cash compensation expense.............................    1.0      2.0       3.3
                                                              -----    -----    ------
          Total sales and marketing.........................   13.8     10.9      16.6
  General and administrative................................   12.9     10.3      19.7
  Non-cash compensation charge..............................    6.4     24.5       7.7
                                                              -----    -----    ------
          Total general and administrative..................   19.3     34.8      27.4
                                                              -----    -----    ------
          Total operating expenses..........................   54.2     75.3      94.9
                                                              -----    -----    ------
Loss from operations........................................  (19.2)   (39.8)   (128.6)
Interest and other income, net..............................    1.5      5.0      11.3
                                                              -----    -----    ------
Loss before income taxes....................................  (17.7)   (34.8)   (117.3)
Income tax provision (benefit)..............................   (0.9)     1.7       1.1
                                                              -----    -----    ------
Net loss....................................................  (16.8)%  (36.5)%  (118.4)%
                                                              =====    =====    ======
</Table>

YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

     Revenues. Revenues were $7.6 million, $22.2 million, and $20.4 million for
the years ended December 31, 1999, 2000 and 2001, respectively. Revenues
increased 194% from 1999 to 2000

                                        14
<PAGE>

because of an increase of $12.7 million in sales of our OPMS products, as well
as $1.9 million of initial sales of our wavelength management products. Revenue
declined 8% from 2000 to 2001 due to an overall slowdown in the
telecommunications industry and decreased sales of our OPMS products.

     Gross Profit (Loss). Gross profit, including non-cash compensation expense,
increased from $2.6 million, or 35.0% of revenues in 1999, to $7.9 million, or
35.5% of revenues in 2000, but decreased to a loss of $6.9 million, or negative
33.7% of revenues, in 2001. Excluding non-cash compensation expense, gross
profit increased from $2.7 million, or 35.3% of revenues in 1999, to $8.8
million, or 39.8% of revenues in 2000, but decreased to a loss of $5.2 million,
or negative 25.6% of revenues, in 2001. As a percentage of revenues, the
increase in gross profit from 1999 to 2000, excluding non-cash compensation
expense, was primarily the result of manufacturing economies of scale resulting
from higher production volumes of our OPMS products, partially offset by
start-up manufacturing costs in the introduction of DWDM-related products. The
decrease in gross profit from 2000 to 2001, as a percentage of revenues, was due
to a $6.5 million inventory write-off of mainly DWDM products, a $5.2 million
fixed asset impairment in conjunction with the DWDM inventory write-off, and
lower-than-anticipated sales of DWDM-related products. In the year ended
December 31, 2001, the decrease in gross profit in DWDM-related products was
partially offset by an increase in gross profit in our OPMS products. Of fourth
quarter 2001 sales, proceeds of $117,000 was from the sales of DWDM inventory
with original cost of approximately $1.0 million previously reserved for and
accordingly, $1.0 million of the related inventory reserve was reversed. We
expect our gross profit as a percentage of revenues to be negatively impacted in
the near term due to low production volumes and ramp up costs associated with
our new DWDM-related products.

     Research and Development Expenses. Research and development expenses,
including non-cash compensation expense, increased from $1.6 million, or 21.1%
of revenues, in 1999 to $6.6 million, or 29.6% of revenues, in 2000, and
increased to $10.4 million, or 50.9% of revenues, in 2001. Excluding non-cash
compensation expense, research and development expenses increased from $1.5
million, or 20.3% of revenues, in 1999 to $4.3 million, or 19.3% of revenues, in
2000, and increased to $7.2 million, or 35.2% of revenues, in 2001. Excluding
non-cash compensation expense, these increases in absolute dollars were
primarily due to costs related to the development of additional OPMS products,
increases in the number of research and development personnel and related costs,
and development and pilot production costs for our new DWDM-related products. We
expect our research and development expenses to continue to increase in absolute
dollars in the foreseeable future.

     Sales and Marketing Expenses. Sales and marketing expenses, including
non-cash compensation expense, increased from $1.0 million, or 13.8% of
revenues, in 1999 to $2.4 million, or 10.9% of revenues, in 2000, and increased
to $3.4 million, or 16.6% of revenues, in 2001. Excluding non-cash compensation
expense, sales and marketing expenses increased from $968,000, or 12.8% of
revenues, in 1999 to $2.0 million, or 8.9% of revenues, in 2000, and increased
to $2.7 million, or 13.3% of revenues, in 2001. The increases in absolute
dollars, as well as the percentage of revenue increase from 2000 to 2001, were
attributable primarily to expansion of our sales and marketing efforts that
resulted in an increase in marketing and advertising expenses. As a percentage
of revenue, the decrease in sales and marketing expenses from 1999 to 2000 was
primarily due to economies of scale. We expect our sales and marketing expenses
to continue to increase in absolute dollars in the foreseeable future.

     General and Administrative Expenses. General and administrative expenses,
including non-cash compensation expense, increased from $1.5 million, or 19.3%
of revenues, in 1999 to $7.7 million, or 34.8% of revenues in 2000, but
decreased to $5.6 million, or 27.4% of revenues, in 2001. Excluding non-cash
compensation, general and administrative expenses increased from $975,000, or
12.9% of revenues, in 1999 to $2.3 million, or 10.3% of revenues, in 2000 to
$4.0 million, or 19.7% of revenues, in 2001. These increases in absolute dollars
were primarily due to hiring additional personnel and associated expenses
necessary to manage and support our increased scale of operations. The decrease
in general and administrative expenses as a percentage of revenue from 1999 to
2000 was primarily due to economies of scale, and the increase from 2000 to 2001
was mainly due to the increased scale of our

                                        15
<PAGE>

operations. We expect our general and administrative expenses to continue to
increase in absolute dollars, but to decrease as a percentage of revenues, in
the foreseeable future.

     Interest and Other Income, Net. Interest and other income, net, was
$117,000, $1.1 million, and $2.3 million for the years ended December 31, 1999,
2000 and 2001, respectively. These amounts consisted primarily of interest
income, which fluctuated based on cash balances. The increase from 1999 to 2000
was the result of significantly higher average cash balances resulting from
proceeds from two private rounds of preferred stock financing and our initial
public offering of common stock. The increase from 2000 to 2001 was due to
interest earned from significant investments in municipal bonds and corporate
debt obligations during fiscal year 2001.

     Income Taxes. Income taxes included a benefit of $67,000 in the year ended
December 31, 1999, and expenses of $396,000 and $223,000 in the years ended
December 31, 2000 and 2001, respectively. The income tax benefit in 1999 was
based primarily on recovering income taxes paid in previous years. The income
tax expenses in 2000 and 2001 were primarily the result of non-cash compensation
charges that are not deductible for income tax purposes resulting in taxable
income.

     As of December 31, 2001, the Company had approximately $8.5 million and
$4.7 million of net operating loss carryforwards for federal and state tax
purposes, respectively, which will expire in 2021 for federal and in 2011 for
state purposes, if not utilized.

     Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of the assets is more likely
than not. Based upon the weight of available evidence, which included our
historical operating performance and our cumulative net losses, we have provided
a full valuation allowance against our net deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have financed our operations primarily through private
sales of convertible preferred stock and bank debt. Additionally, in November
2000, we completed our initial public offering of common stock, raising $44.4
million, net of costs and expenses. At December 31, 2001, we had cash and cash
equivalents of $16.9 million and short-term investments of $33.1 million.

     Net cash used in operating activities was $1.0 million in 1999, $3.6
million in 2000, and $12.8 million in 2001. Net cash used in 1999 and 2000 was
primarily the result of our net loss, which was partially offset by non-cash
charges, and an increase in working capital requirements caused by increasing
revenue and the related expansion of our operations. In 2001, our net loss of
$24.1 million included non-cash charges of $19.2 million, primarily related to
non-cash compensation expense of $7.1 million, depreciation of $424,000,
impairment of property and equipment related to DWDM production of $5.2 million,
and an inventory reserve of mainly DWDM-related products of $6.5 million. The
net result was $4.9 million of cash used. Accounts receivable decreased by $2.6
million, due primarily to better collection of the receivables and decreasing
sales, and inventory increased by $7.2 million due to a further slowdown in
market demand. Along with the $2.1 million increase in payables and the $552,000
increase in accrued expenses, the net cash used in operating activities in 2001
totaled $12.8 million, $9.2 million more than cash used in 2000 in operating
activities.

     Cash used in investing activities was $862,000 in 1999, $31.2 million in
2000, and $13.2 million in 2001. In 1999, all of the cash was used to acquire
property and equipment. In 2000, $7.0 million was spent to acquire property and
equipment and $24.2 million was invested in short-term securities. In 2001, $4.4
million was used for property and equipment and $8.8 million was used to
purchase high-grade, short-term securities.

     Cash generated by financing activities was $4.1 million in 1999, $71.1
million in 2000, and $467,000 in 2001. Cash generated by financing activities in
1999 resulted primarily from the sale of Series B convertible preferred stock
and borrowings of $295,000 under our bank lending facility. Cash generated by
financing activities in 2000 included $27.4 million generated by the sale of
Series C preferred stock and $44.4 million from the sale of common stock in our
initial public offering. Cash

                                        16
<PAGE>

generated by financing activities in 2001 was comprised of proceeds from the
exercise of options to purchase shares of our common stock as well as common
stock purchased through our Employee Stock Purchase Plan.

     We entered into loan facilities in July 1999 and January 2000 with Silicon
Valley Bank for a maximum of $800,000, which was drawn down during the course of
fiscal years 1999 and 2000. We repaid these loans with a portion of the proceeds
of our initial public offering. These facilities were closed as of December 31,
2001. In July 2000, we arranged an additional facility with Silicon Valley Bank
in the form of a $641,000 letter of credit to secure a building lease. During
2001, the Silicon Valley Bank letter of credit was replaced by a letter of
credit issued by UBS PaineWebber Inc. for the same amount. The letter of credit
restricts our ability to use the $641,000 that secures the line of credit. The
restricted cash will be forfeited if we default under the lease the letter of
credit secures.

     In July and December 2000, we entered into leases for 10,500 and 10,600
square feet of space, respectively, near our existing facility in Sunnyvale,
California. Additionally, in December 2000, the Company purchased approximately
8,200 square feet of space immediately adjacent to our leased facility in
Tu-Cheng City, Taiwan for $797,000. In April 2001 we entered into a lease in
mainland China but cancelled it, without penalty, in the third quarter of 2001.
As of December 31, 2001, we had a lease for a facility of approximately 12,000
square feet in the Shenzhen area of China that will expire in December 2002. The
future minimum lease payments under our operating leases are as follows (in
thousands):

<Table>
<Caption>
              YEARS ENDING DECEMBER 31,
              -------------------------
<S>                                                     <C>
  2002................................................  $1,802
  2003................................................   1,883
  2004................................................   1,055
                                                        ------
          Total.......................................  $4,740
                                                        ======
</Table>

     Our principal source of liquidity as of December 31, 2001 consisted of
$50.1 million in cash and cash equivalents and interest bearing marketable
securities. As of December 31, 2001, we had $641,000 in restricted cash securing
a letter of credit for the lease of our headquarters.

     We believe that our current cash, cash equivalents, short-term investments,
and credit line 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 potential acquisitions, may require
additional funding. If cash generated from operations is insufficient to satisfy
our long-term liquidity requirements, we may need to raise capital through
additional equity or debt financings or additional credit facilities. 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 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, which could harm our business,
financial condition and operating results.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 established new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the FASB deferred the effective date of SFAS No. 133 until the
first quarter for fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities -- An Amendment of FASB Statement

                                        17
<PAGE>

No. 133." SFAS No. 138 amended the accounting and reporting standards for
certain derivatives and hedging activities such as net settlement contracts,
foreign currency transactions and intercompany derivatives. The Company does not
currently hold derivative instruments or engage in hedging activities. We have
adopted SFAS Nos. 133 and 138 in the first quarter of fiscal year 2001 and such
adoption did not have a material effect on our Consolidated Financial
Statements.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B to defer the effective
date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000.
We adopted the provisions of SAB No. 101 in its Consolidated Financial
Statements for all years presented in this Report, and the adoption did not have
a material effect on our Consolidated Financial Statements.

     In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB No. 25." This Interpretation clarifies:

     - the definition of employee for purposes of applying APB No. 25;

     - the criteria for determining whether a plan qualifies as a
       noncompensatory plan;

     - the accounting consequence of various modifications to the terms of a
       previously fixed stock option or award;

     - and the accounting for an exchange of stock compensation awards in a
       business combination.

     The adoption of FIN No. 44 did not have a significant effect on the
Company's Consolidated Financial Statements.

     In June 2001, the FASB issued two Statements: SFAS No. 141, "Business
Combinations"; and SFAS No. 142, "Goodwill and Other Intangible Assets". The
Statements:

     - Prohibit the use of the pooling-of-interest method. All business
       combinations must be accounted for using the purchase method of
       accounting.

     - Establish a new accounting standard for goodwill acquired in a business
       combination. Goodwill will continue to be recognized as an asset but will
       not be amortized as currently required by APB No. 17, "Intangible
       Assets."

     - Establish a new method of testing goodwill for impairment. Goodwill must
       be separately tested for impairment on an annual basis using a
       fair-value-based approach. Goodwill must be tested for impairment at a
       level referred to as a reporting unit, which is the same level as, or one
       level below, an operating segment.

     SFAS No. 141 applies to all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. We do not expect either SFAS No. 141 or SFAS No. 142 to have a material
effect on our Consolidated Financial Statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Asset". SFAS No. 144 clarifies and further
defines the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144
does not apply to goodwill and other intangible assets that are not amortized.
We will adopt SFAS No. 144 in the first quarter of 2002. The adoption of this
statement is not expected to have a material effect on our Consolidated
Financial Statements.

                                        18
<PAGE>

                        FACTORS THAT MAY AFFECT RESULTS

WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUES IN THE FUTURE TO ACHIEVE AND SUSTAIN PROFITABILITY.

     We incurred operating losses of approximately $4.1 million, $8.8 million
and $26.2 million in fiscal year 1999, 2000 and 2001, respectively, and expect
that our net losses and negative cash flows will continue for the foreseeable
future as we continue to invest in our business. As of December 31, 2001, we had
an accumulated deficit of approximately $33.7 million.

     Although we are currently experiencing decreased demand for our products
and are not currently expanding our manufacturing capacity, we are hopeful that
demand for our products will increase in the future. If this happens, we expect
to incur significant and increasing expenses for expansion of our manufacturing
operations, research and development, sales and marketing, and administration,
and in developing direct sales and distribution channels. Given our early stage
of development, our increasing operating expenses, the rate at which competition
in our industry intensifies, and the significant downturn in demand for our
products, we may not be able to adequately control our costs and expenses or
achieve or maintain adequate operating margins. As a result, to achieve and
maintain profitability, we will need to generate and sustain substantially
higher revenues while maintaining reasonable cost and expense levels. We may not
be able to achieve and sustain profitability on a quarterly or an annual basis.

OUR QUARTERLY AND ANNUAL FINANCIAL RESULTS HAVE HISTORICALLY FLUCTUATED DUE
PRIMARILY TO INTRODUCTION OF, DEMAND FOR, AND SALES OF OUR PRODUCTS, AND FUTURE
FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO DECLINE.

     We believe that period-to-period comparisons of our operating results are
not a good indication of our future performance. Our quarterly operating results
have fluctuated in the past and are likely to fluctuate significantly in the
future due to a number of factors. For example, the timing and expenses
associated with product introductions, the timing and extent of product sales,
the mix of products sold and significant decreases in the demand for our
products have caused our operating results to fluctuate in the past. Because we
incur operating expenses based on anticipated revenue trends, and a high
percentage of our expenses are fixed in the short term, any delay in generating
or recognizing revenues or any decrease in revenues could significantly harm our
quarterly results of operations. Other factors, many of which are more fully
discussed in other risk factors below, may also cause our results to fluctuate.
Many of the factors that may cause our results to fluctuate are outside of our
control. If our quarterly or annual operating results do not meet the
expectations of investors and securities analysts, the trading price of our
common stock could significantly decline.

OUR OPTICAL PATH MANAGEMENT SOLUTION (OPMS) PRODUCTS (FORMERLY KNOWN AS OPIS
PRODUCTS) HAVE HISTORICALLY REPRESENTED SUBSTANTIALLY ALL OF OUR REVENUES, AND
IF WE ARE UNSUCCESSFUL IN COMMERCIALLY SELLING OUR DWDM-RELATED PRODUCTS, OUR
BUSINESS WILL BE SERIOUSLY HARMED.

     Sales of our OPMS products accounted for over 90% of our revenues in the
fiscal year ended December 31, 2001 and substantially all of our historical
revenues. We expect to substantially depend on these products for our near-term
revenues. Any significant decline in the price of, or demand for, these
products, or failure to increase their market acceptance, would seriously harm
our business. In addition, we believe that our future growth and a significant
portion of our future revenues will depend on the commercial success of our
DWDM-related products, which we began shipping commercially in July 2000. Demand
for these products declined sharply during the second quarter of 2001, and
continued to decline in the third quarter of 2001. Although DWDM-related product
revenue appears to have increased in the fourth quarter of 2001, this increase
was due to the sale of $117,000 of DWDM inventory, with original cost of
approximately $1.0 million, previously reserved for. Without this sale of
reserved inventory, DWDM-related revenue would have declined in the fourth
quarter. Based on the reduced demand and reduced revenue projections for this
product line, we took a charge of $6.5 million against excess DWDM-related
inventory in the quarter ended June 30, 2001. In addition, during the second
quarter of 2001, we recorded an impairment charge of $5.2 million for the
property and equipment used to manufacture our

                                        19
<PAGE>

DWDM-related products. If demand does not increase and our target customers do
not adopt and purchase our DWDM-related products, our revenues may decline
further and we may have to write-off additional inventory currently on our
books.

WE MAY EXPERIENCE A DECREASE IN MARKET DEMAND DUE TO A RECESSION IN THE UNITED
STATES AS THE SLUMPING ECONOMY IS FURTHER STYMIED BY THE RECENT OUTBREAK OF
INTERNATIONAL TERRORISM, WAR AND POLITICAL INSTABILITY.

     The United States economy experienced a significant slowdown in consumption
and demand for most of 2001. The September 11, 2001 terrorist attacks could have
contributed to the further slowdown of the already slumping market demand for
goods, including fiber optics equipment. We may experience further decreases in
the demand for our products due to a recession as the fiber optics industry
copes with the effects of terrorism, war and political instability. Even if the
general economy experiences a mild recovery, the activity of United States
telecommunications industry may lag behind the recovery of the overall United
States economy.

WE MAY NOT BE ABLE TO MAINTAIN OUR LISTING ON THE NASDAQ NATIONAL MARKET AND IF
WE FAIL TO DO SO, THE PRICE AND LIQUIDITY OF OUR COMMON STOCK MAY DECLINE.

     The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of common stock on The Nasdaq National Market. The current
requirements affecting us include (i) having net tangible assets of at least $4
million and (ii) maintaining a minimum bid price per share of $1. As of December
31, 2001 we were in compliance with all Nasdaq National Market listing
requirements. However, there were instances during the third and fourth quarters
of 2001 when the closing bid price per share of our common stock was below $1.
Although our bid price has been equal to or above $1 per share since November
12, 2001, if the bid price of our common stock price again slips below $1 per
share for more than 60 days, our common stock may not remain listed on The
Nasdaq National Market. Also, effective November 1, 2002, we will also have to
comply with the Nasdaq National Market's revised quantitative maintenance
criteria including a new minimum requirement of $10 million in stockholders'
equity. There can be no assurance that we will be able to comply with the
quantitative maintenance criteria or any of The Nasdaq National Market's rules
in the future. If we fail to maintain continued listing on the Nasdaq National
Market and must move to a market with less liquidity, our financial condition
could be harmed and our stock price would likely decline. If we are delisted, it
could have a material adverse effect on the market price of, and the liquidity
of the trading market for, our common stock.

IF WE CANNOT ATTRACT MORE OPTICAL COMMUNICATIONS EQUIPMENT MANUFACTURERS TO
PURCHASE OUR PRODUCTS, WE MAY NOT BE ABLE TO INCREASE OR SUSTAIN OUR REVENUES.

     Our future success will depend on our ability to migrate existing customers
to our new products and our ability to attract additional customers. Some of our
present customers are relatively new companies. The growth of our customer base
could be adversely affected by:

     - customer unwillingness to implement our products;

     - any delays or difficulties that we may incur in completing the
       development and introduction of our planned products or product
       enhancements;

     - the success of our customers;

     - new product introductions by our competitors;

     - any failure of our products to perform as expected; or

     - any difficulty we may incur in meeting customers' delivery requirements
       or product specifications.

     The downturn in the economy has affected the telecommunications industry.
Telecommunications companies have cut back on their capital expenditure budgets,
which has and may continue to further decrease demand for equipment and parts,
including our products. This decrease has had and may

                                        20
<PAGE>

continue to have an adverse effect on the demand for fiber optic products and
negatively impact the growth of our customer base.

THE MARKET FOR FIBER OPTIC COMPONENTS IS INCREASINGLY COMPETITIVE, AND IF WE ARE
UNABLE TO COMPETE SUCCESSFULLY OUR REVENUES COULD DECLINE.

     The market for fiber optic components is intensely competitive. We believe
that our principal competitors are the major manufacturers of optical components
and integrated modules, including vendors selling to third parties and business
divisions within communications equipment suppliers. Our principal competitors
in the components market include Avanex, Corning, DiCon Fiberoptics, Gould, JDS
Uniphase, Lucent, Luminent (merged into MRV Communications, Inc.), New Focus,
Nortel, Oplink, Stratos Lightwave and Tyco Electronics. We believe that we
primarily compete with diversified suppliers for the majority of our product
line and to a lesser extent with niche companies that offer a more limited
product line. Competitors in any portion of our business may also rapidly become
competitors in other portions of our business. In addition, our industry has
recently experienced significant consolidation, and we anticipate that further
consolidation will occur. This consolidation has further increased competition.

     Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing, manufacturing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, to
devote greater resources to the development, promotion and sale of products, to
negotiate lower prices on raw materials and components, or to deliver
competitive products at lower prices.

     Several of our existing and potential customers are also current and
potential competitors of ours. These companies may develop or acquire additional
competitive products or technologies in the future and subsequently reduce or
cease their purchases from us. In light of the consolidation in the optical
networking industry, we also believe that the size of suppliers will be an
increasingly important part of a purchaser's decision-making criteria in the
future. We may not be able to compete successfully with existing or new
competitors, nor can we ensure that the competitive pressures we face will not
result in lower prices for our products, loss of market share, or reduced gross
margins, any of which could harm our business.

     New and competing technologies are emerging due to increased competition
and customer demand. The introduction of products incorporating new or competing
technologies or the emergence of new industry standards could make our existing
products noncompetitive. For example, there are technologies for the design of
wavelength division multiplexers that compete with the technology that we
incorporate in our products. If our products do not incorporate technologies
demanded by customers, we could lose market share causing our business to
suffer.

IF WE FAIL TO EFFECTIVELY MANAGE OUR OPERATIONS, SPECIFICALLY GIVEN THE RECENT
SUDDEN AND DRAMATIC DOWNTURN IN DEMAND FOR OUR PRODUCTS, OUR OPERATING RESULTS
COULD BE HARMED.

     We rapidly expanded our operations domestically and internationally in the
final two quarters of 2000. We had to carefully manage and re-evaluate this
expansion given the sudden and dramatic downturn in demand for our products
experienced in 2001. Additionally, we implemented a reduction in force to reduce
employees during the second and third quarter of 2001 to match our operations to
this decreased demand for our products. As of December 31, 2001, we had a total
of 149 full-time employees in Sunnyvale, California, 202 full-time employees in
Taiwan, and 25 full-time employees in China. Matching the scale of our
operations with the recent demand fluctuations, combined with the challenges of
expanding and managing geographically dispersed operations, has placed, and will
continue to place, a significant strain on our management and resources. To
manage the expected fluctuations in our operations and personnel, we will be
required to:

     - improve existing and implement new operational, financial and management
       controls, reporting systems and procedures;

                                        21
<PAGE>

     - hire, train, motivate and manage additional qualified personnel,
       especially if we experience a significant increase in demand for our
       products;

     - effectively expand or reduce our manufacturing capacity, attempting to
       adjust it to customer demand; and

     - effectively manage relationships with our customers, suppliers,
       representatives and other third parties.

     In addition, we will need to coordinate our domestic and international
operations and establish the necessary infrastructure to implement our
international strategy. If we are not able to manage our growth in an efficient
and timely manner, our business will be severely harmed.

     Our success also depends, to a large degree, on the efficient and
uninterrupted operation of our facilities. We have expanded our manufacturing
facilities in Taiwan and manufacture many of our products there. Although we
terminated the lease for our China manufacturing site, recently we established a
new facility in China. There is significant political tension between Taiwan and
China. If there is an outbreak of hostilities between Taiwan and China, our
manufacturing operations may be disrupted or we may have to relocate our
manufacturing operations. Tensions between Taiwan and China may also affect our
training facility in China. We plan to lease additional facilities, as
necessary, to support our growth. Relocating a portion of our employees could
cause temporary disruptions in our operations and divert management's attention.
Because of past shortages of office and manufacturing space in Northern
California, we cannot assure you that we will be able to locate suitable space
on acceptable terms or at all in the future.

BECAUSE OF THE TIME IT TAKES TO DEVELOP FIBER OPTIC COMPONENTS, WE INCUR
SUBSTANTIAL EXPENSES FOR WHICH WE MAY NOT EARN ASSOCIATED REVENUES.

     The development of new or enhanced fiber optic products is a complex and
uncertain process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent the development, introduction or
marketing of new products and enhancements. Development costs and expenses are
incurred before we generate revenues from sales of products resulting from these
efforts. Our total research and development expenses, excluding non-cash
compensation expenses, were approximately $1.5 million, $4.3 million and $7.2
million for the fiscal years 1999, 2000 and 2001, respectively. We intend to
continue to invest a substantial amount of funds in our research and product
development efforts, which could have a negative impact on our earnings in
future periods.

IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE
MARKET ACCEPTANCE, SALES OF OUR FIBER OPTIC COMPONENTS COULD DECLINE, WHICH
COULD REDUCE OUR REVENUES.

     The communications industry is characterized by rapidly changing
technology, frequent new product introductions, changes in customer
requirements, evolving industry standards and, more recently, significant
variations in customer demand. Our future success depends on our ability to
anticipate market needs and develop products that address those needs. As a
result, our products could quickly become obsolete if we fail to predict market
needs accurately or develop new products or product enhancements in a timely
manner. Our failure to predict market needs accurately or to develop new
products or product enhancements in a timely manner will harm market acceptance
and sales of our products. If the development or enhancement of these products
or any other future products takes longer than we anticipate, or if we are
unable to introduce these products to market, our sales will not increase. Even
if we are able to develop and commercially introduce them, these new products
may not achieve the widespread market acceptance necessary to provide an
adequate return on our investment.

                                        22
<PAGE>

THE OPTICAL NETWORKING COMPONENT INDUSTRY HAS IN THE PAST, IS NOW, AND MAY IN
THE FUTURE EXPERIENCE DECLINING AVERAGE SELLING PRICES, WHICH COULD CAUSE OUR
GROSS MARGINS TO DECLINE.

     The optical networking component industry has in the past experienced
declining average selling prices as a result of increasing competition and
greater unit volumes as communication service providers continue to deploy fiber
optic networks. Average selling prices are currently decreasing and may continue
to decrease in the future in response to product introductions by competitors,
price pressures from significant customers, greater manufacturing efficiencies
achieved through increased automation in the manufacturing process and inventory
build-up due to decreased demand. Average selling price declines may contribute
to a decline in our gross margins, which could harm our results of operations.

WE WILL NOT ATTRACT NEW ORDERS FOR OUR FIBER OPTIC COMPONENTS UNLESS WE CAN
DELIVER SUFFICIENT QUANTITIES OF OUR PRODUCTS TO OPTICAL COMMUNICATIONS
EQUIPMENT MANUFACTURERS.

     Communications service providers and optical systems manufacturers
typically require that suppliers commit to provide specified quantities of
products over a given period of time. If we are unable to commit to deliver
quantities of our products to satisfy a customer's anticipated needs, we will
lose the order and the opportunity for significant sales to that customer for a
lengthy period of time. In addition, we would be unable to fill large orders if
we do not have sufficient manufacturing capacity to enable us to commit to
provide customers with specified quantities of products. However, if we build
our manufacturing capacity and inventory in excess of demand, as we have done in
the past, we may produce excess inventory that may have to be reserved.

WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES TO SUPPLY KEY MATERIALS,
COMPONENTS AND EQUIPMENT, SUCH AS FERRULES AND LENSES, AND IF WE ARE NOT ABLE TO
OBTAIN SUFFICIENT QUANTITIES OF THESE ITEMS AT ACCEPTABLE PRICES, OUR ABILITY TO
FILL ORDERS WOULD BE LIMITED AND OUR OPERATING RESULTS COULD BE HARMED.

     We depend on third parties to supply the raw materials and components we
use to manufacture our products. To be competitive, we must obtain from our
suppliers, on a timely basis, sufficient quantities of raw materials and
components at acceptable prices. We obtain most of our critical raw materials
and components from a single or limited number of suppliers and generally do not
have long-term supply contracts with them. As a result, our suppliers could
terminate the supply of a particular material or component at any time without
penalty. Finding alternative sources may involve significant expense and delay,
if these sources can be found at all. Difficulties in obtaining raw materials or
components in the future may delay or limit our product shipments, which could
result in lost orders, increase our costs, reduce our control over quality and
delivery schedules and require us to redesign our products. If a supplier became
unable or unwilling to continue to manufacture or ship materials or components
in required volumes, we would have to identify and qualify an acceptable
replacement. A delay or reduction in shipments or any need to identify and
qualify replacement suppliers would harm our business. All of our graded index,
or GRIN, lenses, which are incorporated into substantially all of our
filter-based DWDM products, are obtained from one supplier, Nippon Sheet Glass.

     We also depend on a limited number of manufacturers and vendors that make
and sell the complex equipment we use in our manufacturing process. In periods
of high market demand, the lead times from order to delivery of this equipment
could be significant. Delays in the delivery of this equipment or increases in
the cost of this equipment could harm our operating results.

BECAUSE WE EXPERIENCE LONG LEAD TIMES FOR MATERIALS AND COMPONENTS, WE MAY NOT
BE ABLE TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS, WHICH COULD HARM OUR
OPERATING RESULTS.

     Because we experience long lead times for materials and components and are
often required to purchase significant amounts of materials and components far
in advance of product shipments, we may not effectively manage our inventory
levels, which could harm our operating results. We recorded significant charges
for excess inventory in the quarter ended June 30, 2001. Alternatively, if we
underestimate our raw material requirements, we may have inadequate inventory,
which could result in delays in

                                        23
<PAGE>

shipments and loss of customers. If we purchase raw materials and increase
production in anticipation of orders that do not materialize or that shift to
another quarter, we will, as we have in the past, have to carry or write off
excess inventory and our gross margins will decline. Either situation could
cause our results of operations to be below the expectations of investors and
public market analysts, which could, in turn, cause the price of our common
stock to decline. The time our customers require to incorporate our products
into their own can vary significantly and generally exceeds several months,
which further complicates our planning processes and reduces the predictability
of our forecasts. Even if we receive these orders, the additional manufacturing
capacity that we add to meet our customer's requirements may be underutilized in
a subsequent quarter.

     In order to facilitate the rapid deployment of anticipated projects, our
customers have, in the past and may in the future, build significant inventory.
If, after building a significant inventory of our products, these projects are
delayed, our customers will be required to maintain a significant inventory of
our products for longer periods than they originally anticipated, which would
reduce further purchases by these customers of our products until deployment of
the delayed projects commences. These reductions, in turn, could cause
fluctuations in our future results of operations and severely harm our business
and financial condition.

WE DEPEND ON KEY PERSONNEL TO OPERATE OUR BUSINESS EFFECTIVELY IN THE RAPIDLY
CHANGING FIBER OPTIC COMPONENTS MARKET, AND IF WE ARE UNABLE TO HIRE AND RETAIN
APPROPRIATE MANAGEMENT AND TECHNICAL PERSONNEL, OUR ABILITY TO DEVELOP OUR
BUSINESS COULD BE HARMED.

     Our success depends to a significant degree upon the continued
contributions of the principal members of our technical sales, marketing,
engineering and management personnel, many of whom perform important management
functions and would be difficult to replace. We particularly depend upon the
continued services of our executive officers, particularly Peter Chang, our
President and Chief Executive Officer, David Hubbard, our Vice President, Sales
and Marketing, and other key engineering, sales, marketing, finance,
manufacturing and support personnel. In addition, we depend upon the continued
services of key management personnel at our Taiwanese subsidiary. None of our
officers or key employees is bound by an employment agreement for any specific
term, and may terminate their employment at any time. In addition, we do not
have "key person" life insurance policies covering any of our employees.

     In order to continue to expand our product offerings both in the United
States and abroad, we must hire a number of research and development personnel.
In addition, in order to continue strengthening our research and development
efforts in the United States, we must hire a significant number of additional
manufacturing and research development personnel. Hiring technical sales
personnel in our industry is very competitive due to the limited number of
people available with the necessary technical skills and understanding of our
technologies. Our ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining whether we will be successful
in the future. We may have difficulty hiring skilled engineers at our
manufacturing facility in Taiwan. If we are not successful in attracting,
assimilating or retaining qualified personnel to fulfill our current or future
needs, our business may be harmed.

IF WE ARE NOT ABLE TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS AND SUFFICIENT
PRODUCT RELIABILITY IN THE PRODUCTION OF OUR FIBER OPTIC COMPONENTS, WE MAY
INCUR INCREASED COSTS AND DELAYS IN SHIPPING PRODUCTS TO OUR CUSTOMERS, WHICH
COULD IMPAIR OUR OPERATING RESULTS.

     Complex and precise processes are required for the manufacture of our
products. Changes in our manufacturing processes or those of our suppliers, or
the inadvertent use of defective materials, could significantly reduce our
manufacturing yields and product reliability. Because the majority of our
manufacturing costs are relatively fixed, manufacturing yields are critical to
our results of operations. Lower than expected production yields could delay
product shipments and impair our operating results. We may not obtain acceptable
yields in the future.

                                        24
<PAGE>

     In some cases, existing manufacturing techniques, which involve substantial
manual labor, may not allow us to cost-effectively meet our production goals so
that we maintain acceptable gross margins while meeting the cost targets of our
customers. We will need to develop new manufacturing processes and techniques
that will involve higher levels of automation to increase our gross margins. We
may not achieve adequate manufacturing cost efficiencies.

     Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our product
development department to our manufacturing group and coordinate our efforts
with those of our suppliers to rapidly achieve volume production. In our
experience, our yields have been lower during the early stages of introducing
new product to manufacturing. If we fail to effectively manage this process or
if we experience delays, disruptions or quality control problems in our
manufacturing operations, our shipments of products to our customers could be
delayed.

BECAUSE THE QUALIFICATION AND SALES CYCLE ASSOCIATED WITH FIBER OPTIC COMPONENTS
IS LENGTHY AND VARIED, IT IS DIFFICULT TO PREDICT THE TIMING OF A SALE OR
WHETHER A SALE WILL BE MADE, WHICH MAY CAUSE US TO HAVE EXCESS MANUFACTURING
CAPACITY OR INVENTORY AND NEGATIVELY IMPACT OUR OPERATING RESULTS.

     In the communications industry, service providers and optical systems
manufacturers often undertake extensive qualification processes prior to placing
orders for large quantities of products such as ours, because these products
must function as part of a larger system or network. This process may range from
three to six months and sometimes longer. Once they decide to use a particular
supplier's product or component, these potential customers design the product
into their system, which is known as a design-in win. Suppliers whose products
or components are not designed in are unlikely to make sales to that customer
until at least the adoption of a future redesigned system. Even then, many
customers may be reluctant to incorporate entirely new products into their new
systems, as this could involve significant additional redesign efforts. If we
fail to achieve design-in wins in our potential customers' qualification
processes, we will lose the opportunity for significant sales to those customers
for a lengthy period of time.

     In addition, some of our customers require that our products be subjected
to standards-based qualification testing, which can take up to nine months or
more. While our customers are evaluating our products and before they place an
order with us, we may incur substantial sales and marketing and research and
development expenses, expend significant management efforts, increase
manufacturing capacity and order long lead-time supplies. Even after the
evaluation process, it is possible a potential customer will not purchase our
products. In addition, product purchases are frequently subject to unplanned
processing and other delays, particularly with respect to larger customers for
which our products represent a very small percentage of their overall purchase
activity. Accordingly, our revenues and operating results may vary significantly
and unexpectedly from quarter to quarter.

IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPTICAL NETWORKING COMPONENTS MAY BE DROPPED FROM SUPPLY PROGRAMS AND OUR
REVENUES MAY DECLINE.

     Customers generally will not purchase any of our products, other than
limited numbers of evaluation units, before they qualify our products, approve
our manufacturing process and approve our quality assurance system. Our existing
manufacturing lines, as well as each new manufacturing line, must pass through
various levels of approval with our customers. For example, customers may
require that we be registered under international quality standards. Our
products may also have to be qualified to specific customer requirements. This
customer approval process determines whether the manufacturing line achieves the
customers' quality, performance and reliability standards. Delays in product
qualification may cause a product to be dropped from a long-term supply program
and result in significant lost revenue opportunity over the term of that
program.

                                        25
<PAGE>

OUR FIBER OPTIC COMPONENTS ARE DEPLOYED IN LARGE AND COMPLEX COMMUNICATIONS
NETWORKS AND MAY CONTAIN DEFECTS THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS
HAVE BEEN INSTALLED, WHICH COULD DAMAGE OUR REPUTATION AND CAUSE US TO LOSE
CUSTOMERS.

     Our products are designed for deployment in large and complex optical
networks. Because of the nature of these products, they can only be fully tested
for reliability when deployed in networks for long periods of time. Our fiber
optic products may contain undetected defects when first introduced or as new
versions are released, and our customers may discover defects in our products
only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things:

     - loss of customers;

     - damage to our reputation;

     - failure to attract new customers or achieve market acceptance;

     - diversion of development and engineering resources; and

     - legal actions by our customers.

     The occurrence of any one or more of the foregoing factors could cause our
net loss to increase.

CURRENT AND FUTURE DEMAND FOR OUR PRODUCTS DEPENDS ON THE CONTINUED GROWTH OF
THE INTERNET AND THE COMMUNICATIONS INDUSTRY, WHICH IS EXPERIENCING RAPID
CONSOLIDATION, REALIGNMENT, OVERSUPPLY OF PRODUCT INVENTORY AND REDUCTION IN
DEMAND FOR FIBER OPTIC PRODUCTS.

     Our future success depends on the continued growth of the Internet as a
widely used medium for communications and commerce, and the growth of optical
networks to meet the increased demand for capacity to transmit data, or
bandwidth. If the Internet does not continue to expand as a medium for
communications and commerce, the need to significantly increase bandwidth across
networks and the market for fiber optic components may not continue to develop.
If this growth does not continue, sales of our products may continue to decline
and would adversely affect our revenues. Additionally, if growth in demand for
our products exceeds the demand for our customers' products, our customers may
experience an oversupply of inventory and decrease orders of our products.
Future demand for our products is uncertain and will depend heavily on the
continued growth and upgrading of optical networks, especially in the
metropolitan, last mile, and enterprise access segments of the networks. The
rate at which communication service providers and other fiber optic network
users have built new fiber optic networks or installed new systems in their
existing fiber optic networks has fluctuated in the past and these fluctuations
may continue in the future. These fluctuations may result in reduced demand for
new or upgraded fiber optic systems that utilize our products and, therefore,
may result in reduced demand for our products. Recent declines in the
development of new networks and installation of new systems have resulted in a
decrease in demand for our products, an increase in our inventory, and erosion
in the average selling prices.

     The communications industry is experiencing rapid consolidation and
realignment, as industry participants seek to capitalize on the rapidly changing
competitive landscape developing around the Internet and new communications
technologies such as fiber optic networks. As the communications industry
consolidates and realigns to accommodate technological and other developments,
our customers may consolidate or align with other entities in a manner that
results in a decrease in demand for our products.

                                        26
<PAGE>

THE MARKET FOR FIBER OPTIC COMPONENTS IS NEW AND UNPREDICTABLE, CHARACTERIZED BY
RAPID TECHNOLOGICAL CHANGES, EVOLVING INDUSTRY STANDARDS, AND SIGNIFICANT
CHANGES IN CUSTOMER DEMAND, WHICH COULD RESULT IN DECREASED DEMAND FOR OUR
PRODUCTS, EROSION OF AVERAGE SELLING PRICES, AND COULD NEGATIVELY IMPACT OUR
REVENUES.

     The market for fiber optic components is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is new, it is
difficult to predict its potential size or future growth rate. Widespread
adoption of optical networks, especially in the metropolitan, last mile, and
enterprise access segments of the networks, is critical to our future success.
Potential end-user customers who have invested substantial resources in their
existing copper lines or other systems may be reluctant or slow to adopt a new
approach, such as optical networks. Our success in generating revenues in this
emerging market will depend on:

     - the education of potential end-user customers and network service
       providers about the benefits of optical networks; and

     - the continued growth of the metropolitan, last mile, and enterprise
       access segments of the communications network.

If we fail to address changing market conditions, sales of our products may
decline, which would adversely impact our revenues.

IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
TO USE OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR
REVENUES OR INCREASE OUR COSTS.

     The fiber optic component market is a highly competitive industry in which
we, and most other participants, rely on a combination of patent, copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect proprietary rights. The competitive nature
of our industry, rapidly changing technology, frequent new product
introductions, changes in customer requirements and evolving industry standards
heighten the importance of protecting proprietary technology rights. Since the
United States Patent and Trademark Office keeps patent applications confidential
until a patent is issued, our pending patent applications may attempt to protect
proprietary technology claimed in a third party patent application. Our existing
and future patents may not be sufficiently broad to protect our proprietary
technologies as policing unauthorized use of our products is difficult and we
cannot be certain that the steps we have taken will prevent the misappropriation
or unauthorized use of our technologies, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as United States laws.
Our competitors may independently develop similar technology, duplicate our
products, or design around any of our patents or other intellectual property. If
we are unable to adequately protect our proprietary technology rights, others
may be able to use our proprietary technology without having to compensate us,
which could reduce our revenues and negatively impact our ability to compete
effectively.

     Litigation may be necessary to enforce our intellectual property rights or
to determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.

WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT ARE COSTLY
TO DEFEND AND COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE.

     Our industry is very competitive and is characterized by frequent
intellectual property litigation based on allegations of infringement of
intellectual property rights. Numerous patents in our industry have already been
issued, and as the market further develops and participants in our industry
obtain additional intellectual property protection, litigation is likely to
become more frequent. From time to time, third

                                        27
<PAGE>

parties may assert patent, copyright, trademark and other intellectual property
rights to technologies or rights that are important to our business. In
addition, we may in the future enter into agreements to indemnify our customers
for any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any litigation arising from claims
asserting that our products infringe or may infringe the proprietary rights of
third parties, whether the litigation is with or without merit, could be
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. We do not have insurance against our
alleged or actual infringement of intellectual property of others. These claims
could cause us to stop selling our products, which incorporate the challenged
intellectual property, and could also result in product shipment delays or
require us to redesign or modify our products or to enter into licensing
agreements. These licensing agreements, if required, would increase our product
costs and may not be available on terms acceptable to us, if at all.

     Although we are not aware of any intellectual property lawsuits filed
against us, we may be a party to litigation regarding intellectual property in
the future. We may not prevail in any such actions, given their complex
technical issues and inherent uncertainties. Insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. If there is a successful claim of infringement or we fail
to develop non-infringing technology or license the proprietary rights on a
timely basis, our business could be harmed.

IF WE FAIL TO INCREASE SALES OF OUR PRODUCTS TO OPTICAL COMMUNICATIONS EQUIPMENT
MANUFACTURERS OUTSIDE OF NORTH AMERICA, GROWTH OF OUR BUSINESS MAY BE HARMED.

     For the years ended December 31, 1999, 2000 and 2001, sales to customers
located outside of North America were 28.7%, 20.9%, and 17.8% of our revenues,
respectively. In order to expand our business, we must increase our sales to
customers located outside of North America. We have limited experience in
marketing and distributing our products internationally and in developing
versions of our products that comply with local standards. Our international
sales will be limited if we cannot establish relationships with international
distributors, establish additional foreign operations, expand international
sales channels, hire additional personnel and develop relationships with
international communications equipment manufacturers. Even if we are able to
successfully continue international operations, we may not be able to maintain
or increase international market demand for our products.

BECAUSE OUR MANUFACTURING OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE FAULT
ZONES IN CALIFORNIA AND TAIWAN, AND OUR TAIWAN LOCATION IS SUSCEPTIBLE TO THE
EFFECTS OF A TYPHOON, WE FACE THE RISK THAT A NATURAL DISASTER COULD LIMIT OUR
ABILITY TO SUPPLY PRODUCTS.

     Our primary manufacturing operations are located in Sunnyvale, California
and Tu-Cheng City, Taiwan, both active earthquake fault zones. These regions
have experienced large earthquakes in the past and may likely experience them in
the future. In September 2001, a typhoon hit Taiwan causing businesses,
including our manufacturing facility, and the financial markets to close for two
days. Because the majority of our manufacturing operations are located in
Taiwan, a large earthquake or typhoon in Taiwan could disrupt our manufacturing
operations for an extended period of time, which would limit our ability to
supply our products to our customers in sufficient quantities on a timely basis,
harming our customer relationships.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

     We currently maintain our funds primarily in money market funds and highly
liquid marketable securities. We do not have any derivative financial
instruments. As of December 31, 2001, $15.9 million, or 31.8% of our
investments, had maturities of less than three months. We will continue to
invest a significant portion of our existing cash in interest bearing,
investment grade securities, with maturities of less than 12 months. We do not
believe that our investments, in the aggregate, have significant exposure to
interest rate risk.

                                        28
<PAGE>

EXCHANGE RATE SENSITIVITY

     We currently have operations in the United States, Taiwan and China. The
functional currency of our subsidiaries in Taiwan and China are the local
currencies, and we are subject to foreign currency exchange rate fluctuations
associated with the translation to United States dollars. Though some expenses
are incurred by our Taiwan and China operations, substantially all of our sales
are made in United States dollars; hence, we have minimal exposure to foreign
currency rate fluctuations relating to sales transactions.

     While we expect our international revenues to continue to be denominated
predominately in United States dollars, an increasing portion of our
international revenues may be denominated in foreign currencies in the future.
In addition, we plan to continue to expand our overseas operations. As a result,
our operating results may become subject to significant fluctuations based upon
changes in exchange rates of certain currencies in relation to the United States
dollar. We will analyze our exposure to currency fluctuations and may engage in
financial hedging techniques in the future to attempt to minimize the effect of
these potential fluctuations; however, exchange rate fluctuations may adversely
affect our financial results in the future.

                                        29
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
CONSOLIDATED FINANCIAL STATEMENTS
  Report of Independent Accountants.........................   31
  Consolidated Balance Sheets as of December 31, 2000 and
     2001...................................................   32
  Consolidated Statements of Operations for each of the
     three years in the period ended December 31, 2001......   33
  Consolidated Statements of Stockholders' Equity for each
     of the three years in the period ended December 31,
     2001...................................................   34
  Consolidated Statements of Cash Flows for each of the
     three years in the period ended December 31, 2001......   35
  Notes to Consolidated Financial Statements................   36
FINANCIAL STATEMENT SCHEDULE
  For each of the three years in the period ended December
     31, 2001
  II -- Valuation and Qualifying Accounts...................   50
</Table>

                                        30
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Alliance Fiber Optic Products, Inc.

     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the consolidated
financial position of Alliance Fiber Optic Products, Inc. and its subsidiaries
at December 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California
January 25, 2002

                                        31
<PAGE>

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       2001
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 42,548   $ 16,947
  Short-term investments....................................    24,129     33,118
  Accounts receivable, net..................................     5,302      2,645
  Inventories, net..........................................     6,792      7,419
  Prepaid expense and other current assets..................       835      1,291
                                                              --------   --------
          Total current assets..............................    79,606     61,420
Property and equipment, net.................................     8,590      7,381
Other assets................................................       329        575
                                                              --------   --------
          Total assets......................................  $ 88,525   $ 69,376
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  3,234   $  1,425
  Income tax payable........................................       401        153
  Accrued expenses..........................................     2,210      1,666
                                                              --------   --------
          Total current liabilities.........................     5,845      3,244
Long-term liabilities.......................................       181        182
                                                              --------   --------
          Total liabilities.................................     6,026      3,426
                                                              --------   --------
Commitments and contingencies (Note 13)
Stockholders' equity
  Common stock, $0.001 par value: 250,000,000 shares
     authorized; 34,644,300 and 35,409,524 shares issued and
     outstanding at December 31, 2000 and 2001,
     respectively...........................................        35         35
  Additional paid-in-capital................................   114,984    108,755
  Receivables from stockholders.............................    (1,950)    (1,749)
  Deferred stock-based compensation.........................   (20,813)    (7,261)
  Accumulated deficit.......................................    (9,576)   (33,709)
  Accumulated other comprehensive loss......................      (181)      (121)
                                                              --------   --------
  Stockholders' equity......................................    82,499     65,950
                                                              --------   --------
          Total liabilities and stockholders' equity........  $ 88,525   $ 69,376
                                                              ========   ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.

                                        32
<PAGE>

                      ALLIANCE FIBER OPTICE PRODUCTS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATE)

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                           -------------------------------
                                                            1999        2000        2001
                                                           -------    --------    --------
<S>                                                        <C>        <C>         <C>
Revenues.................................................  $ 7,551    $ 22,223    $ 20,388
Cost of revenues:
  Cost of revenues.......................................    4,885      13,374      25,615
  Non-cash compensation expense..........................       26         950       1,635
                                                           -------    --------    --------
          Total cost of revenues.........................    4,911      14,324      27,250
                                                           -------    --------    --------
  Gross profit (loss)....................................    2,640       7,899      (6,862)
                                                           -------    --------    --------
Operating expenses:
  Research and development...............................    1,532       4,280       7,180
  Non-cash compensation expense..........................       63       2,309       3,191
                                                           -------    --------    --------
          Total research and development.................    1,595       6,589      10,371
  Sales and marketing....................................      968       1,982       2,721
  Non-cash compensation expense..........................       77         433         671
                                                           -------    --------    --------
          Total sales and marketing......................    1,045       2,415       3,392
  General and administrative.............................      975       2,285       4,022
  Non-cash compensation charge...........................      480       5,439       1,560
                                                           -------    --------    --------
          Total general and administrative...............    1,455       7,724       5,582
                                                           -------    --------    --------
          Total operating expenses.......................    4,095      16,728      19,345
                                                           -------    --------    --------
Loss from operations.....................................   (1,455)     (8,829)    (26,207)
Interest and other income, net...........................      117       1,114       2,297
                                                           -------    --------    --------
Loss before income taxes.................................   (1,338)     (7,715)    (23,910)
Income tax provision (benefit)...........................      (67)        396         223
                                                           -------    --------    --------
Net loss.................................................   (1,271)     (8,111)    (24,133)
Deemed preferred stock dividend..........................       --     (14,758)         --
                                                           -------    --------    --------
Net loss attributable to common stockholders.............  $(1,271)   $(22,869)   $(24,133)
                                                           =======    ========    ========
Net loss per share attributable to common stockholders:
  Basic and diluted......................................  $ (0.31)   $  (2.71)   $  (0.73)
                                                           =======    ========    ========
Shares used in computing net loss per share attributable
  to common stockholders:
  Basic and diluted......................................    4,080       8,452      33,286
                                                           =======    ========    ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.

                                        33
<PAGE>

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                                 (IN THOUSANDS)
<Table>
<Caption>
                                                                                                              ACCUMULATED
                                   COMMON STOCK     ADDITIONAL   RECEIVABLES      DEFERRED                       OTHER
                                  ---------------    PAID-IN         FROM       STOCK-BASED    ACCUMULATED   COMPREHENSIVE
                                  SHARES   AMOUNT    CAPITAL     STOCKHOLDERS   COMPENSATION     DEFICIT         LOSS
                                  ------   ------   ----------   ------------   ------------   -----------   -------------
<S>                               <C>      <C>      <C>          <C>            <C>            <C>           <C>
BALANCE AT JANUARY 1, 1999......   3,600    $ 4        1,339            --           (154)          (194)          (1)
Issuance of Common Stock upon
  exercise of warrants..........     800     --           40            --             --             --           --
Deferred stock-based
  compensation..................      --     --        1,302            --         (1,302)            --           --
Amortization of deferred stock-
  based Compensation............      --     --           --            --            646             --           --
Comprehensive Loss:
  Net loss for the year.........      --     --           --            --             --         (1,271)          --
  Currency translation
    adjustments.................      --     --           --            --             --             --          (13)
        Comprehensive Loss......
                                  ------    ---      -------        ------        -------        -------         ----
BALANCE AT DECEMBER 31, 1999....   4,400    $ 4        2,681            --           (810)        (1,465)         (14)
Issuance of Common Stock upon
  exercise of options...........   3,420      3        2,014        (1,950)            --             --           --
Issuance of Common Stock upon
  completion of initial public
  offering......................   4,500      5       44,405            --             --             --           --
Conversion of preferred stock
  upon completion of initial
  public offering...............  22,400     23       37,533            --             --             --           --
Stock repurchased...............     (76)    --         (782)           --             --             --           --
Deferred stock-based
  compensation..................      --     --       27,255            --        (27,255)            --           --
Stock-based compensation for
  Series C Preferred Stock......      --     --        1,878            --             --             --           --
Allocation of discount on
  preferred stock...............      --     --       14,758            --             --             --           --
Deemed preferred stock
  dividend......................      --     --      (14,758)           --             --             --           --
Amortization of deferred stock-
  based compensation............      --     --           --            --          7,252             --           --
Comprehensive Loss:
  Net loss for the year.........      --     --           --            --             --         (8,111)          --
  Unrealized loss on short-term
    investments.................      --     --           --            --             --             --          (77)
  Currency translation
    adjustments.................      --     --           --            --             --             --          (90)
        Comprehensive Loss......
                                  ------    ---      -------        ------        -------        -------         ----
BALANCE AT DECEMBER 31, 2000....  34,644    $35      114,984        (1,950)       (20,813)        (9,576)        (181)
Issuance of Common Stock upon
  exercise of options...........     782     --          123            --             --             --           --
Issuance of Common Stock upon
  purchase of ESPP..............     182     --          342            --             --             --           --
Repayment of notes receivable...      --     --           --             2             --             --           --
Stock repurchased...............    (199)    --         (199)          199             --             --           --
Deferred stock-based
  compensation..................      --     --       (6,495)           --          6,495             --           --
Amortization of deferred stock-
  based compensation............      --     --           --            --          7,057             --           --
Comprehensive Loss:
  Net loss for the year.........      --     --           --            --             --        (24,133)          --
  Unrealized loss on short-term
    investments.................      --     --           --            --             --             --          157
  Currency translation
    adjustments.................      --     --           --            --             --             --          (97)
        Comprehensive Loss......
                                  ------    ---      -------        ------        -------        -------         ----
BALANCE AT DECEMBER 31, 2001....  35,409    $35      108,755        (1,749)        (7,261)       (33,709)        (121)
                                  ======    ===      =======        ======        =======        =======         ====

<Caption>

                                             COMPREHENSIVE
                                   TOTAL     INCOME/(LOSS)
                                  --------   -------------
<S>                               <C>        <C>
BALANCE AT JANUARY 1, 1999......  $    994
Issuance of Common Stock upon
  exercise of warrants..........        40
Deferred stock-based
  compensation..................        --
Amortization of deferred stock-
  based Compensation............       646
Comprehensive Loss:
  Net loss for the year.........    (1,271)    $ (1,271)
  Currency translation
    adjustments.................       (13)         (13)
                                               --------
        Comprehensive Loss......               $ (1,284)
                                  --------     ========
BALANCE AT DECEMBER 31, 1999....  $    396
Issuance of Common Stock upon
  exercise of options...........        67
Issuance of Common Stock upon
  completion of initial public
  offering......................    44,410
Conversion of preferred stock
  upon completion of initial
  public offering...............    37,556
Stock repurchased...............      (782)
Deferred stock-based
  compensation..................        --
Stock-based compensation for
  Series C Preferred Stock......     1,878
Allocation of discount on
  preferred stock...............    14,758
Deemed preferred stock
  dividend......................   (14,758)
Amortization of deferred stock-
  based compensation............     7,252
Comprehensive Loss:
  Net loss for the year.........    (8,111)    $ (8,111)
  Unrealized loss on short-term
    investments.................       (77)         (77)
  Currency translation
    adjustments.................       (90)         (90)
                                               --------
        Comprehensive Loss......               $ (8,278)
                                  --------     ========
BALANCE AT DECEMBER 31, 2000....  $ 82,499
Issuance of Common Stock upon
  exercise of options...........       123
Issuance of Common Stock upon
  purchase of ESPP..............       342
Repayment of notes receivable...         2
Stock repurchased...............        --
Deferred stock-based
  compensation..................        --
Amortization of deferred stock-
  based compensation............     7,057
Comprehensive Loss:
  Net loss for the year.........   (24,133)    $(24,133)
  Unrealized loss on short-term
    investments.................       157          157
  Currency translation
    adjustments.................       (97)         (97)
                                               --------
        Comprehensive Loss......               $(24,073)
                                  --------     ========
BALANCE AT DECEMBER 31, 2001....  $ 65,950
                                  ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.
                                        34
<PAGE>

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                           -------------------------------
                                                            1999        2000        2001
                                                           -------    --------    --------
<S>                                                        <C>        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss...............................................  $(1,271)   $ (8,111)   $(24,133)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation........................................      519         957         425
     Amortization of deferred compensation and stock
       based compensation for Series C Preferred Stock...      646       9,131       7,057
     Impairment in property and equipment................       --          --       5,200
     Provision for inventory.............................       --          --       6,543
     Changes in assets and liabilities:
       Accounts receivable, net..........................   (1,201)     (3,563)      2,648
       Inventories, net..................................     (278)     (5,434)     (7,213)
       Prepaid expenses and other assets.................      (39)       (922)       (709)
       Accounts payable..................................      338       2,175      (1,818)
       Income tax payable................................       --         401        (248)
       Accrued expenses..................................      236       1,684        (552)
       Other long-term liabilities.......................       45          50          10
       Minority interest.................................       --          19          (9)
                                                           -------    --------    --------
          Net cash used in operating activities..........   (1,005)     (3,613)    (12,799)
                                                           -------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of short-term investments.....................       --     (24,206)     (8,832)
  Purchase of property and equipment.....................     (862)     (6,986)     (4,416)
                                                           -------    --------    --------
          Net cash used in investing activities..........     (862)    (31,192)    (13,248)
                                                           -------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from bank borrowings..........................      295         459          --
  Repayments of bank borrowings..........................       --        (754)         --
  Proceeds from issuance of Series B preferred stock.....    3,720         280          --
  Proceeds from issuance of Series C preferred stock.....       --      27,441          --
  Proceeds from issuance of common stock upon the
     exercise of warrants................................       40          --          --
  Proceeds from issuance of common stock under ESPP......       --          --         342
  Proceeds from the exercise of common stock options.....       --          67         123
  Proceeds from the issuance of stock upon completion of
     initial public offering.............................       --      44,410          --
  Proceeds from repayment of notes receivable............       --          --           2
  Stock repurchase.......................................       --        (782)         --
                                                           -------    --------    --------
          Net cash provided by financing activities......    4,055      71,121         467
                                                           -------    --------    --------
Effect of exchange rate changes on cash and cash
  equivalents............................................      (34)         93         (21)
                                                           -------    --------    --------
Net increase (decrease) in cash and cash equivalents.....    2,154      36,409     (25,601)
Cash and cash equivalents at beginning of year...........    3,985       6,139      42,548
                                                           -------    --------    --------
Cash and cash equivalents at end of year.................  $ 6,139    $ 42,548    $ 16,947
                                                           =======    ========    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Income taxes paid......................................  $    --    $     --    $     84
                                                           =======    ========    ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.

                                        35
<PAGE>

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

     Alliance Fiber Optic Products, Inc. (the "Company") was incorporated in
California on December 12, 1995 and reincorporated in Delaware on October 19,
2000. The Company designs, manufactures and markets fiber optic components for
communications equipment manufacturers. The Company's principal business
location is Sunnyvale, California.

     In October 1997, the Company acquired 97% of the outstanding common stock
of Transian Technology Ltd. Co. ("Transian"), a Taiwan corporation, for $512,000
in cash, an amount that was approximately equal to the value of the tangible
assets of Transian at the time. In April 1998, the Company invested an
additional $152,000 in cash increasing its ownership to 98.5% of the outstanding
common stock of Transian.

     In December 2000, the Company established a subsidiary, Alliance Fiber
Optic Products, in the People's Republic of China, which will manufacture some
of the Company's products.

PUBLIC OFFERING

     In November 2000, the Company sold 4,500,000 shares of common stock in an
underwritten initial public offering for net proceeds of approximately $44.4
million. Simultaneously with the closing of the public offering, all 22,400,000
outstanding mandatorily redeemable convertible preferred shares were converted
to common shares on a one for one basis.

USE OF ESTIMATES

     The preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

BASIS OF PRESENTATION

     The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION

     The Company's operations in foreign subsidiaries use the local currency as
their functional currency. All assets and liabilities of the subsidiaries are
translated at rates of exchange on the balance sheet date. Revenues and expenses
are translated at the average rate of exchange for the period. Gains and losses
resulting from foreign currency translation are recorded as a separate component
of other comprehensive income (loss) in stockholders' equity. Foreign currency
transaction gains and losses are recorded in interest and other income and have
not been material.

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

     The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
consist primarily of market rate accounts, municipal bonds, and highly rated
commercial paper that are stated at cost, which approximates fair value.
Investments include high-grade corporate debt obligations that have maturities
greater than three months but

                                        36
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

less than one year. As of December 31, 2000 and 2001, all investments are
classified as short-term investments. Short-term investments are classified as
available-for-sale as of the balance sheet date in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and are reported at fair value, with
unrealized gains and losses recorded in stockholders' equity as a component of
other comprehensive income/loss.

     The Company's financial instruments also include accounts receivable,
accounts payable and debts, and are carried at cost, which approximates their
fair value because of the short-term maturity of these instruments.

INVENTORIES

     Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method, less reserves for excess and
obsolete inventory. Provisions are made for excess and obsolete inventory based
on historical usage and management's estimates of future demand.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost less accumulated depreciation and
impairment charges. Depreciation is computed using the straight-line method
using estimated useful lives of two to five years for machinery and equipment
and five years for furniture and fixtures. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
estimated life of the assets, generally two to four years, or the lease term.

IMPAIRMENT OF LONG-LIVED ASSETS

     The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
fully recoverable. When such an event occurs, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the undiscounted expected future cash flows are less than the
carrying amount of the asset, an impairment loss is recognized to the extent the
carrying amount of such assets exceeds its fair value, which is determined based
on discounted cash flows or appraised value, depending on the nature of the
asset.

REVENUE RECOGNITION

     The Company recognizes revenue upon the shipment of its products to the
customer, provided that the Company has received a purchase order, the price is
fixed and collection of the resulting receivable is probable. Subsequent to the
sale of its products, the Company has no obligation to provide any modification
or customization upgrades, enhancements or postcontract customer support.
Provisions for return allowances and warranties are recorded at the time revenue
is recognized based on the Company's historical experience.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development costs are expensed as incurred.

ADVERTISING EXPENSES

     Advertising costs are expensed as incurred and have not been material.

                                        37
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INCOME TAXES

     The Company accounts for deferred income taxes under the liability approach
whereby the expected future tax consequences of temporary differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities. A valuation allowance is established for any deferred
tax assets for which realization is uncertain. The Company does not record a
deferred tax provision on unremitted earnings of its subsidiaries to the extent
that such earnings are considered permanently invested.

STOCK-BASED COMPENSATION

     The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting
Standards Board ("FASB") issued Interpretations ("FIN") No. 44 "Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
No. 25." Under APB Opinion No. 25 and FIN No. 44, compensation cost is, in
general, recognized based on the excess, if any, of the fair market value of the
Company's stock on the date of grant over the amount an employee must pay to
acquire the stock. In addition, the Company complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Equity
instruments issued to non-employees are accounted for in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18, which require the award to be recorded at its fair value.

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

     Basic net loss per share is computed by dividing net loss attributable to
common stockholders for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common and potential common equivalent shares outstanding during the period.
The calculation of diluted net loss per share excludes potential common shares
if the effect is anti-dilutive. Potential common shares are composed of shares
of common stock subject to repurchase and common stock issuable upon the
exercise of stock options.

COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) is defined as the change in equity of a company
from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners.
Comprehensive income (loss) is disclosed in the consolidated statement of
stockholders' equity.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the FASB deferred the effective date of SFAS No. 133 until the
first quarter for fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities -- An Amendment of FASB Statement No. 133." SFAS No. 138 amended the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany

                                        38
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

derivatives. The Company does not currently hold derivative instruments or
engage in hedging activities. The Company adopted SFAS Nos. 133 and 138 in the
first quarter of fiscal year 2001 and such adoption did not have a material
effect on the Company's Consolidated Financial Statements.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B to defer the effective
date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000.
The Company adopted the provisions of SAB No. 101 in its Consolidated Financial
Statements for all years presented in this Report, and the adoption did not have
a material effect on the Company's Consolidated Financial Statements.

     In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB No. 25." This Interpretation clarifies (a) the definition of employee for
purposes of applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a significant effect on the
Company's Consolidated Financial Statements.

     In June 2001, the FASB issued two Statements: SFAS No. 141, "Business
Combinations"; and SFAS No. 142, "Goodwill and Other Intangible Assets". The
Statements:

     - Prohibit the use of the pooling-of-interest method. All business
       combinations must be accounted for using the purchase method of
       accounting.

     - Establish a new accounting standard for goodwill acquired in a business
       combination. Goodwill will continue to be recognized as an asset but will
       not be amortized as currently required by APB No. 17, "Intangible
       Assets."

     - Establish a new method of testing goodwill for impairment. Goodwill must
       be separately tested for impairment on an annual basis using a
       fair-value-based approach. Goodwill must be tested for impairment at a
       level referred to as a reporting unit, which is the same level as, or one
       level below, an operating segment.

     SFAS No. 141 applies to all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. These new Statements are not expected to affect the Company's Consolidated
Financial Statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 clarifies and further
defines the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144
does not apply to goodwill and other intangible assets that are not amortized.
The Company will adopt SFAS No. 144 in the first quarter of 2002. The adoption
of this statement is not expected to have a material effect on the Company's
Consolidated Financial Statements.

                                        39
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BALANCE SHEET COMPONENTS (IN THOUSANDS)

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2000       2001
                                                              -------    -------
<S>                                                           <C>        <C>
ACCOUNTS RECEIVABLE, NET:
  Accounts receivable.......................................  $ 5,839    $ 3,321
  Less: Allowance for doubtful accounts and sales returns...     (537)      (676)
                                                              -------    -------
                                                              $ 5,302    $ 2,645
                                                              =======    =======
INVENTORIES, NET:
  Finished goods............................................  $ 2,382    $ 3,241
  Work-in-process...........................................    2,687      5,977
  Raw materials.............................................    2,386      2,966
  Less: Reserve for excess and obsolete inventory...........     (663)    (4,765)
                                                              -------    -------
                                                              $ 6,792    $ 7,419
                                                              =======    =======
PROPERTY AND EQUIPMENT, NET:
  Machinery and equipment...................................  $ 7,269    $ 7,191
  Furniture and fixtures....................................    1,306      1,366
  Leasehold improvements....................................      612      1,024
  Building and equipment prepayments........................    1,365        187
                                                              -------    -------
                                                               10,552      9,768
  Less: Accumulated depreciation............................   (1,962)    (2,387)
                                                              -------    -------
                                                              $ 8,590    $ 7,381
                                                              =======    =======
ACCRUED EXPENSES:
  Accrued compensation costs................................  $ 1,345    $ 1,097
  Provision for warranty....................................      214        107
  Accrued professional fees.................................      175        252
  Other accruals............................................      476        210
                                                              -------    -------
                                                              $ 2,210    $ 1,666
                                                              =======    =======
LONG-TERM LIABILITIES:
  Minority Interest.........................................  $    35    $    26
  Other long-term liabilities...............................      146        156
                                                              -------    -------
                                                              $   181    $   182
                                                              =======    =======
</Table>

3. SHORT-TERM INVESTMENTS

     As of December 31, 2000 and 2001, the following investments are classified
as cash equivalents (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                      INVESTMENT TYPE                          2000       2001
                      ---------------                         -------    -------
<S>                                                           <C>        <C>
Corporate debt obligations..................................  $12,085    $    --
Municipal bonds.............................................   26,123     11,513
Money market instruments and funds..........................    3,319      4,395
                                                              -------    -------
                                                              $41,527    $15,908
                                                              =======    =======
</Table>

                                        40
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     As of December 31, 2000 and 2001, the following investments are classified
as short term investments (in thousands):

<Table>
<Caption>
                                                              DECEMBER 31,
                            --------------------------------------------------------------------------------
                                             2000                                      2001
                            --------------------------------------    --------------------------------------
                                            GROSS                                     GROSS
                            AMORTIZED    UNREALIZED     ESTIMATED     AMORTIZED    UNREALIZED     ESTIMATED
     INVESTMENT TYPE          COST       (LOSS)/GAIN    FAIR VALUE      COST       (LOSS)/GAIN    FAIR VALUE
     ---------------        ---------    -----------    ----------    ---------    -----------    ----------
<S>                         <C>          <C>            <C>           <C>          <C>            <C>
Corporate debt
  obligations.............   $24,206        $(77)        $24,129       $16,577         $71         $16,648
Municipal bonds...........        --          --              --         7,800          --           7,800
Commercial paper..........        --          --              --         2,486           2           2,488
Government agencies.......        --          --              --         6,175           7           6,182
                             -------        ----         -------       -------         ---         -------
                             $24,206        $(77)        $24,129       $33,038         $80         $33,118
                             =======        ====         =======       =======         ===         =======
</Table>

4. DEBT

     In July 1999, the Company entered into an agreement for an equipment loan
facility for a maximum of $300,000. Loans under this facility bore interest at
prime plus 1.25%. In January 2000, the Company amended this agreement to include
a second equipment loan facility for a maximum of $500,000. Loans under the
second facility bore interest at prime plus 1%. In July 2000, the Company
amended this agreement to include a revolving line of credit up to a maximum of
$1 million and a third equipment loan facility up to a maximum of $750,000.
Loans under these two additional facilities bore interest at prime plus 0.5% and
prime plus 1.0%, respectively. Certain equipment of the Company secured each of
the equipment loan facilities and certain receivables secure the revolving line
of credit. During the years ended December 31, 1999 and 2000, the Company
borrowed $795,000 under the first two equipment loan facilities, all of which
was fully repaid as of December 31, 2000. These facilities were closed as of
December 31, 2001.

5. IMPAIRMENT OF PROPERTY AND EQUIPMENT AND PROVISION FOR INVENTORY

     Due to the decline in business conditions in the quarter ended June 30,
2001, the Company determined that demand for its DWDM products would be
significantly lower in the future than originally expected and, therefore, that
the carrying value of certain property and equipment used in the manufacture of
its DWDM products was impaired. The Company recorded a charge of $5.2 million
during the quarter ended June 30, 2001 related to the impairment, measured as
the amount by which the carrying amount exceeded the present value of the
estimated discounted future cash flows for DWDM products.

     The Company also recorded a provision for inventory totaling $6.5 million
during the quarter ended June 30, 2001, substantially all of which related to an
excess inventory charge. This excess inventory charge was due to an
unforeseeable and significant decrease in forecasted revenue for DWDM products,
and was calculated in accordance with the Company's policy of reserving against
inventory levels in excess of 12-month demand for each specific product. During
the quarter ended December 31, 2001, approximately $1.0 million of the reserve
was reversed subsequent to the sale of the related inventories.

                                        41
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES

     The components of loss before income taxes are as follows (in thousands):

<Table>
<Caption>
                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                     1999       2000        2001
                                                    -------    -------    --------
<S>                                                 <C>        <C>        <C>
Loss subject to domestic income taxes only........  $(1,161)   $(9,336)   $(21,561)
Income (loss) subject to foreign income taxes
  only............................................     (177)     1,621      (2,349)
                                                    -------    -------    --------
                                                    $(1,338)   $(7,715)   $(23,910)
                                                    =======    =======    ========
</Table>

     The income tax provision (benefit) is composed of the following (in
thousands):

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               1999      2000      2001
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Current
  Federal...................................................   $(67)     $125      $ --
  State.....................................................     --         3        --
  Foreign...................................................     --       268       223
                                                               ----      ----      ----
                                                                (67)      396       223
Deferred....................................................     --        --        --
                                                               ----      ----      ----
          Total provision (benefit).........................   $(67)     $396      $223
                                                               ====      ====      ====
</Table>

     The following is a reconciliation of the effective tax rates and the United
States statutory federal income tax rate:

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                             --------------------------
                                                              1999      2000      2001
                                                             ------    ------    ------
<S>                                                          <C>       <C>       <C>
Statutory federal income tax rate..........................  (34.0)%   (34.0)%   (34.0)%
State income taxes, net of federal tax.....................     --      (5.8)     (5.8)
Foreign taxes, at lower rate...............................    5.2       3.4       0.3
Permanent differences -- stock compensation................   15.8      40.3      11.6
Research and development credits...........................   (2.2)     (0.8)     (0.8)
Valuation allowance........................................    9.0      (0.9)     25.0
Other......................................................    1.2       2.9       4.7
                                                             -----     -----     -----
Effective tax rate.........................................   (5.0)%     5.1%      1.0%
                                                             =====     =====     =====
</Table>

     Deferred tax assets consisted of the following (in thousands):

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              ----------------
                                                              2000      2001
                                                              -----    -------
<S>                                                           <C>      <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 146    $ 3,169
  Credit carryforwards......................................    190      1,161
  Depreciation..............................................   (198)      (672)
  Accruals and allowances...................................    278      2,467
                                                              -----    -------
                                                                416      6,125
Less: valuation allowances..................................   (416)    (6,125)
                                                              -----    -------
Net deferred tax assets.....................................  $  --    $    --
                                                              =====    =======
</Table>

                                        42
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Based upon the weight of available evidence, which includes the historical
operating performance and the accumulated deficit, the Company provided a full
valuation allowance against net deferred tax assets.

     As of December 31, 2001, the Company had a net operating loss carryforward
of approximately $8.5 million for federal and $4.7 million for state tax
purposes. If not utilized, these carryforwards will begin to expire in 2021 for
federal and in 2011 for state purposes.

     The Company has research credit carryforwards of approximately $253,000 and
$406,000 for federal and state income tax purposes, respectively. If not
utilized, the federal carryforward will expire in various amounts beginning in
2020. The California tax credit can be carried forward indefinitely.

     Internal Revenue Code Section 382 limits the use of net operating loss and
tax credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.

7. NET LOSS PER SHARE

     The following table sets forth the computation of basic and diluted net
loss per share for the years indicated (in thousands, except per share amounts):

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                           -------------------------------
                                                            1999        2000        2001
                                                           -------    --------    --------
<S>                                                        <C>        <C>         <C>
Numerator:
  Net loss attributable to common stockholders...........  $(1,271)   $(22,869)   $(24,133)
                                                           =======    ========    ========
Denominator:
  Shares used in computing net loss per share:
     Weighted average of common shares outstanding.......    4,080       9,524      35,032
     Less: Weighted average of shares subject to
       repurchase........................................       --      (1,072)     (1,746)
                                                           -------    --------    --------
     Basic and diluted...................................    4,080       8,452      33,286
                                                           =======    ========    ========
Net loss per share attributable to common stockholders:
  Basic and diluted......................................  $ (0.31)   $  (2.71)   $  (0.73)
                                                           =======    ========    ========
Anti-dilutive securities, including options, manditorily
  redeemable convertible preferred stock, and shares
  subject to repurchase not included in net loss per
  share calculation......................................   17,392      21,260       2,099
                                                           =======    ========    ========
</Table>

     The following outstanding options and mandatorily redeemable convertible
preferred stock were excluded from the computation of diluted net loss per share
(in thousands):

<Table>
<Caption>
                                                         YEARS ENDED DECEMBER 31,
                                                         -------------------------
                                                          1999      2000     2001
                                                         ------    ------    -----
<S>                                                      <C>       <C>       <C>
Options to purchase common stock and shares subject to
  repurchase...........................................   1,992     4,211    2,099
Mandatorily redeemable convertible preferred stock.....  15,400    17,049       --
                                                         ------    ------    -----
                                                         17,392    21,260    2,099
                                                         ======    ======    =====
</Table>

8. DEEMED PREFERRED STOCK DIVIDEND

     In July 2000, the Company issued 4,700,000 shares of Series C preferred
stock at a price of $5.50 per share. The difference between that price and the
deemed fair value of the common stock on the date of the transaction resulted in
a beneficial conversion feature in the amount of $14,758,000. The value of

                                        43
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

this beneficial conversion feature was recognized immediately as a deemed
preferred stock dividend in the quarter ended September 30, 2000 as the
preferred stockholders had the right to immediately convert their preferred
shares.

9. AMENDED CERTIFICATE OF INCORPORATION

     The Company amended its Certificate of Incorporation upon the completion of
its initial public offering. Upon the adoption of the amended Certificate of
Incorporation, the Company is authorized to issue 250,000,000 shares of common
stock, $0.001 par value per share, and 5,000,000 undesignated shares of
preferred stock, $0.001 par value per share.

10. STOCK-BASED COMPENSATION PLANS

1997 STOCK OPTION PLAN

     In May 1997, the Company adopted a 1997 Stock Plan under which 3,000,000
shares of common stock were reserved for issuance to eligible employees,
directors and consultants upon exercise of stock options and stock purchase
rights. During the year ended December 31, 2000, an additional 5,200,000 shares
were reserved for issuance under the 1997 Stock Plan. Incentive stock options
are granted at a price not less than 100% of the fair market value of the
Company's common stock and at a price of not less than 110% of the fair market
value for grants to any person who owned more than 10% of the voting power of
all classes of stock on the date of grant. Nonstatutory stock options are
granted at a price not less than 85% of the fair market value of the common
stock and at a price not less than 110% of the fair market value for grants to a
person who owned more than 10% of the voting power of all classes of stock on
the date of the grant. Options granted under the 1997 Stock Plan generally vest
over four years and are exercisable for not more than ten years (five years for
grants to any person who owned more than 10% of the voting power of all classes
of stock on the date of the grant). In November 2000, the 1997 Stock Plan was
replaced by the 2000 Stock Incentive Plan and all shares available for grant
under the 1997 Stock Plan were transferred to the 2000 Stock Incentive Plan.

2000 STOCK INCENTIVE PLAN

     In November 2000, the Company adopted a 2000 Stock Incentive Plan under
which 1,500,000 shares of common stock were reserved for issuance to eligible
employees, directors and consultants upon exercise of stock options and stock
purchase rights. In addition, 1,397,867 shares available for grant under the
1997 Stock Plan at the time of its termination were transferred to and became
reserved for issuance under the 2000 Stock Incentive Plan. On January 1 of each
year, beginning on January 1, 2001, the number of shares available for grant
will automatically increase by the lesser of: (i) 1,700,000 shares; (ii) 5% of
the fully diluted outstanding shares of stock on that date; or (iii) a lesser
amount as may be determined by the Board of Directors. Incentive stock options
are granted at a price not less than 100% of the fair market value of the
Company's common stock and at a price of not less than 110% of the fair market
value for grants to any person who owned more than 10% of the voting power of
all classes of stock on the date of grant. Nonstatutory stock options are
granted at a price not less than 85% of the fair market value of the common
stock and at a price not less than 110% of the fair market value for grants to a
person who owned more than 10% of the voting power of all classes of stock on
the date of the grant. Options granted under the 2000 Stock Incentive Plan
generally vest over four years and are exercisable for not more than ten years
(five years for grants to any person who owned more than 10% of the voting power
of all classes of stock on the date of the grant).

                                        44
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes activity under the Plans:

<Table>
<Caption>
                                                  OPTIONS OUTSTANDING       WEIGHTED
                                               --------------------------   AVERAGE
                                  AVAILABLE    NUMBER OF      EXERCISE      EXERCISE
                                  FOR GRANT      SHARES         PRICE        PRICE
                                  ----------   ----------   -------------   --------
<S>                               <C>          <C>          <C>             <C>
Balance at December 31, 1998....   1,516,000    1,484,000       $0.05        $0.05
Granted.........................  (1,402,000)   1,402,000       $0.20        $0.20
Canceled........................     733,000     (733,000)      $0.05        $0.05
                                  ----------   ----------
Balance at December 31, 1999....     847,000    2,153,000   $0.05 - $0.20    $0.12
Amendment of the 1997 Plan......   5,200,000           --
Adoption of the 2000 Plan.......   1,500,000           --
Options granted under the 1997
  Plan and canceled after the
  adoption of the 2000 Plan.....     (13,200)          --
Granted.........................  (4,947,266)   4,947,266   $0.20 - $5.75    $1.63
Canceled........................     132,333     (132,333)  $0.20 - $4.50    $2.07
Exercised.......................          --   (3,420,750)  $0.05 - $2.00    $0.59
                                  ----------   ----------
Balance at December 31, 2000....   2,718,867    3,547,183   $0.05 - $5.75    $1.70
Amendment of the 2000 Plan......   1,459,333           --
Options granted under the 1997
  Plan and canceled after the
  adoption of the 2000 Plan.....    (929,959)          --   $0.20 - $4.50    $2.00
Granted.........................  (1,922,300)   1,922,300   $0.72 - $6.38    $1.26
Canceled........................   1,034,109   (1,034,109)  $2.10 - $6.38    $2.21
Exercised.......................          --     (782,425)  $0.05 - $2.00    $0.16
                                  ----------   ----------
Balance at December 31, 2001....   2,360,050    3,652,949   $0.05 - $6.38    $1.79
                                  ==========   ==========
</Table>

     Information relating to stock options outstanding at December 31, 2001 is
as follows:

<Table>
<Caption>
                     OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
-------------------------------------------------------------   ----------------------------
                                WEIGHTED
                                 AVERAGE
                                REMAINING         WEIGHTED                       WEIGHTED
  EXERCISE       NUMBER        CONTRACTUAL        AVERAGE         NUMBER         AVERAGE
    PRICE      OUTSTANDING   LIFE (IN YEARS)   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE
-------------  -----------   ---------------   --------------   -----------   --------------
<S>            <C>           <C>               <C>              <C>           <C>
$0.05              75,000         4.75             $0.05           75,000         $0.05
$0.20             411,917         7.31             $0.20          172,417         $0.20
$0.50             226,375         8.22             $0.50           39,325         $0.50
$0.72 - $0.86     966,600         9.94             $0.85               --         $  --
$0.95 - $1.00     356,775         9.24             $0.97           26,300         $1.00
$1.70             280,000         9.92             $1.70               --         $  --
$2.00 - $2.50     635,150         9.15             $2.11           68,913         $2.11
$4.00 - $4.50     503,332         8.79             $4.45          137,083         $4.45
$4.88              78,000         9.00             $4.88           19,500         $4.88
$5.75              60,000         8.96             $5.75           15,000         $5.75
$6.38              59,800         8.94             $6.38            6,900         $6.38
                ---------                                         -------
                3,652,949         9.01             $1.79          560,438         $1.90
                =========                                         =======
</Table>

                                        45
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RECEIVABLES FROM STOCKHOLDERS

     On various dates during the year ended December 31, 2000, 2,935,000 options
were exercised prior to being vested by certain officers of the Company for a
total of $1.95 million in notes payable to the Company. These exercised shares
are subject to rights of repurchase by the Company until such shares are vested.
The notes are full recourse, have a four-year term, and bear interest ranging
from 6.5% to 7.0% per annum. The number of shares of common stock subject to
repurchase was 2,143,542 and 1,230,208 as of December 31, 2000 and 2001,
respectively.

EMPLOYEE STOCK PURCHASE PLAN

     In November 2000, the Company adopted its 2000 Employee Stock Purchase Plan
(the "Plan"). The Company has reserved 1,500,000 shares of common stock for
issuance under the Plan, none of which were issued as of December 31, 2000. On
the first day of January each year beginning January 1, 2001, additional shares
of common stock shall be reserved for issuance under the Plan as determined by
the Board of Directors. The plan limits the annual increase to the lesser of 1%
of the Company's issued and outstanding common stock or 1,000,000 shares. The
Plan provides eligible employees with the opportunity to acquire an ownership
interest in the Company through a program of periodic payroll deductions applied
every six months to the purchase of the common stock. The Plan is structured as
a qualified employee stock purchase plan under Section 423 of the amended
Internal Revenue Code of 1986. However, the Plan is not intended to be a
qualified pension, profit sharing or stock bonus plan under Section 401(a) of
the 1986 Code and is not subject to the provisions of the Employee Retirement
Security Act of 1974. The Board may amend, suspend, or terminate the Plan at any
time without notice. A total of 181,799 shares were purchased under the Plan in
2001.

STOCK-BASED COMPENSATION UNDER APB OPINION NO. 25

     During the years ended December 31, 1999, 2000 and 2001, the Company
recorded deferred stock based compensation of $1,302,000, $27,255,000 and a
reversal of $6,495,000, respectively. This deferred compensation represents the
difference between the exercise price of common stock options and the deemed
fair value for financial statement reporting purposes of the Company's common
stock on the option grant date. Deferred compensation is being amortized using
the graded vesting method, in accordance with FIN No. 28, over the vesting
period of each respective option, generally four years. Under the graded vesting
method, each option grant is separated into portions based on its vesting terms,
which results in acceleration of amortization expense for the overall award. The
accelerated amortization pattern results in expensing approximately 52% of the
total award in year one, 27% in year two, 15% in year three and 6% in year four.

SFAS NO. 123 COMPENSATION TO CONSULTANTS

     In the years ended December 31, 2000 and 2001, the Company granted options
to purchase common stock of 173,333 shares and 29,000 shares, respectively, to
consultants and an advisor. The aggregate exercise prices amounted to $96,000
and $111,000 for the years ended December 31, 2000 and 2001, respectively. These
options vest over periods of one to four years. The Company is required to
record the change in the fair value of these options at each reporting date
prior to vesting and then finally at the vesting date of the option. Deferred
stock-based compensation in accordance with SFAS No. 123 and EITF Issue No.
96-18 related to these options totaled $115,000, $1,238,000, and $820,000 at
December 31, 1999, 2000 and 2001, respectively. Amortization of the deferred
stock-based compensation balance amounted to $22,000, $940,000, and $45,000 for
the years ended December 31, 1999, 2000 and 2001, respectively.

                                        46
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK-BASED COMPENSATION ARISING FROM SERIES C MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK

     The Company sold 5.0 million shares of Series C mandatorily redeemable
convertible preferred stock during the third quarter of 2000 at $5.50 per share.
As 300,000 of these shares were sold to employees and related parties in a
second closing when the value of the stock was deemed to be $11.76 per share,
the Company recorded a one-time general and administrative expense of $1.9
million related to the sale of these shares.

PRO FORMA DISCLOSURE UNDER SFAS NO. 123

     Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock option grants
under the fair value method. The fair value of these options was estimated using
the Black-Scholes option pricing model. The Company calculated the fair value of
each option on the date of grant using the Black-Scholes option pricing model,
as prescribed by SFAS No. 123, using the following assumptions:

<Table>
<Caption>
                                   YEARS ENDED DECEMBER 31,
                             -------------------------------------
                             1999         2000            2001
                             -----    ------------    ------------
<S>                          <C>      <C>             <C>
Risk free interest rate....  5.00%    5.00 - 5.96%    3.91 - 4.86%
Expected life (years)......  4        3 - 4           3 - 4
Volatility.................  0.00%    70.00%          140.00%
Dividend yield.............  0.00%    0.00%           0.00%
</Table>

     The weighted average fair value on the grant date of options in the years
ended December 31, 1999, 2000 and 2001 was $1.27, $6.19 and $0.81, respectively.

     Had compensation cost been determined based upon the fair value on the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been as follows (in thousands, except per share
data):

<Table>
<Caption>
                                                      YEARS ENDED DECEMBER 31,
                                                   -------------------------------
                                                    1999        2000        2001
                                                   -------    --------    --------
<S>                                                <C>        <C>         <C>
Net loss attributable to common stockholders:
  As reported....................................  $(1,271)   $(22,869)   $(24,133)
  Pro forma......................................   (1,330)    (23,562)    (24,613)
Net loss per share attributable to common
  stockholders, basic and diluted:
  As reported....................................  $ (0.31)   $  (2.71)   $  (0.73)
  Pro forma......................................  $ (0.33)   $  (2.79)   $  (0.74)
</Table>

11. CONCENTRATIONS OF CERTAIN RISKS

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. The Company limits the amount of
deposits in any one financial institution and any one financial instrument. The
Company invests its excess cash principally in certificates of deposit, debt
instruments issued by high-credit quality financial institutions and
corporations and money market accounts with financial institutions in the United
States.

                                        47
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company performs ongoing credit evaluations of its customers' financial
condition, and limits the amount of credit extended when deemed necessary, but
generally does not require collateral.

     At December 31, 2000, one customer accounted for 10% of the Company's
accounts receivable. As of December 31, 2001, one customer accounted for 15% of
the Company's accounts receivable.

     For the year ended December 31, 1999, one customer accounted for 11% of
revenues. For the years ended December 31, 2000 and 2001, no individual customer
accounted for 10% or more of revenues.

     Certain components used in manufacturing the Company's products have
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components cannot be accomplished quickly.

12. GEOGRAPHIC SEGMENT INFORMATION

     The Company operates in a single industry segment. This industry segment is
characterized by rapid technological change and significant competition.

     The following is a summary of the Company's revenues generated from and
identifiable assets situated in geographic segments (in thousands):

<Table>
<Caption>
                                                       YEARS ENDED DECEMBER 31,
                                                     ----------------------------
                                                      1999      2000       2001
                                                     ------    -------    -------
<S>                                                  <C>       <C>        <C>
REVENUES
  United States....................................  $6,724    $20,248    $16,760
  Taiwan...........................................     827      1,975      3,628
                                                     ------    -------    -------
                                                     $7,551    $22,223    $20,388
                                                     ======    =======    =======
</Table>

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2000       2001
                                                              -------    -------
<S>                                                           <C>        <C>
IDENTIFIABLE ASSETS
  United States.............................................  $80,548    $60,503
  Taiwan....................................................    7,771      8,554
  China.....................................................      206        319
                                                              -------    -------
          Total.............................................  $88,525    $69,376
                                                              =======    =======
</Table>

13. COMMITMENTS AND CONTINGENCIES

     From time to time, the Company may be involved in litigation in the normal
course of business. Management believes that the outcome of such matters to date
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.

     The Company leases certain office space under long-term operating leases
expiring at various dates through 2004. Total lease expenses under these
operating leases were approximately $357,000, $526,000, and $2.1 million for the
years ended December 31, 1999, 2000 and 2001, respectively.

                                        48
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Total future minimum lease payments under operating leases as of December
31, 2001, for the years ending December 31, are summarized below (in thousands):

<Table>
<S>                                                          <C>
YEARS ENDING DECEMBER 31,
2002.......................................................  $1,802
2003.......................................................   1,883
2004.......................................................   1,055
                                                             ------
          Total............................................  $4,740
                                                             ======
</Table>

14. ACCUMULATED OTHER COMPREHENSIVE LOSS

     The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 established standards for the reporting and disclosure of
comprehensive income and its components; however, the disclosure had no impact
on the Company's consolidated results of operations, financial position or cash
flows. Comprehensive income is defined as the change in equity of a company
during a period resulting from transactions and other events and circumstances,
excluding transactions resulting from investments by owners and distributions to
owners. The difference between net loss and comprehensive loss for the Company
is due to foreign exchange translations adjustments and unrealized gain (loss)
on available-for-sale securities.

     The components of accumulated other comprehensive loss as of December 31,
2000 and 2001 are as follows (in thousands):

<Table>
<Caption>
                                                              DECEMBER 31,
                                                             --------------
                                                             2000     2001
                                                             -----    -----
<S>                                                          <C>      <C>
Cumulative translation adjustments.........................  $(104)   $(201)
Unrealized gain (loss) on short-term investments...........    (77)      80
                                                             -----    -----
          Accumulated other comprehensive loss.............  $(181)   $(121)
                                                             =====    =====
</Table>

INTERIM FINANCIAL INFORMATION (UNAUDITED)

     The following table contains selected unaudited quarterly statement of
operations data for each of the eight quarters in the period ended December 31,
2001. The Company believes that the historical quarterly information has been
prepared substantially on the same basis as the audited financial statements,
and all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts below to present fairly the unaudited
quarterly results of operation data (in thousands, except per share data):

<Table>
<Caption>
                                                                          THREE MONTHS ENDED
                                       -----------------------------------------------------------------------------------------
                                       MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                         2000        2000       2000        2000       2001        2001       2001        2001
                                       ---------   --------   ---------   --------   ---------   --------   ---------   --------
<S>                                    <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Revenues.............................   $3,143      $4,271    $  5,961    $ 8,848     $ 7,369    $  4,568    $ 4,280    $ 4,171
Gross profit (loss)..................    1,346       1,823       2,079      2,651       2,327     (11,126)     1,043        894
Net loss attributable to common
  stockholders(1)....................     (814)       (920)    (17,686)    (3,449)     (2,776)    (16,480)    (2,268)    (2,609)
Net loss attributable to common
  stockholders(2)(3)
  Basic and diluted..................   $(0.17)     $(0.17)   $  (3.34)   $ (0.20)    $ (0.09)   $  (0.50)   $ (0.07)   $ (0.08)
                                        ======      ======    ========    =======     =======    ========    =======    =======
</Table>

---------------
(1) Net loss attributable to common stockholders in the quarter ended September
    30, 2000 includes a charge of $14,758,000 related to a deemed preferred
    stock dividend. See Note 8 to Consolidated Financial Statements for a
    detailed explanation of the determination of this dividend. Net loss

                                        49
<PAGE>
                      ALLIANCE FIBER OPTIC PRODUCTS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    attributable to common stockholders in the quarter ended June 30, 2001
    includes charges for inventory reserves and asset impairment charge of $6.5
    million and $5.2 million, respectively. See Note 5 to Consolidated Financial
    Statements for further discussion.

(2) The diluted net income (loss) per share attributable to common stockholders
    computation excludes potential shares of common stock (convertible preferred
    stock, options to purchase common stock and shares of common stock issued
    upon exercise of stock options which are subject to repurchase rights held
    by the Company), if their effect would be anti-dilutive. See Notes 1 and 7
    to Consolidated Financial Statements for a detailed explanation of the
    determination of the shares used in computing basic and diluted net loss per
    share.

(3) Net loss per share is computed independently for each quarter presented.
    Therefore, the aggregate of the quarterly per share information may not
    equal the annual loss per share.

FINANCIAL STATEMENT SCHEDULE

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<Table>
<Caption>
                                                   BALANCE AT                              BALANCE AT
                                                   BEGINNING                                 END OF
                                                    OF YEAR      ADDITIONS    REVERSALS       YEAR
                                                   ----------    ---------    ---------    ----------
<S>                                                <C>           <C>          <C>          <C>
Year Ended December 31, 2001
  Allowance for doubtful accounts and sales
     returns.....................................     $537        $  253       $  (114)      $  676
  Inventory reserves.............................      663         6,543        (2,441)       4,765
  Valuation allowance on deferred tax assets.....      416         5,709            --        6,125

Year Ended December 31, 2000
  Allowance for doubtful accounts and sales
     returns.....................................      319           218            --          537
  Inventory reserves.............................       --           663            --          663
  Valuation allowance on deferred tax assets.....      330            86            --          416

Year Ended December 31, 1999
  Allowance for doubtful accounts and sales
     returns.....................................       --           319            --          319
  Inventory reserves.............................       --            --            --           --
  Valuation allowance on deferred tax assets.....      210           120            --          330
</Table>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                        50
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2002 Annual Meeting of Stockholders to be held on May
17, 2002 (the "Proxy Statement").

     Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16(a) of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.

     The executive officers of the Company are as follows:

     Peter C. Chang, 44, has served as our Chairman of the Board, Chief
Executive Officer, President and Secretary since our formation in December 1995.
From 1990 to 1995, Mr. Chang was Division Manager at Hon Hai Holding. From 1984
to 1988, he was an engineer at AlliedSignal Inc. and from 1988 to 1990 was a
member of the technology staff at Lucent Bell Labs. Mr. Chang received a B.S. in
Mechanical Engineering from the National Taiwan University and an M.S. in
Mechanical Engineering from Notre Dame University.

     David A. Hubbard, 42, has served as our Vice President, Sales and Marketing
since October 1996. From February 1995 to September 1996, Mr. Hubbard was
Director of Marketing/Business Development at Tracor/AEL Industries. Mr. Hubbard
received his M.S. from University of Connecticut and his B.S. from State
University of New York.

     Philip J. Rehkemper, 39, has served as our Vice President, Finance and
Chief Financial Officer since December 2001. From August 2000 to December 2001,
Mr. Rehkemper served as Corporate Controller at Calient Networks, a fiber optic
switching system manufacturer. From January 1998 to August 2000, Mr. Rehkemper
served as the Controller for the Network Server Division at Hewlett-Packard
Company, and from October 1995 to January 1998, he served as the Controller for
Hewlett-Packard's Convex Division. Mr. Rehkemper received an M.B.A. and a B.S.
in Finance from Santa Clara University.

     Wei-Shin Tsay, Ph.D., 50, has served as our Senior Vice President, Product
Development since August 2000. From May 1999 to August 2000, Dr. Tsay served as
a Director of Marketing for the Asia/ Pacific region for the Transmission
Systems Division of JDS Uniphase. From July 1997 to March 1999, he was a
Director of Engineering for the Transmission Systems Division at JDS Uniphase.
From February 1997 to July 1997, Dr. Tsay was the Director of Operations at
Uniphase Telecom Products. From May 1996 to February 1997, he was a Director of
Digital Transmission at Uniphase Telecom Products. From February 1994 to May
1996, Dr. Tsay was the Product Manager of High Performance Lasers for the
Optoelectronics Strategic Business Unit at AT&T/Lucent Microelectronics. Dr.
Tsay received an M.S. in Manufacturing Systems Engineering from Lehigh
University, a Ph.D. in physics from the University of Rochester and a B.S. in
physics at the National Tsing-Hua University in Hsin-Chu, Taiwan.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference from the
information under the captions "Election of Directors -- Director Compensation,"
"Executive Compensation," and "Election of Directors -- Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.

                                        51
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference from the
information contained under the caption "Certain Relationships and Related Party
Transactions" contained in the Proxy Statement.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) DOCUMENTS FILED AS PART OF THIS REPORT:

       (1) Consolidated Financial Statements

            Reference is made to the Index to Consolidated Financial Statements
            of Alliance Fiber Optic Products, Inc., under Item 8 of Part II
            hereof.

       (2) Financial Statement Schedules

            Reference is made to the Index to Consolidated Financial Statements
            of Alliance Fiber Optic Products, Inc., under Item 8 of Part II
            hereof.

     All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Consolidated Financial Statements or the Notes thereto.

       (3) Exhibits

            See Item 14(c) below. Each management contract or compensatory plan
            or arrangement required to be filed has been identified.

     (b) REPORTS ON FORM 8-K.

     The Company filed no reports on Form 8-K during the quarter ended December
31, 2001.

                                        52
<PAGE>

     (c) EXHIBITS

<Table>
<Caption>
 EXHIBIT
  NUMBER                        DESCRIPTION OF DOCUMENT
----------                      -----------------------
<C>           <S>
  3(i).1      Amended and Restated Certificate of Incorporation
              (incorporated by reference to Exhibit 3(i).3 to the
              Company's Registration Statement on Form S-1 (File No.
              333-45482)).
 3(ii).1      Restated Bylaws of the Registrant (incorporated by reference
              to Exhibit 3(ii).3 to the Company's Registration Statement
              on Form S-1 (File No. 333-45482)).
     4.1      Form of Common Stock Certificate (incorporated by reference
              to Exhibit 4.1 to Amendment No. 1 to the Company's
              Registration Statement on Form S-1 (File No. 333-45482)).
     4.2      Amended and Restated Rights Agreement dated as of August 31,
              2000 (incorporated by reference to Exhibit 4.2 to the
              Company's Registration Statement on Form S-1 (File No.
              333-45482)).
     4.3      Rights Agreement dated as of May 29, 2001 between the
              Company and Mellon Investor Services, LLC. (incorporated by
              reference to Exhibit 4.1 to the Company's Registration of
              Certain Classes of Securities on Form 8-A (File No.
              0-31857)).
    10.1#     1997 Stock Plan and form of agreements thereunder
              (incorporated by reference to Exhibit 10.1 to the Company's
              Registration Statement on Form S-1 (File No. 333-45482)).
    10.2      Form of Indemnification Agreement between the Company and
              its officers and directors (incorporated by reference to
              Exhibit 10.2 to the Company's Registration Statement on Form
              S-1 (File No. 333-45482)).
    10.3      Lease Agreement dated April 6, 1999 by and between North
              Pastoria Partners and the Company (incorporated by reference
              to Exhibit 10.3 to the Company's Registration Statement on
              Form S-1 (File No. 333-45482)).
    10.4      Lease dated June 26, 2000 by and between Renault & Handley
              Employees Investment Co. and the Company (incorporated by
              reference to Exhibit 10.4 to the Company's Registration
              Statement on Form S-1 (File No. 333-45482)).
    10.5#     Alliance Fiber Optic Products, Inc. 2000 Stock Incentive
              Plan (incorporated by reference to Exhibit 10.5 to Amendment
              No. 3 to the Company's Registration Statement on Form S-1
              (File No. 333-45482)).
    10.6#     Alliance Fiber Optic Products, Inc. 2000 Employee Stock
              Purchase Plan (incorporated by reference to Exhibit 10.6 to
              Amendment No. 4 to the Company's Registration Statement on
              Form S-1 (File No. 333-45482)).
    10.7#     Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
              Option Agreement dated May 2, 2000 between Peter C. Chang
              and the Company (incorporated by reference to Exhibit 10.7
              to Amendment No. 1 to the Company's Registration Statement
              on Form S-1 (File No. 333-45482)).
    10.8#     Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
              Option Agreement dated June 15, 2000 between R. David
              Dicioccio and the Company (incorporated by reference to
              Exhibit 10.8 to Amendment No. 1 to the Company's
              Registration Statement on Form S-1 (File No. 333-45482)).
    10.9#     Form of Full Recourse Promissory Note (incorporated by
              reference to Exhibit 10.9 to Amendment No. 1 to the
              Company's Registration Statement on Form S-1 (File No.
              333-45482)).
</Table>

                                        53
<PAGE>

<Table>
<Caption>
 EXHIBIT
  NUMBER                        DESCRIPTION OF DOCUMENT
----------                      -----------------------
<C>           <S>
    10.10#    Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
              Option Agreement dated July 25, 2000 between John M. Harland
              and the Company (incorporated by reference to Exhibit 10.10
              to Amendment No. 3 to the Company's Registration Statement
              on Form S-1 (File No. 333-45482)).
    10.11#    Agreement and Release of Claim by and between the Company
              and John M. Harland dated August 23, 2001 (incorporated by
              reference to Exhibit 10.11 to the Company's Form 10-Q for
              the Quarter ended September 30, 2001).
    21.1      Subsidiaries of the Company (incorporated by reference to
              Exhibit 21.1 to the Company's Annual Report on Form 10-K).
    23.1*     Consent of PricewaterhouseCoopers LLP, independent
              accountants.
    24.1*     Power of Attorney (see page 55 of this Form 10-K).
</Table>

---------------
* Filed herewith.

# Indicates management contract or compensatory plan or arrangement.

     (d) FINANCIAL STATEMENTS.

         Reference is made to Item 14(a)(2) above.

                                        54
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          ALLIANCE FIBER OPTIC PRODUCTS, INC.

Date: March 21, 2002

                                          By         /s/ PETER C. CHANG
                                            ------------------------------------
                                                       Peter C. Chang
                                               President and Chief Executive
                                                           Officer

                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter C. Chang and Philip J. Rehkemper, and each
of them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any amendments
to this report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<Table>
<Caption>
                      NAME                                       TITLE                      DATE
                      ----                                       -----                      ----
<S>                                               <C>                                  <C>
               /s/ PETER C. CHANG                 President, Chief Executive Officer   March 21, 2002
------------------------------------------------   (Principal Executive Officer) and
                 Peter C. Chang                                Chairman




            /s/ PHILIP J. REHKEMPER               Chief Financial Officer (Principal   March 21, 2002
------------------------------------------------   Financial and Accounting Officer)
              Philip J. Rehkemper




             /s/ R. DAVID DICIOCCIO                            Director                March 20, 2002
------------------------------------------------
               R. David Dicioccio




               /s/ GWONG-YIH LEE                               Director                March 21, 2002
------------------------------------------------
                 Gwong-Yih Lee




                /s/ JAMES C. YEH                               Director                March 21, 2002
------------------------------------------------
                  James C. Yeh




                /s/ MICHAEL TUNG                               Director                March 20, 2002
------------------------------------------------
                  Michael Tung
</Table>

                                        55
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
 EXHIBIT
 NUMBER                        DESCRIPTION OF DOCUMENT
---------                      -----------------------
<C>          <S>
 3(i).1      Amended and Restated Certificate of Incorporation
             (incorporated by reference to Exhibit 3(i).3 to the
             Company's Registration Statement on Form S-1 (File No.
             333-45482)).
3(ii).1      Restated Bylaws of the Registrant (incorporated by reference
             to Exhibit 3(ii).3 to the Company's Registration Statement
             on Form S-1 (File No. 333-45482)).
    4.1      Form of Common Stock Certificate (incorporated by reference
             to Exhibit 4.1 to Amendment No. 1 to the Company's
             Registration Statement on Form S-1 (File No. 333-45482)).
    4.2      Amended and Restated Rights Agreement dated as of August 31,
             2000 (incorporated by reference to Exhibit 4.2 to the
             Company's Registration Statement on Form S-1 (File No.
             333-45482)).
    4.3      Rights Agreement dated as of May 29, 2001 between the
             Company and Mellon Investor Services, LLC. (incorporated by
             reference to Exhibit 4.1 to the Company's Registration of
             Certain Classes of Securities on Form 8-A (File No.
             0-31857)).
   10.1#     1997 Stock Plan and form of agreements thereunder
             (incorporated by reference to Exhibit 10.1 to the Company's
             Registration Statement on Form S-1 (File No. 333-45482)).
   10.2      Form of Indemnification Agreement between the Company and
             its officers and directors (incorporated by reference to
             Exhibit 10.2 to the Company's Registration Statement on Form
             S-1 (File No. 333-45482)).
   10.3      Lease Agreement dated April 6, 1999 by and between North
             Pastoria Partners and the Company (incorporated by reference
             to Exhibit 10.3 to the Company's Registration Statement on
             Form S-1 (File No. 333-45482)).
   10.4      Lease dated June 26, 2000 by and between Renault & Handley
             Employees Investment Co. and the Company (incorporated by
             reference to Exhibit 10.4 to the Company's Registration
             Statement on Form S-1 (File No. 333-45482)).
   10.5#     Alliance Fiber Optic Products, Inc. 2000 Stock Incentive
             Plan (incorporated by reference to Exhibit 10.5 to Amendment
             No. 3 to the Company's Registration Statement on Form S-1
             (File No. 333-45482)).
   10.6#     Alliance Fiber Optic Products, Inc. 2000 Employee Stock
             Purchase Plan (incorporated by reference to Exhibit 10.6 to
             Amendment No. 4 to the Company's Registration Statement on
             Form S-1 (File No. 333-45482)).
   10.7#     Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
             Option Agreement dated May 2, 2000 between Peter C. Chang
             and the Company (incorporated by reference to Exhibit 10.7
             to Amendment No. 1 to the Company's Registration Statement
             on Form S-1 (File No. 333-45482)).
   10.8#     Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
             Option Agreement dated June 15, 2000 between R. David
             Dicioccio and the Company (incorporated by reference to
             Exhibit 10.8 to Amendment No. 1 to the Company's
             Registration Statement on Form S-1 (File No. 333-45482)).
   10.9#     Form of Full Recourse Promissory Note (incorporated by
             reference to Exhibit 10.9 to Amendment No. 1 to the
             Company's Registration Statement on Form S-1 (File No.
             333-45482)).
   10.10#    Alliance Fiber Optic Products, Inc. 1997 Stock Plan Stock
             Option Agreement dated July 25, 2000 between John M. Harland
             and the Company (incorporated by reference to Exhibit 10.10
             to Amendment No. 3 to the Company's Registration Statement
             on Form S-1 (File No. 333-45482)).
   10.11#    Agreement and Release of Claim by and between the Company
             and John M. Harland dated August 23, 2001 (incorporated by
             reference to Exhibit 10.11 to the Company's Form 10-Q for
             the Quarter ended September 30, 2001).
   21.1      Subsidiaries of the Company (incorporated by reference to
             Exhibit 21.1 to the Company's Annual Report on Form 10-K).
</Table>

                                        56
<PAGE>

<Table>
<Caption>
 EXHIBIT
 NUMBER                        DESCRIPTION OF DOCUMENT
---------                      -----------------------
<C>          <S>
   23.1*     Consent of PricewaterhouseCoopers LLP, independent
             accountants.
   24.1*     Power of Attorney (see page 55 of this Form 10-K).
</Table>

---------------
* Filed herewith.

# Indicates management contract or compensatory plan or arrangement.

                                        57