<PAGE>   1

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                              --------------------

                                    FORM 10-Q

        (Mark One)
              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 2001

                                       or

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

        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)


           Delaware                                             77-0554122
 ------------------------------                           ----------------------
(State or other jurisdiction of                              (I.R.S. employer
 incorporation or organization)                           identification number)


             735 North Pastoria Avenue, Sunnyvale, California 94085
   -------------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's telephone number, including area code: (408) 736-6900

                              --------------------

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed 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 [ ]


On August 1, 2001, 35,012,320 shares of the Registrant's Common Stock, $0.001
par value per share, were outstanding.



<PAGE>   2

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.

                                    FORM 10-Q

                      QUARTERLY PERIOD ENDED JUNE 30, 2001

                                      INDEX

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
<S>                                                                                <C>
Part I:  Financial Information................................................       1

    Item 1:  Financial Statements.............................................       1

        Consolidated Balance Sheets at December 31, 2000 and June 30, 2001           1

        Consolidated Statements of Operations for the Three and Six Months
          Ended June 30, 2000 and 2001 .......................................       2

        Consolidated Statements of Cash Flows for the Six Months Ended
          June 30, 2000 and 2001 .............................................       3

        Notes to Consolidated Financial Statements............................       4

    Item 2:  Management's Discussion and Analysis of Financial Condition
      and Results of Operations ..............................................       8

    Item 3:  Quantitative and Qualitative Disclosures About Market Risk
      and Interest Rate Risk .................................................      21

Part II:  Other Information...................................................      22

    Item 2:  Changes in Securities and Use of Proceeds........................      22

    Item 4:  Submissions and Matters to a Vote of Security Holders............      22

    Item 6:  Exhibits and Reports on Form 8-K.................................      24

Signature.....................................................................      25

</TABLE>



                                       i
<PAGE>   3

                          PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.
                           CONSOLIDATED BALANCE SHEETS
                  (UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                  DEC. 31,              JUNE 30,
                                                                    2000                  2001
                                                                  ---------             ---------
<S>                                                               <C>                   <C>
ASSETS
Current assets:
       Cash and cash equivalents                                  $  42,548             $  21,293
       Short-term investments                                        24,129                36,055
       Accounts receivable, net                                       5,302                 2,869
       Inventories                                                    6,792                 6,386
       Prepaid expense and other current assets                         835                   465
                                                                  ---------             ---------
            Total current assets                                     79,606                67,068

Property and equipment, net                                           8,590                 6,736
Other assets                                                            329                   713

                                                                  ---------             ---------

            Total assets                                          $  88,525             $  74,517
                                                                  =========             =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Accounts payable                                           $   3,234             $   2,674
       Income tax payable                                               401                   322
       Accrued expenses                                               2,210                 2,087
                                                                  ---------             ---------
            Total current liabilities                                 5,845                 5,083

Long-term liabilities                                                   181                   161

                                                                  ---------             ---------

            Total liabilities                                         6,026                 5,244
                                                                  ---------             ---------

Commitments and contingencies (Note 5)

Stockholders' equity
       Common stock, $0.001 par value: 250,000,000
            shares authorized at December 31, 2000
            and June 30, 2001; and 34,644,300 and
            34,989,320 shares issued and outstanding
            at December 31, 2000 and June 30, 2001,
            respectively                                                 35                    35
       Additional paid-in-capital                                   114,984               113,520
       Receivables from stockholders                                 (1,950)               (1,950)
       Deferred stock-based compensation                            (20,813)              (13,314)
       Accumulated deficit                                           (9,576)              (28,832)
       Accumulated other comprehensive loss                            (181)                 (186)

                                                                  ---------             ---------

       Stockholders' equity                                          82,499                69,273

                                                                  ---------             ---------

            Total liabilities and stockholders' equity            $  88,525             $  74,517
                                                                  =========             =========
</TABLE>

       The accompanying notes are an integral part of these consolidated
                              financial statements



                                       1
<PAGE>   4

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                                  ---------------------------        -------------------------
                                                                    2000              2001             2000             2001
                                                                  ---------         ---------        --------         --------
<S>                                                               <C>               <C>              <C>              <C>
Revenues                                                           $  4,271         $  4,568         $  7,414         $ 11,937

Cost of revenues                                                      2,374           15,267            4,137           19,824
Non-cash compensation expense                                            74              427              108              912
                                                                   --------         --------         --------         --------
    Total cost of revenues                                            2,448           15,694            4,245           20,736

                                                                   --------         --------         --------         --------

    Gross profit (loss)                                               1,823          (11,126)           3,169           (8,799)

Operating Expenses
    Research and development                                          1,183            1,784            1,908            3,458
    Non-cash compensation expense                                       180            1,275              237            2,522
                                                                   --------         --------         --------         --------
         Total research and development                               1,363            3,059            2,145            5,980

    Sales and marketing                                                 487              733              815            1,542
    Non-cash compensation expense                                        40              292               75              585
                                                                   --------         --------         --------         --------
         Total sales and marketing                                      527            1,025              890            2,127

    General and administrative                                          424            1,148              822            2,107
    Non-cash compensation charge                                        460              755            1,164            1,736
                                                                   --------         --------         --------         --------
         Total general and administrative                               884            1,903            1,986            3,843

                                                                   --------         --------         --------         --------
         Total operating expenses                                     2,774            5,987            5,021           11,950
                                                                   --------         --------         --------         --------
Loss from operations                                                   (951)         (17,113)          (1,852)         (20,749)
Interest and other income, net                                           67              636              189            1,619
                                                                   --------         --------         --------         --------
Loss before income taxes                                               (884)         (16,477)          (1,663)         (19,130)
Income tax provision                                                     36                3               71              126
                                                                   --------         --------         --------         --------
Net loss attributable to common stockholders                       $   (920)        $(16,480)        $ (1,734)        $(19,256)
                                                                   ========         ========         ========         ========

Net loss per share attributable to common stockholders:
         Basic and diluted                                         $  (0.17)        $  (0.50)        $  (0.34)        $  (0.59)
                                                                   ========         ========         ========         ========

Shares used in computing net loss per share attributable to
  common stockholders:
         Basic and diluted                                            5,397           32,987            5,119           32,809
                                                                   ========         ========         ========         ========

Pro forma net loss per share attributable to common
     stockholders
         Basic and diluted                                         $  (0.04)        $  (0.50)        $  (0.08)        $  (0.59)
                                                                   ========         ========         ========         ========

Shares used in computing pro forma net loss per share
    attributable to common stockholders:                             22,797           32,987           22,320           32,809
                                                                   ========         ========         ========         ========
</TABLE>

       The accompanying notes are an integral part of these consolidated
                              financial statements



                                       2
<PAGE>   5

                      ALLIANCE FIBER OPTIC PRODUCTS, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                           (UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       SIX MONTHS ENDED
                                                                                            JUNE 30
                                                                                   ----------------------------
                                                                                    2000                 2001
                                                                                   -------             --------
<S>                                                                                <C>                 <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss:                                                                    $(1,734)            $(19,256)
      Adjustments to reconcile net loss to net cash provided
          by (used in) operating activities:
          Depreciation                                                                 384                  974
          Amortization of deferred compensation                                      1,584                5,755
          Impairment on property and equipment                                          --                5,200
          Provision for inventory                                                       --                6,543
          Changes in assets and liabilities:
             Accounts receivable, net                                                 (490)               2,423
             Inventories                                                              (973)              (6,185)
             Prepaid expenses and other assets                                         (18)                 (17)
             Accounts payable                                                        1,160                 (577)
             Income tax payable and accrued expenses                                   539                 (212)
             Other long-term liabilities                                                48                  (20)
                                                                                   -------             --------
                    Net cash provided by (used in) operating activities                500               (5,372)

 CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of short-term investments                                              (433)             (11,848)
      Purchase of property and equipment                                            (2,158)              (4,320)
                                                                                   -------             --------
                    Net cash used in investing activities                           (2,591)             (16,168)

 CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from bank borrowings                                                    459                   --
      Proceeds from issuance of Series B preferred stock                               280                   --
      Proceeds from issuance of common stock under ESPP                                 --                  210
      Proceeds from the exercise of common stock options                                56                   71
                                                                                   -------             --------
                    Net cash provided by financing activities                          795                  281

 Effect of exchange rate changes on cash and cash equivalents                          (51)                   4
                                                                                   -------             --------
 Net decrease in cash and cash equivalents                                          (1,347)             (21,255)
 Cash and cash equivalents at beginning of period                                    6,139               42,548
                                                                                   -------             --------
 Cash and cash equivalents at end of period                                        $ 4,792             $ 21,293
                                                                                   =======             ========

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Income taxes paid                                                            $    71             $     --
                                                                                   =======             ========
</TABLE>

        The accompanying notes are an integral part of these consolidated
                              financial statements



                                       3
<PAGE>   6

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)


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. The Company has manufacturing and product
development capabilities in the United States, Taiwan, and China.

BASIS OF PRESENTATION

        The consolidated financial information as of June 30, 2001 included
herein is unaudited and has been prepared by the Company in accordance with
generally accepted accounting principles and reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to state fairly the Company's consolidated financial
position, results of its consolidated operations, and consolidated cash flows
for the periods presented. The December 31, 2000 balance sheet and the
consolidated statements of operations and cash flows for the six month period
ended June 30, 2000 were derived from audited financial statements on those
dates.

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results will differ from those estimates, and such
differences may be material to the financial statements.

        These financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 2000 included in the Company's Annual Report on Form 10-K, as filed on April
2, 2001, with the Securities and Exchange Commission ("SEC"). The results of
operations for the three and six months ended June 30, 2001 are not necessarily
indicative of the results to be expected for any future periods.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board (" FASB") issued
Statement of Financial Accounting Standards 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.
The Company adopted SFAS No. 133 in the first



                                       4
<PAGE>   7

quarter of fiscal year 2001 and the adoption of SFAS No. 133 did not have a
material effect on the Company's consolidated financial statements.

        In July 2001, the FASB issued two statements, Statement of Financial
Accounting Standards No. 141, "Business Combinations" and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 prohibits the use of the pooling-of-interest method and establish that all
business combinations be accounted for using the purchase method of accounting.
SFAS NO. 142 further established a new accounting standard for goodwill acquired
in a business combination. It continued to require recognition of goodwill as an
asset but would not permit amortization of goodwill as currently require by APB
Opinion No. 17, "Intangible Assets." The statement also established a new method
of testing goodwill for impairment. It requires that goodwill be separately
tested for impairment using a fair-value-based approach. Goodwill would be
tested for impairment at a level referred to as a reporting unit, generally a
lower lever than that of the total entity. The statement requires that a
benchmark assessment be performed in certain circumstances. That assessment
would establish the methods and assumptions that would be used to test goodwill
for impairment. Goodwill of a reporting unit would be tested for impairment when
events and circumstances occur indicating that it might be impaired. Goodwill
related to long-lived assets to be held and used would no longer be allocated to
those assets when they are tested for impairment as currently required by SFAS
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of." The provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001. Use of the pooling-of-interest
method of accounting for those transactions is prohibited. The provisions of the
statement also apply to all business combinations accounting for by the purchase
method that are completed after June 30, 2001. The provisions of SFAS No. 142
should be applied in fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when the assets were initially
recognized. Early application is permitted for entities with fiscal years
beginning after March 15, 2001 provided that the first interim period financial
statements have not been issued previously. In all cases, the provisions of this
statement initially should be applied in the beginning of a fiscal year.
Retroactive application is not permitted. These new standards would affect the
Company's financial statements if the Company were to acquire other entities.

2. INVENTORIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                         DECEMBER 31,       JUNE 30,
                            2000              2001
                         -----------        --------
<S>                      <C>                <C>
Finished goods             $2,107            $1,842
Work-in-process             2,471             2,548
Raw materials               2,214             1,996
                           ------            ------
                           $6,792            $6,386
                           ======            ======
</TABLE>


3. LOSS PER SHARE

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 rights, common stock issuable upon the
exercise of stock options and common stock issuable upon conversion of
mandatorily redeemable convertible preferred stock.

PRO FORMA NET LOSS PER SHARE

        Basic and diluted pro forma net loss per share for the three and six
months ended June 30, 2000 and 2001 is computed using the weighted average
number of common shares outstanding, including the conversion of the Company's
mandatorily redeemable convertible preferred stock into common stock effective
upon the closing of the Company's initial public offering, as if such conversion
occurred at the beginning of the periods presented, or the date of issuance of
the mandatorily redeemable convertible preferred stock, whichever is later. The
calculation of basic and diluted pro forma net loss per share excludes
incremental common stock subject to repurchase rights and common stock issuable
upon the exercise of stock options as the effect would be anti-dilutive.

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



                                       5
<PAGE>   8

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED JUNE 30,
                                                                -----------------------------
                                                                  2000                 2001
                                                                --------             --------
<S>                                                             <C>                  <C>
    Numerator:
      Net loss attributable to common stockholders              $ (1,734)            $(19,256)
                                                                ========             ========

    Denominator:
      Shares used in computing net loss per share:                 5,433               34,841
       Weighted average of common shares outstanding
       Less: Weighted average of shares subject to
         repurchase right                                           (314)              (2,032)
                                                                --------             --------
       Basic and diluted                                           5,119               32,809
                                                                ========             ========

    Net loss per share attributable to common
     stockholders:
      Basic and diluted                                         $  (0.34)            $  (0.59)
                                                                ========             ========

    Anti-dilutive securities, including options,
       warrants and mandatorily redeemable
       convertible preferred stock, not included
       in net loss per share calculation                          19,310                3,503
                                                                ========             ========

    Pro forma:
      Shares used above                                            5,119               32,809

    Pro forma adjustment to reflect weighted
      average effect of the assumed conversion
      of mandatorily redeemable convertible
      preferred stock                                             17,201                   --
                                                                --------             --------

    Shares used in computing pro forma net loss
     per share attributable to common stockholders:
       Basic and diluted                                          22,320               32,809
                                                                ========             ========

    Pro forma net loss per share attributable to
     common stockholders:
       Basic and diluted                                        $  (0.08)            $  (0.59)
                                                                ========             ========
</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>
                                                                 SIX MONTHS ENDED JUNE 30,
                                                                 -------------------------
                                                                  2000               2001
                                                                 -------            ------
<S>                                                              <C>                <C>
    Options to purchase common stock                               1,910            3,503
    Mandatorily redeemable convertible preferred stock            17,400               --
                                                                  ------            -----
                                                                  19,310            3,503
                                                                  ======            =====
</TABLE>


4. GEOGRAPHIC SEGMENT INFORMATION

        The Company operates in a single industry segment. This industry segment
is characterized by rapid technological change and significant competition.
Certain components used in manufacturing the Company's



                                       6
<PAGE>   9

products have relatively few alternative sources of supply, and establishing
additional or replacement suppliers for such components cannot be accomplished
quickly.

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

<TABLE>
<CAPTION>
                         SIX MONTHS ENDED JUNE 30,
                         -------------------------
                          2000               2001
                         ------            -------
<S>                      <C>               <C>
REVENUES
United States            $6,809            $10,695
Taiwan                      605              1,242
                         ------            -------
Total                    $7,414            $11,937
                         ======            =======
</TABLE>

<TABLE>
<CAPTION>
                             DECEMBER 31,        JUNE 30,
                             ------------        --------
                                2000               2001
                             ------------        --------
<S>                          <C>                 <C>
IDENTIFIABLE ASSETS
United States                  $80,548            $66,159
Taiwan                           7,771              8,039
China                              206                319
                               -------            -------
Total                          $88,525            $74,517
                               =======            =======
</TABLE>


5. 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 any such
matters to date will not have a material adverse effect on the Company's
consolidated financial statements.


6. IMPAIRMENT ON PROPERTY AND EQUIPMENT AND PROVISION FOR INVENTORY

        Due to the decline in business conditions, the Company determined that
demand for DWDM products will 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 second quarter of 2001
related to the impairment, measured as the amount by which the carrying amount
exceeded the present value of the estimated future cash flows for DWDM products.

        The Company also recorded a provision for inventory totaling $6.5
million during the second quarter of 2001, of which substantially all related to
an excess inventory charge. This excess inventory charge was due to an
unforeseeable and significant decrease in forecasted revenue 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.



                                       7
<PAGE>   10

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

8
     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 our profitability, statements as to our net losses, our sources of revenue
and anticipated revenue, the need for future inventory write-downs, the levels
of allowances for bad debts, our ability to maintain and develop supplier
relationships, demand for our products, the fluctuation of our cost of revenues
as a percentage of revenues, the impact of the power crisis in California, our
plans to expand our product development efforts, our plans to expand our
operations domestically and internationally, our plans to hire additional
employees, our exposure to currency rate fluctuations, the amount and mix of our
anticipated expenditures, our need for additional financing, our ability to
establish and maintain relationships with key customers, our competitors, our
plans to expand our manufacturing capacity, our ability to maintain appropriate
inventory, and factors that affect a customer's decision to chose a supplier,
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 the competition from
other entities 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,
the need for and magnitude of future inventory write-downs or impairment
charges, 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.

        This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K, and the notes thereto,
for the year ended December 31, 2000.


OVERVIEW

        We were founded in December 1995 and commenced operations to design,
manufacture and market fiber optic interconnect products, which we term our
Optical Path Integration Solution, or OPIS, products. We also distributed a
cable television transmission product line, which we discontinued in 1997. Since
1997, we have broadened our OPIS product line which now includes attenuators and
fused fiber products. Most of these products were introduced between 1997 and
1999. In early 1999, we started developing our dense wavelength division
multiplexing, or DWDM, and other wavelength management products based in part on
our proprietary technology. We started selling our DWDM devices in limited
production quantities in July 2000.

        Substantially all of our OPIS products are manufactured by our Taiwan
subsidiary and substantially all of our DWDM products are manufactured in our
Sunnyvale, California facility.



                                       8
<PAGE>   11

        From our inception, we have derived nearly all of our revenues from our
OPIS products. Revenues from our DWDM products represented approximately 8.3% of
revenues for the year ended December 31, 2000. In the first six months of 2001,
our DWDM products contributed revenues of $1.1 million, or 9.2% of total
revenues.

        We market and sell our products predominantly through our direct sales
force. 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. For the six months ended June 30, 2000
and 2001, revenues derived from sales outside of North America were 20.8% and
10.4%, respectively.

        Demand for products in the telecommunications industry, including our
products, declined dramatically during the first quarter of 2001 and continued
to decline in the second quarter of 2001. During the first six months of 2001,
we experienced a slowdown in customer orders, as well as cancellations and
rescheduling of orders to future quarters. As a result, our revenues have
declined in each of the first two quarters of 2001. Additionally, sales to
customers located in the People's Republic of China, net of allowances, were
approximately $1.2 million for the six months ended June 30, 2001 and net
accounts receivable at that date were $540,000. Although we believe this amount
is collectible, additional allowances may have to be taken in the future.

        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 accordance 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 December 2000, we established a subsidiary in the People's Republic
of China and commenced operations in a facility near the city of Shenzhen. We
entered into a lease for a new facility in April 2001 but cancelled the lease,
without penalty, in June 2001.

RESULTS OF OPERATIONS

        The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenues:

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED JUNE 30,             SIX MONTHS ENDED JUNE 30,
                                                        --------------------------              --------------------------
                                                         2000                2001                2000                2001
                                                        ------              ------              ------              ------
<S>                                                     <C>                 <C>                 <C>                 <C>
Revenues                                                 100.0%              100.0%              100.0%              100.0%
Cost of revenues                                          57.3%             (343.6%)              57.3%             (173.7%)

                                                        ------              ------              ------              ------

Gross profit (loss)                                       42.7%             (243.6%)              42.7%              (73.7%)

Operating Expenses
     Research and development                             31.9%               67.0%               28.9%               50.1%
     Sales and marketing                                  12.4%               22.4%               12.0%               17.8%
     General and administrative                           20.7%               41.7%               26.8%               32.2%
                                                        ------              ------              ------              ------
          Total operating expenses                        65.0%              131.1%               67.7%              100.1%
                                                        ------              ------              ------              ------
Loss from operations                                     (22.3%)            (374.7%)             (25.0%)            (173.8%)
Interest and other income, net                             1.6%               14.0%                2.6%               13.6%
                                                        ------              ------              ------              ------
Loss before income taxes                                 (20.7%)            (360.7%)             (22.4%)            (160.2%)
Income tax provision                                       0.8%                0.1%                1.0%                1.1%
                                                        ------              ------              ------              ------
Net loss attributable to common stockholders             (21.5%)            (360.8%)             (23.4%)            (161.3%)
                                                        ======              ======              ======              ======
</TABLE>



                                       9
<PAGE>   12

        Revenues. Revenues were $4.3 million and $4.6 million for the three
months ended June 30, 2000 and 2001, respectively. Revenues increased 7.0% from
2000 to 2001 due primarily to the introduction of our DWDM products, which were
introduced in the second half of fiscal year 2000. Revenues from our DWDM
products were $197,000 for the three months ended June 30, 2001. Revenues were
$7.4 million and $11.9 million for the six months ended June 30, 2000 and 2001,
respectively. Revenues increased 61.0% from 2000 to 2001 due to higher volume
sales of our OPIS products and, to a lesser extent, the introduction of our DWDM
products, which accounted for $1.1 million in revenues for the six months ended
June 30, 2001.

        Gross Profit (Loss). Gross profit (loss), including non-cash
compensation expense, decreased in absolute dollars from $1.8 million, or 42.7%
of revenues, for the three months ended June 30, 2000 to a loss of $11.1
million, or (243.6%) of revenues, for the same period in 2001. Excluding
non-cash compensation expense, gross profit decreased from $1.9 million, or
44.4% of revenues for the three months ended June 30, 2000, to a loss of $10.7
million, or (234.2%) of revenues, for the same period in 2001. Gross profit,
including non-cash compensation expense, decreased in absolute dollars from $3.2
million, or 42.7% of revenues, for the six months ended June 30, 2000 to a loss
of $8.8 million, or (73.7%) of revenues, for the same period in 2001. Excluding
non-cash compensation expense, gross profit decreased from $3.3 million, or
44.2% of revenues for the six months ended June 30, 2000, to a loss of $7.9
million, or (66.1%) of revenues, for the same period in 2001.

        The decrease in margins were primarily due to an excess inventory charge
of $6.5 million, an asset impairment charge of $5.2 million recorded in the
second quarter of 2001 and unabsorbed overhead in our DWDM manufacturing
operations due to low production volumes.

        Due to the unforeseeable and significant decrease in demand for our
products, inventory levels exceeded our requirements based on current 12-month
sales forecasts. This excess inventory charge was calculated based on the
inventory levels in excess of 12-month demand for each specific product. We do
not anticipate that the excess inventory subject to this provision will be used
at a later date based on our current 12-month demand forecast.

        Due to the decline in business conditions, we determined that expected
demand for DWDM products will be significantly lower than originally expected
and, therefore, that the carrying value of the property and equipment used in
the manufacture of our DWDM products was impaired. We recorded a charge of $5.2
million during the second quarter of 2001 related to the impairment, measured as
the amount by which the carrying amount exceeded the present value of the
estimated future cash flows for DWDM products.

        We expect our gross profit as a percentage of revenues to continue to be
negatively impacted in the near term due to low production volumes and
unabsorbed overhead. The anticipated growth of our DWDM product sales has been
significantly impacted by the overall industry slowdown. After the excess
inventory charge, the Company had approximately $1.8 million in DWDM inventory
on hand at June 30, 2001. Although we continue to take steps to manage future
inventory levels, there is a risk that additional write-downs of our inventory
may have to be taken in future periods if orders for our products do not
materialize.

        Research and Development Expenses. Research and development expenses,
including non-cash compensation expense, increased from $1.4 million, or 31.9%
of revenues, for the three months ended June 30, 2000 to $3.1 million, or 67.0%
of revenues, for the same period in 2001. Excluding non-cash compensation
expense, research and development expenses increased from $1.2 million, or 27.7%
of revenues, for the three months ended June 30, 2000 to $1.8 million, or 39.1%
of revenues, in the same period in 2001. Research and development expenses,
including non-cash compensation expense, increased from $2.1 million, or 28.9%
of revenues, for the six months ended June 30, 2000 to $6.0 million, or 50.1% of
revenues, for the same period in 2001. Excluding non-cash compensation expense,
research and development expenses increased from $1.9 million, or 25.7% of
revenues, for the six months ended June 30, 2000 to $3.5 million, or 29.0% of
revenues, for the same period in 2001. Excluding non-cash compensation expense,
these increases in absolute dollars were primarily due to costs related to the
development of new products and increases in the number of research and
development personnel and related costs. We expect our research and development
expenses to continue to increase in absolute dollars in 2001.



                                       10
<PAGE>   13

        Sales and Marketing Expenses. Sales and marketing expenses, including
non-cash compensation expense, increased from $527,000, or 12.4% of revenues,
for the three months ended June 30, 2000 to $1.0 million, or 22.4% of revenues,
for the same period in 2001. Excluding non-cash compensation expense, sales and
marketing expenses increased from $487,000, or 11.4% of revenues, in 2000 to
$733,000, or 16.0% of revenues, in 2001. Sales and marketing expenses, including
non-cash compensation expense, increased from $890,000, or 12.0% of revenues,
for the six months ended June 30, 2000 to $2.1 million, or 17.8% of revenues,
for the same period in 2001. Excluding non-cash compensation expense, sales and
marketing expenses increased from $815,000, or 11.0% of revenues, for the six
months ended June 30, 2000 to $1.5 million, or 12.9% of revenues, in the same
period in 2001. These increases were attributable primarily to hiring additional
sales and marketing personnel and expanding our sales and marketing efforts. We
expect our sales and marketing expenses to continue to be flat over the balance
of 2001.

        General and Administrative Expenses. General and administrative
expenses, including non-cash compensation expense, increased in absolute dollars
from $884,000, or 20.7% of revenues, for the three months ended June 30, 2000 to
$1.9 million, or 41.7% of revenues, for the same period in 2001. Excluding
non-cash compensation expense, general and administrative expenses increased
from $424,000, or 9.9% of revenues, for the three months ended June 30, 2000 to
$1.1 million, or 25.1% of revenues, in the same period in 2001. General and
administrative expenses, including non-cash compensation expense, increased in
absolute dollars from $2.0 million, or 26.8% of revenues, for the six months
ended June 30, 2000 to $3.8 million, or 32.2% of revenues, for the same period
in 2001. Excluding non-cash compensation expense, general and administrative
expenses increased from $822,000, or 11.1% of revenues, in 2000 to $2.1 million,
or 17.7% of revenues, in 2001. These increases were primarily due to hiring
additional personnel and associated expenses necessary to support our increased
scale of operations and the requirements of being a public company. General and
administrative expenses, excluding non-cash compensation expenses, increased
from $959,000 to $1.1 million from the quarter ended March 31, 2001 to the
quarter ended June 30, 2001, respectively, primarily as the result of legal,
printing, and other costs associated with the Annual Report, SEC filings, and
implementation of a stockholder rights plan. We expect our general and
administrative expenses to be lower over the next two quarters.

        Interest and Other Income, Net. Interest and other income, net, was
$67,000 and $636,000 for the three months ended June 30, 2000 and 2001,
respectively. Interest and other income, net, was $189,000 and $1.6 million for
the six months ended June 30, 2000 and 2001, respectively. The increases from
2000 to 2001, in both instances, were the result of significantly higher average
cash balances resulting from proceeds from a private round of preferred stock
financing in July 2000 and our initial public offering of common stock in
November 2000.

        Income Taxes. Income taxes were $36,000 and $3,000 for the three months
ended June 30, 2000 and 2001, respectively, and $71,000 and $126,000 for the six
months ended June 30, 2000 and 2001, respectively. The income tax expense in
these periods was the result of taxable income from our Taiwan subsidiary.
Non-cash compensation charges are not deductible for income tax purposes, which
contributed in the taxable income position.

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
approximately $44.4 million, net of costs and expenses. At June 30, 2001, we had
cash and cash equivalents of $21.3 million and short-term investments of $36.1
million.

        Net cash generated by operating activities was $500,000 for the six
months ended June 30, 2000 compared to net cash used by operations of $5.4
million for the six months ended June 30, 2001. Net cash generated in the six
months ended June 30, 2000 was primarily the result of $2.0 million in non-cash
expenses offsetting our net loss of $1.7 million, and a $218,000 decrease in net
working capital. Net cash used in the six months ended June 30, 2001 was $5.4
million, due primarily to our net loss after the effect of non-cash expenses and
cash to fund an increase in inventories and other assets and a decrease in
accounts payable, income tax payable, and accrued expenses, partially offset by
a decrease in accounts receivable.

        Cash used in investing activities was $2.6 million and $16.2 million for
the six months ended June 30, 2000 and 2001, respectively. In the six months
ended June 30, 2000, $433,000 was invested in high-grade, short-term investments
while $2.2 million was used to acquire property and equipment. In the six months
ended 2001, $11.9



                                       11
<PAGE>   14

million was invested in high-grade, short-term investments, while $4.3 million
was used to acquire property and equipment.

        Cash generated by financing activities was $795,000 in the six months
ended June 30, 2000, resulting from $459,000 of net borrowings on our bank
lending facility and $280,000 proceeds from Series B preferred stock. For the
six months ended June 30, 2001, cash generated by financing activities was
$281,000, resulting from proceeds from the exercise of common stock options and
stock issued 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 fully drawn down during
the course of fiscal year 2000. We repaid these loans with a portion of the
proceeds of our initial public offering. In July 2000, we arranged additional
facilities with Silicon Valley Bank: a $750,000 equipment lease line which is
fully available, and a $1 million line of credit under which we have obtained a
$641,000 letter of credit to secure a building lease. The loan facility will
expire in July 2001 and the Company does not intend to renew the facility.

        We believe that our current cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, our
future growth, including 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.


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 losses of approximately $1.7 million and $19.3 million in
the first six months of fiscal 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 June 30, 2001, we had an
accumulated deficit of approximately $28.8 million.

        Although we are currently experiencing decreased demand for our products
and are not currently expanding our manufacturing capacity, we are hopeful that
demand does 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. In particular, given
our early stage of development, our increasing operating expenses, the rate at
which competition in our industry continues to intensify 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



                                       12
<PAGE>   15

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 which 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 INTEGRATION SOLUTION (OPIS) PRODUCTS HAVE HISTORICALLY
REPRESENTED SUBSTANTIALLY ALL OF OUR REVENUES, AND IF WE ARE UNSUCCESSFUL IN
COMMERCIALLY SELLING OUR THIN-FILM FILTER-BASED DWDM PRODUCTS, OUR BUSINESS WILL
BE SERIOUSLY HARMED.

        Sales of our OPIS products accounted for over 91% of our revenues in the
six months ended June 30, 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 thin-film
filter-based DWDM products, which we began shipping commercially in July 2000.
Demand for these products has declined sharply during the six months ended June
30, 2001. Based on the decreased demand and reduced revenue projections for this
product line, we took a charge of $6.5 million against excess DWDM inventory in
the period ended June 30, 2001. In addition, we recorded an impairment charge of
$5.2 million for the property and equipment used to manufacture our DWDM
products. If demand does not increase and our target customers do not adopt and
purchase our DWDM products, our revenues may decline further and we may have to
write-off additional inventory currently on our books and incur additional
impaired asset charges. At June 30, 2001, less than 10% of our backlog was
related to our DWDM products.

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, which acquired E-TEK Dynamics and SDL, Lucent, Luminent,
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. One of our top ten customers, JDS Uniphase, is
also a competitor, however this customer accounted for less than 10% of our
revenues in the six months ended June 30, 2001. 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.



                                       13
<PAGE>   16

        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 and our business would suffer.

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.
Many 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


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 $1.9 million and $3.5 million in the
first six months of 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 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 had rapidly expanded our operations domestically and internationally
in the final two quarters of 2000. We have had to carefully manage and
re-evaluate this expansion given the sudden and dramatic downturn in demand for
our products experienced in the first two quarters of 2001. Additionally, we
implemented a reduction in force during this period to more closely match our
operations to this decreased demand for our products. As of June 30, 2001, we
had a total of 183 full-time employees in Sunnyvale, California, 279 full-time
employees in Taiwan, and 47 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.
Some of our existing senior management personnel joined us within the last 12
months, including a number of key managerial, technical and operations personnel
whom we have not yet fully integrated. Our Chief Financial Officer and our
Senior Vice President, Product Development, have both joined us since July 2000.
To manage the expected fluctuations in our operations and personnel, we will be
required to:



                                       14
<PAGE>   17

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

        -       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. For example, in the last quarter of 2000, we established
a manufacturing facility in mainland China. 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 recently expanded our
manufacturing facilities in Taiwan and manufacture many of our products there.
We also established a manufacturing facility in mainland China where we have
begun to manufacture some of our products. 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 new manufacturing operations 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.

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 these new products, the new
products may not achieve widespread market acceptance necessary to provide an
adequate return on our investment.

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.



                                       15
<PAGE>   18

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. We are presently able to fill substantially all of our
customers' orders. However, if we do not increase our manufacturing capacity to
meet the future production requirements of our customers, growth of our business
will be negatively impacted. 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
written off.

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. In this regard, we are
experiencing difficulties in obtaining ferrules used in our OPIS products. The
difficulties have typically resulted from demand for ferrules within the
industry exceeding the capacity of suppliers. We believe shortages of ferrules
have limited our growth. In the future, if we are unable to obtain sufficient
ferrules to meet increasing demand for products incorporating these ferrules,
potential growth of our business will be impeded. In addition, 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. In anticipation of
market demand for our DWDM products, we have been, and intend to continue,
building inventory. If we underestimate our requirements, we may have inadequate
inventory, which could result in delays in 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 this
quarter, 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



                                       16
<PAGE>   19

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 hiring and
retaining 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 U.S.
and abroad, we must hire a number of research and development personnel. In
addition, in order to expand our manufacturing capabilities in China, we must
hire a significant number of additional manufacturing and research and
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. Competition for highly
skilled personnel is intense, particularly in Northern California. We may also
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.

        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



                                       17
<PAGE>   20

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.

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 to be deployed 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;



                                       18
<PAGE>   21

        -       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.

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 U.S. 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.

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 year ended December 31, 2000 and the six months ended June 30,
2001, sales to customers located outside of North America were 20.8% and 10.4%
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.

WE MAY EXPERIENCE POWER BLACKOUTS AND HIGHER ELECTRICITY PRICES AS A RESULT OF
CALIFORNIA'S CURRENT ENERGY CRISIS, WHICH COULD DISRUPT OUR MANUFACTURING
OPERATIONS AND INCREASE OUR EXPENSES.

        California is in the midst of an energy crisis that could disrupt our
manufacturing operations and increase our expenses. We rely on the major
Northern California public utility, Pacific Gas & Electric Company, or PG&E, to
supply electric power to our facilities in Northern California. Due to problems
associated with the deregulation of the power industry in California and
shortages in wholesale electricity supplies, customers of PG&E have been faced
with increased electricity prices, power shortages and rolling blackouts.
Increased energy prices will increase our expenses incurred in manufacturing
which will increase our cost of revenues and decrease our gross profits. If
blackouts interrupt our power supply, we may be temporarily unable to continue
our manufacturing operations at our



                                       19
<PAGE>   22

facilities. Any such interruption in our ability to continue our manufacturing
operations could delay our ability to develop new products, manufacture our
existing products or provide services. Such disruptions could damage our
reputation and result in lost revenue, either of which could substantially harm
our business and results of operations.

BECAUSE OUR MANUFACTURING OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE FAULT
ZONES IN CALIFORNIA AND TAIWAN, 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. Because the majority of our manufacturing operations are
located in Taiwan, a large earthquake 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.

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 additional intellectual property
protection is obtained by participants in our industry, litigation is likely to
become more frequent. From time to time, third 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 have been advised that we may infringe a patent and may owe
royalties. We may be a party to litigation regarding this or other matters 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.

WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE INTERNET AND THE
COMMUNICATIONS INDUSTRY, WHICH IS EXPERIENCING RAPID CONSOLIDATION AND
REALIGNMENT AND AN OVERSUPPLY OF PRODUCT INVENTORY AND MAY NOT CONTINUE TO
DEMAND FIBER OPTIC PRODUCTS, THEREBY REDUCING DEMAND FOR OUR 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 decline, which would
adversely affect our revenues. Additionally, if our customers experience an
oversupply of inventory they may 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 and last mile
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.



                                       20
<PAGE>   23

        The communications industry is also 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
harms our business.

THE MARKET FOR FIBER OPTIC COMPONENTS IS NEW AND UNPREDICTABLE AND CHARACTERIZED
BY RAPID TECHNOLOGICAL CHANGES, EVOLVING STANDARDS AND, MORE RECENTLY,
SIGNIFICANT DECREASES IN CUSTOMER DEMAND, AND IF THIS MARKET DOES NOT DEVELOP
AND RESUME ITS EXPANSION AS WE ANTICIPATE, DEMAND FOR OUR PRODUCTS MAY CONTINUE
TO DECLINE, WHICH COULD ADVERSELY 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 and last mile
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 and last mile 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.



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE 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 June 30, 2001, $20.2 million, or 35.9% of our investments,
matured in less than three months. We plan to 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.

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 translation to U.S. dollars. Though some expenses are incurred
by our Taiwan and China operations, substantially all of our sales are made in
U.S. 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 U.S. 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 U.S. dollar. We will
analyze our exposure to currency fluctuations and may engage in financial
hedging techniques in the



                                       21
<PAGE>   24

future to attempt to minimize the effect of these potential fluctuations;
however, exchange rate fluctuations may adversely affect our financial results
in the future.


                           PART II: OTHER INFORMATION


ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

        On May 18, 2001, the Company's Board of Directors adopted a stockholder
rights plan, pursuant to which one preferred stock purchase right (a "Right")
was distributed for each share of Common Stock held as of June 12, 2001. Each
Right, when exercisable, will entitle the holder to purchase from the Company
one one-thousandth of a share of the Company's Series A Participating Preferred
Stock at a price of $80.00 (the "Purchase Price"), subject to antidilution
adjustments.

        In general, if a person or group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the outstanding shares of Common Stock,
then each Right (other than those held by an Acquiring Person) will entitle the
holder to receive, upon exercise, shares of Common Stock (or, under certain
circumstances, a combination of securities or other assets) having a value of
twice the Purchase Price. In addition, if following the announcement of the
existence of an Acquiring Person the Company is involved in a business
combination or sale of 50% or more of its assets or earning power, each Right
(other than those held by an Acquiring Person) will entitle the holder to
receive, upon exercise, shares of common stock of the acquiring entity having a
value of twice the Purchase Price. When the foregoing rights arise, any Rights
owned by an Acquiring Person will immediately become void. The Board of
Directors will also have the right, after there is an Acquiring Person, to cause
each Right (except those that have become void) to be exchanged for Common Stock
or substitute consideration.

        The Company may redeem the Rights at a price of $0.001 per Right before
the existence of an Acquiring Person is announced. The Rights expire on May 29,
2011.

        This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement, was filed
as an exhibit to the Company's Registration Statement on Form 8-A filed on May
30, 2001.


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

1. On May 18, 2001, we held our 2001 Annual Meeting of Stockholders, at which
meeting our stockholders approved the following:

        (a)Election of the following Class I directors:
        Peter C. Chang
        R. David Dicioccio



                                       22
<PAGE>   25

Peter C. Chang:

<TABLE>
<CAPTION>
                  For                    Against                   Abstain
            ---------------          ---------------          ----------------
            <S>                      <C>                      <C>
               19,653,400                   0                      633,264
</TABLE>

R. David Dicioccio:

<TABLE>
<CAPTION>
                  For                    Against                   Abstain
            ---------------          ---------------          ----------------
<S>         <C>                      <C>                      <C>
               20,058,713                    0                     227,951
</TABLE>

        (b)     On the ratification of the appointment of PricewaterhouseCoopers
                LLP as independent auditors of the Company for the current year:

<TABLE>
<CAPTION>
                  For                    Against                   Abstain
            ---------------          ---------------          ----------------
<S>                                  <C>                      <C>
               20,284,859                 1,087                      718
</TABLE>



                                       23
<PAGE>   26

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

        (a)     Exhibits.

        None

        (b)     Reports on Form 8-K.

        The Company filed two reports on Form 8-K with the Securities and
Exchange Commission during the two quarters ended June 30, 2001 as follows:

        (i)     Current Report on Form 8-K, filed January 19, 2001, reporting
                under Item 5, the May 18, 2001 date for the Company's 2001
                Annual Meeting of Stockholders.

        (ii)    Current Report on Form 8-K, filed March 12, 2001, reporting
                under Item 5, the Company's announcement of a presentation,
                relating to certain products under development, at the Global
                Communications Investor Conference in New York City on March 12,
                2001.

        (iii)   Current Report on Form 8-K, filed May 30, 2001, reporting under
                Item 5, the Company's announcement of its adoption of a
                stockholder rights plan on May 18, 2001.



                                       24
<PAGE>   27

                SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: August 13, 2001

                              ALLIANCE FIBER OPTIC PRODUCTS, INC.


                              By /s/ John M. Harland
                                 -----------------------------------------------
                                                 John M. Harland
                                             Chief Financial Officer
                                 (Principal Financial and Accounting Officer and
                                            Duly Authorized Signatory)



                                       25