<PAGE>
                                  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 March 31, 2002

                                       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 April 22, 2002, 35,304,274 shares of the Registrant's Common Stock, $0.001
par value per share, were outstanding.

<PAGE>

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.

                                    FORM 10-Q

                      QUARTERLY PERIOD ENDED MARCH 31, 2002

                                      INDEX

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

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

        Consolidated Balance Sheets at December 31, 2001 and March
           31, 2002...........................................................      1

        Consolidated Statements of Operations for the Three Months
           Ended March 31, 2001 and 2002......................................      2

       Consolidated Statements of Cash Flows for the Three Months
           Ended March 31, 2001 and 2002......................................      3

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

    Item 2:  Management's Discussion and Analysis of Financial
        Condition and Results of Operations...................................      9

    Item 3:  Quantitative and Qualitative Disclosures About Market
        Risk and Interest Rate Risk...........................................     25

Part II:  Other Information...................................................     26

    Item 6:  Exhibits and Reports on Form 8-K.................................     26

Signature.....................................................................     27

</TABLE>

                                       i

<PAGE>

                       PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS


               ALLIANCE FIBER OPTIC PRODUCTS, INC.

                   CONSOLIDATED BALANCE SHEETS

                (IN THOUSANDS, EXCEPT SHARE DATA)

                           (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                DEC. 31,     MARCH 31,
                                                                                  2001         2002
                                                                                ---------    ---------
<S>                                                                             <C>          <C>
ASSETS

Current assets:

    Cash and cash equivalents                                                   $  16,947    $   5,594
    Short-term investments                                                         33,118       42,335
    Accounts receivable, net                                                        2,645        2,078
    Inventories, net                                                                7,419        5,211
    Prepaid expense and other current assets                                        1,291        1,359
                                                                                ---------    ---------
         Total current assets                                                      61,420       56,577

Property and equipment, net                                                         7,381        7,146
Other assets                                                                          575          598
                                                                                ---------    ---------
         Total assets                                                           $  69,376    $  64,321
                                                                                =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                            $   1,425    $   1,300
    Income tax payable                                                                153          153
    Accrued expenses                                                                1,666        1,925
                                                                                ---------    ---------
         Total current liabilities                                                  3,244        3,378

Long-term liabilities                                                                 182          206
                                                                                ---------    ---------
         Total liabilities                                                          3,426        3,584
                                                                                ---------    ---------

Commitments and contingencies (Note 8)

Stockholders' equity:
    Common stock, $0.001 par value: 250,000,000 shares authorized at December
         31, 2001 and March 31, 2002; and 35,409,524 and 35,290,524 shares
         issued and outstanding at December 31, 2001 and March 31, 2002,
         respectively                                                                  35           35
    Additional paid-in-capital                                                    108,755      107,604
    Receivables from stockholders                                                  (1,749)      (1,524)
    Deferred stock-based compensation                                              (7,261)      (5,731)
    Accumulated deficit                                                           (33,709)     (39,400)
    Accumulated other comprehensive loss                                             (121)        (247)
                                                                                ---------    ---------
    Stockholders' equity                                                           65,950       60,737
                                                                                ---------    ---------
         Total liabilities and stockholders' equity                             $  69,376    $  64,321
                                                                                =========    =========
</TABLE>


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


                                       1
<PAGE>

        ALLIANCE FIBER OPTIC PRODUCTS, INC.

       CONSOLIDATED STATEMENTS OF OPERATIONS

       (IN THOUSANDS, EXCEPT PER SHARE DATA)

                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED MARCH 31,
                                                 ----------------------------
                                                    2001            2002
                                                  --------       --------
<S>                                               <C>            <C>
Revenues                                          $  7,369       $  3,532

Cost of revenues                                     4,557          5,169
Non-cash compensation charge                           485           (215)
                                                  --------       --------
      Total cost of revenues                         5,042          4,954
                                                  --------       --------
      Gross profit (loss)                            2,327         (1,422)
                                                  --------       --------

Operating expenses:
      Research and development                       1,674          2,110
      Non-cash compensation charge                   1,247            270
                                                  --------       --------
           Total research and development            2,921          2,380

      Sales and marketing                              809            919
      Non-cash compensation charge                     293             71
                                                  --------       --------
           Total sales and marketing                 1,102            990

      General and administrative                       959            836
      Non-cash compensation charge                     981            376
                                                  --------       --------
           Total general and administrative          1,940          1,212
                                                  --------       --------
           Total operating expenses                  5,963          4,582
                                                  --------       --------
Loss from operations                                (3,636)        (6,004)
Interest and other income, net                         983            313
                                                  --------       --------
Loss before income taxes                            (2,653)        (5,691)
Income tax provision                                   123           --
                                                  --------       --------
Net loss                                          $ (2,776)      $ (5,691)
                                                  ========       ========
Net loss per share:
           Basic and diluted                      $  (0.09)      $  (0.17)
                                                  ========       ========
Shares used in computing net loss per share:
           Basic and diluted                        31,876         34,362
                                                  ========       ========

</TABLE>


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


                                       2
<PAGE>

          ALLIANCE FIBER OPTIC PRODUCTS, INC.

         CONSOLIDATED STATEMENTS OF CASH FLOWS

                    (IN THOUSANDS)

                      (UNAUDITED)

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED MARCH 31,
                                                                ----------------------------
                                                                    2001           2002
                                                                  --------       --------
<S>                                                               <C>            <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:

    Net loss                                                      $ (2,776)      $ (5,691)
    Adjustments to reconcile net loss to net cash used
      in operating activities:
      Depreciation                                                     420            334
      Amortization of deferred compensation                          3,006            502
      Provision for inventory                                         --            2,208
      Changes in assets and liabilities:
         Accounts receivable, net                                      788            566
         Inventories, net                                           (3,579)            (8)
         Prepaid expenses and other assets                              60            (91)
         Accounts payable                                               32           (127)
         Income tax payable                                            121           --
         Accrued expenses                                                6            257
         Other long-term liabilities                                   (24)            29
         Minority interest                                               6             (5)
                                                                  --------       --------
                Net cash used in operating activities               (1,940)        (2,026)
                                                                  --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:

    Purchase of short-term investments                                 (92)        (9,330)
    Purchase of property and equipment                              (2,684)           (99)
                                                                  --------       --------
                Net cash used in investing activities               (2,776)        (9,429)
                                                                  --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:

    Proceeds from the exercise of common stock options                  29             15
    Proceeds from the repayment of notes receivable                   --              225
    Repurchase of common stock                                        --             (138)
                                                                  --------       --------
                Net cash provided by financing activities               29            102
                                                                  --------       --------

Effect of exchange rate changes on cash and cash equivalents           (18)          --
                                                                  --------       --------
Net decrease in cash and cash equivalents                           (4,705)       (11,353)
Cash and cash equivalents at beginning of period                    42,548         16,947
                                                                  --------       --------
Cash and cash equivalents at end of period                        $ 37,843       $  5,594
                                                                  ========       ========

</TABLE>


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


                                       3
<PAGE>

                       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.

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

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

BASIS OF PRESENTATION

            The consolidated financial information as of March 31, 2002 included
herein is unaudited, has been prepared by the Company in accordance with
generally accepted accounting principles in the United States of America, 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, 2001 balance
sheet was derived from audited financial statements on that date.

            The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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
could 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, 2001 included in the Company's Annual Report on Form 10-K, as filed on March
27, 2002 with the Securities and Exchange Commission ("SEC"). The results of
operations for the three months ended March 31, 2002 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.


                                       4
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board ("FASB") issued
two Statements: Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations"; and SFAS No. 142, "Goodwill and Other Intangible
Assets". The Statements:

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

    -   Establish a new accounting standard for goodwill acquired in a business
        combination. Goodwill will continue to be recognized as an asset but
        will not be amortized.

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

        SFAS No. 141 applies to all business combinations completed after June
30, 2001. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. The adoption of these new Statements did not have a material effect on
the Company's Consolidated Financial Statements.

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


                                       5
<PAGE>

2. INVENTORIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                     DEC. 31,   MARCH 31,
                                                       2001       2002
                                                     -------    --------
<S>                                                  <C>        <C>
Inventories, net:
   Finished goods                                    $ 3,241    $ 3,109
   Work-in-process                                     5,977      5,826
   Raw materials                                       2,966      2,842
   Less: Reserve for excess and obsolete inventory    (4,765)    (6,566)
                                                     -------    -------
                                                     $ 7,419    $ 5,211
                                                     =======    =======

</TABLE>


3.  PROVISION FOR INVENTORY

        Due to the continued adverse effects of the industry slowdown and the
current economic outlook, in the quarter ended March 31, 2002 the Company
determined that future demand for its DWDM-related products would be lower than
expected and, therefore, an additional inventory reserve of $1.2 million was
recorded in accordance with the Company's policy of reserving against inventory
levels in excess of future demand for each specific product.

        Due to the rapid technological change in the industry, the Company
recorded an additional inventory reserve of $1.0 million relating to obsolete
OPMS products during the quarter ended March 31, 2002.

4.  NET LOSS PER SHARE

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


                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED MARCH 31,
                                                                         ---------------------------
                                                                            2001           2002
                                                                          --------      --------
<S>                                                                       <C>           <C>
     Numerator:
       Net loss                                                           $ (2,776)     $ (5,691)
                                                                          ========      ========

     Denominator:
       Shares used in computing net loss per share:

        Weighted average of common shares outstanding                       33,966        35,423
        Less: Weighted average of shares subject to repurchase              (2,090)       (1,061)
                                                                          --------      --------
        Basic and diluted                                                   31,876        34,362
                                                                          ========      ========

     Net loss per share:
        Basic and diluted                                                 $  (0.09)     $  (0.17)
                                                                          ========      ========

     Anti-dilutive securities, including options to purchase Common
        Stock and shares subject to repurchase, not included in
        net loss per share calculation                                       4,289            71
                                                                          ========      ========

</TABLE>


5. COMPREHENSIVE LOSS

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

        The components of comprehensive loss are as follows (in thousands):


<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED MARCH 31,
                                                    ---------------------------
                                                        2001          2002
                                                      -------       -------
<S>                                                   <C>           <C>
Net loss                                              $(2,776)      $(5,691)
Cumulative translation adjustments                        (36)          (13)
Unrealized gain (loss) on short-term investments          173          (113)
                                                      -------       -------
      Total comprehensive loss                        $(2,639)      $(5,817)
                                                      =======       =======
</TABLE>


6. CONCENTRATION OF CERTAIN RISKS

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

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


                                       7
<PAGE>

        For the quarter ended March 31, 2001, one customer accounted for 15% of
the Company's accounts receivable. For the quarter ended March 31, 2002, two
customers each accounted for 11% of the Company's accounts receivable.

        For the quarter ended March 31, 2001, two customers accounted for 12%
and 10% of the Company's revenues, respectively. For the quarter ended March 31,
2002, no customer accounted for 10% or more of the Company's revenues.

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

7. GEOGRAPHIC SEGMENT INFORMATION

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

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


<TABLE>
<CAPTION>
                      THREE MONTHS ENDED MARCH 31,
                      ----------------------------
                           2001        2002
                         -------      -------
<S>                      <C>          <C>
REVENUES
    United States        $ 6,374      $ 3,270
    Taiwan                   995          262
                         -------      -------
                         $ 7,369      $ 3,532
                         =======      =======

</TABLE>

<TABLE>
<CAPTION>
                         DEC. 31,     MARCH 31,
                           2001        2002
                         -------      --------
<S>                      <C>          <C>
IDENTIFIABLE ASSETS
    United States        $60,503      $56,163
    Taiwan                 8,554        7,651
    China                    319          507
                         -------      -------
       Total             $69,376      $64,321
                         =======      =======

</TABLE>


8. COMMITMENTS AND CONTINGENCIES

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

        The Company leases certain office space under long-term operating leases
expiring at various dates through 2004. Total lease expenses under these
operating leases were $380,000 and $499,000 for the quarters ended March 31,
2001 and March 31, 2002, respectively.


                                       8
<PAGE>

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

        When used in this discussion, the words "expects," "anticipates,"
"believes", "estimates," "plans," and similar expressions are intended to
identify forward-looking statements. These statements, which include statements
as to critical accounting policies, our sources of revenue, anticipated revenue
levels, our net losses and negative cash flow, the fluctuation of our cost of
revenues as a percentage of revenues, our net losses, the amount and mix of our
anticipated expenditures and expenses, increase or decrease of our expenses or
expenditures in absolute dollars or as a percentage of revenue, our competitive
advantage, our ability to compete, the sources of our competition, the necessary
expenditures to remain competitive, our plans to expand our product development
efforts, the use of excess inventory for which we took a charge, our reliance on
our OPMS products, our future growth and future revenues being dependent on our
DWDM products, our success being tied to relationships with key customers, our
plans to expand our operations domestically and internationally, our increased
expenses if demand for our products increases, our plans to hire additional
employees, our deferred stock-based compensation, the adequacy of our capital
resources, our plans for operating in China, the impact of recent accounting
pronouncements, period-to-period comparisons of our operating results, our
ability to obtain raw materials and components and maintain and develop supplier
relationships, our ability to establish and maintain relationships with key
customers, our ability to maintain appropriate inventory levels, factors that
affect a customer's decision to choose a supplier, our patent applications and
intellectual property, an increase in patent infringement claims, our exposure
to currency rate fluctuations, our need for additional financing, investments of
our existing cash, our exposure to interest rate risk, and the continued
denomination of our international revenues in predominately United States
dollars, are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as well as
competition including the impact of competitive products and pricing, timely
design acceptance by our customers, our success attracting new customers, our
customers adopting our new products, timely introduction of new technologies,
our ability to ramp new products into volume production, our ability to attract
and retain highly skilled personnel, industry wide shifts in supply and demand
for optical components and modules, the development of the market for our DWDM
products, a further decrease in spending by telecommunications companies,
increased competition or consolidation in our industry, our ability to license
intellectual property, 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, its Consolidated
Financial Statement and the notes thereto, for the year ended December 31, 2001.

        The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's discussion and analysis of our financial conditions and
results of operations are based on our Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, bad debts, inventories, asset
impairments, income taxes, contingencies, and litigation. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the


                                       9
<PAGE>

circumstances, the results of which form the basis for making judgments about
the carrying values for assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

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

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

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

        Our inventory write-downs for estimated excess and obsolete or
unmarketable inventory equal to the difference between the cost of inventory and
the excess and estimated market values are based on assumptions about future
demand and market conditions. If actual demand or market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required. Based on reduced demand and revenue projections for our
DWDM-related products and the rapid technological change for our OPMS products,
we took a charge of $2.2 million for excess DWDM-related and obsolete OPMS
inventory in the quarter ended March 31, 2002. In the quarter ended June 30,
2001, we took a charge of $6.5 million for excess DWDM inventory.

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

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

OVERVIEW

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


                                       10
<PAGE>

        From our inception through March 31, 2002, we derived substantially all
of our revenues from our OPMS product line. Our DWDM-related products
contributed revenues of $901,000, $408,000 and $81,000 for the quarters ended
March 31, 2001, December 31, 2001 and March 31, 2002, respectively. In the
quarters ended March 31 and December 31, 2001, our top 10 customers comprised of
55.6% and 57.6% of our revenues, respectively. In the quarter ended March 31,
2002, our top 10 customers comprised of 52.9% of our revenues. For the quarter
ended March 31, 2001, two customers accounted for 12% and 10% of our revenues,
respectively. For the quarters ended December 31, 2001 and March 31, 2002, no
customer accounted for 10% or more of revenues.

        We market and sell our products predominantly through our direct sales
force, which we began building in early 1998. Although we derived a significant
portion of our revenues between 1996 and 1998 from overseas customers, an
increasing percentage of our sales since early 1999 have been in North America.
The percentage of our revenues derived from sales outside of North America was
19.8%, 20.6%, and 7.4% for the quarters ended March 31, 2001, December 31, 2001
and March 31, 2002, respectively.

        Our cost of revenues consists of raw materials, components, direct
labor, manufacturing overhead and production start-up costs. We expect that our
cost of revenues as a percentage of revenues will fluctuate from period to
period based on a number of factors including:

    -   changes in manufacturing volume;

    -   costs incurred in establishing additional manufacturing lines and
        facilities;

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

    -   mix of products sold;

    -   changes in our pricing and pricing from our competitors;

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

    -   mix of domestic and international sales.

        Research and development expenses consist primarily of salaries and
related personnel expenses, fees paid to outside service providers, materials
costs, test units, facilities, overhead and other expenses related to the
design, development, testing and enhancement of our products. We expense our
research and development costs as they are incurred. We believe that a
significant level of investment for product research and development is required
to remain competitive. We plan to expand our product development efforts, but
due to the slowdown in business, we expect our research and development expenses
to decrease in absolute dollars in the foreseeable future.

        Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and technical
support functions, as well as costs associated with trade shows, promotional
activities and travel expenses. We intend to expand our sales and marketing
efforts, both domestically and internationally, in order to increase market
awareness and to generate sales of our products. However, we cannot be certain
that any increased expenditures will result in higher revenues. In addition, we
believe our future success depends upon establishing successful relationships
with a variety of key customers. We believe that continued investment in sales
and marketing functions is critical to our success, but due to the slowdown in
business, we expect these expenses to slightly decrease in absolute dollars in
the foreseeable future.

        General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, administrative, accounting and human
resources personnel, insurance and professional fees for legal and accounting
support. We expect these expenses to be relatively flat in absolute dollars as
we continue to monitor the costs incurred through the growth of our business and
our operations.


                                       11
<PAGE>

        In connection with the grant of stock options to employees and
consultants, we recorded deferred stock-based compensation of approximately
$24.4 million in stockholders' equity through December 31, 2001, representing
the difference between the estimated fair market value of our common stock and
the exercise price of these options at the date of grant. Deferred stock-based
compensation is being amortized using the graded vesting method, under which
each option grant is separated into portions based on its vesting terms which
results in acceleration of amortization expense for the overall award. The
deferred stock-based compensation balance of $5.7 million as of March 31, 2002
will be amortized on an accelerated basis over the vesting periods of the option
grants, which are generally four years.

        In March 2002, upon the resignation of Mr. Gregory W. Barnes as our Vice
President of Operations, we repurchased from Mr. Barnes 163,000 shares of our
common stock, which represent the unvested portion of two stock option grants
that Mr. Barnes early exercised in June and September 2000. In connection with
Mr. Barnes' early exercise of these options, we issued two promissory notes in
the principal amount of $125,000 and $100,000. The notes and the interest that
accrued at the rate of 6.5% per annum were settled in full in March 2002.


                                       12
<PAGE>

RESULTS OF OPERATIONS

        The following table sets forth the relationship between various
components of operations, stated as a percentage of revenues for the periods
indicated:

<TABLE>
<CAPTION>
                                                Three Months Ended March 31,
                                                ----------------------------
                                                    2001          2002
                                                   ------       ------
<S>                                                <C>          <C>
Revenues                                           100.0%       100.0%

Cost of revenues:                                   61.8        146.3
Non-cash compensation charge                         6.6         (6.1)
                                                   -----        -----
      Total cost of revenues                        68.4        140.3
                                                   -----        -----

      Gross profit (loss)                           31.6        (40.3)
                                                   -----        -----

Operating expenses:
      Research and development:                     22.7         59.7
      Non-cash compensation charge                  16.9          7.6
                                                   -----        -----
           Total research and development           39.6         67.4

      Sales and marketing:                          11.0         26.0
      Non-cash compensation charge                   4.0          2.0
                                                   -----        -----
           Total sales and marketing                15.0         28.0

      General and administrative:                   13.0         23.7
      Non-cash compensation charge                  13.3         10.6
                                                   -----        -----
           Total general and administrative         26.3         34.3
                                                   -----        -----
           Total operating expenses                 80.9        129.7
                                                   -----        -----
Loss from operations                               (49.3)      (170.0)
Interest and other income, net                      13.3          8.9
                                                   -----        -----
Loss before income taxes                           (36.1)      (161.2)
Income tax provision                                 1.7          --
                                                   -----        -----
Net loss                                           (37.8%)     (161.2%)
                                                   ======       ======

</TABLE>


        Revenues. Revenues were $7.4 million and $3.5 million for the three
months ended March 31, 2001 and 2002, respectively. Revenues decreased 52.1%
from the quarter ended March 31, 2001 to the same period in 2002 due primarily
to an overall slowdown in the telecommunications industry and decreased sales of
our OPMS products. Revenues from our DWDM-related products were $901,000 and
$81,000 for the three months ended March 31, 2001 and 2002, respectively.

        Gross Profit (Loss). Gross profit (loss), including non-cash
compensation expense, decreased in absolute dollars from $2.3 million, or 31.6%
of revenues, for the three months ended March 31, 2001 to a loss of $1.4
million, or negative 40.3% of revenues, for the same period in 2002. Excluding
non-cash compensation expense, gross profit decreased from $2.8 million, or
38.2% of revenues, for the three months ended March 31, 2001, to a loss of $1.6
million, or negative 46.3% of revenues, for the same


                                       13
<PAGE>

period in 2002. The decrease in margins was primarily due to an increase in
inventory reserve, lower product volumes, and a shift in product mix in our OPMS
product line.

        During the first quarter of 2002, the Company increased its inventory
reserve by $2.2 million. This reserve was increased to cover both obsolete and
excess material. During the quarter, we determined that OPMS inventory valued at
$1.0 million no longer met current customer specifications and was deemed to be
obsolete. Also, due to an unforeseeable and significant decrease in demand for
our DWDM related products, inventory levels exceeded our requirements based on
current sales forecasts. As a result of this decline in demand, an excess
inventory charge for DWDM related products totaling $1.2 million was taken
during the quarter. This excess inventory charge was calculated based on the
inventory levels in excess of the future 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 demand forecast.

        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. With the additional
inventory reserve in the first quarter of 2002, we had approximately $1.7
million in DWDM-related inventory on hand at March 31, 2002. Although we
continue to take steps to attempt to manage future inventory levels, we may have
to record additional inventory reserves in future periods if the decrease in
demand continues.

        Research and Development Expenses. Research and development expenses,
including non-cash compensation expense, decreased from $2.9 million, or 39.6%
of revenues, for the three months ended March 31, 2001 to $2.4 million, or 67.4%
of revenues, for the same period in 2002. Excluding non-cash compensation
expense, research and development expenses increased from $1.7 million, or 22.7%
of revenues, for the three months ended March 31, 2001 to $2.1 million, or 59.7%
of revenues, for the same period in 2002. Excluding non-cash compensation
expense, this increase in absolute dollars was 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 quarterly research and
development expenses to decline in absolute dollars from first quarter levels
throughout the remaining quarters of 2002.

        Sales and Marketing Expenses. Sales and marketing expenses, including
non-cash compensation expense, decreased from $1.1 million, or 15.0% of
revenues, for the three months ended March 31, 2001 to $990,000, or 28.0% of
revenues, for the same period in 2002. Excluding non-cash compensation expense,
sales and marketing expenses increased from $809,000, or 11.0% of revenues, for
the three months ended March 31, 2001 to $919,000, or 26.0% of revenues, for the
three months ended March 31, 2002. This increase was due to the continued
expansion of our sales and marketing efforts including the introduction and
promotion of new products in the first quarter of 2002. We expect our quarterly
sales and marketing expenses to decline slightly in absolute dollars throughout
the remaining quarters of 2002.

        General and Administrative Expenses. General and administrative
expenses, including non-cash compensation expense, decreased in absolute dollars
from $1.9 million, or 26.3% of revenues, for the three months ended March 31,
2001 to $1.2 million, or 34.3% of revenues, for the same period in 2002.
Excluding non-cash compensation expense, general and administrative expenses
decreased from $959,000, or 13.0% of revenues, for the three months ended March
31, 2001 to $836,000, or 23.7% of revenues, for the same period in 2002. The
decrease was primarily due to internal cost control. We expect our quarterly
general and administrative expenses to be relatively flat in absolute dollars
throughout the remaining quarters of 2002.

        Interest and Other Income, Net. Interest and other income, net, was
$983,000 and $313,000 for the three months ended March 31, 2001 and 2002,
respectively. The decrease in absolute dollars from 2001 to 2002 was the result
of significantly lower applicable interest rates.


                                       14
<PAGE>

        Income Taxes. Income tax was $123,000 the three months ended March 31,
2001. The income tax expense in the first quarter of 2001 was the result of
taxable income from our Taiwan subsidiary. There was no provision for income tax
in the first quarter of 2002 as there was no taxable income recorded.

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 March 31, 2002, we
had cash and cash equivalents of $5.6 million and short-term investments of
$42.3 million.

        Net cash used in operating activities was $2.0 million for the three
months ended March 31, 2002 and was primarily due to our net loss of $5.7
million, partially offset by the provision for excess inventories of $2.2
million.

        Cash used in investing activities was $2.8 million and $9.4 million for
the three months ended March 31, 2001 and 2002, respectively. In the three
months ended March 31, 2001, $2.7 million was used to purchase equipment to
support our DWDM-related products. In the three months ended March 31, 2002,
$9.3 million was invested in high-grade, short-term investments, while $99,000
was used to acquire property and equipment.

        Cash generated by financing activities was $29,000 and $102,000 for the
three months ended March 31, 2001 and 2002, respectively, resulting from
proceeds from exercise of options to purchase common stock. For the three months
ended March 31, 2002, cash generated also included net proceeds from the
repayment of notes receivable of $87,000.

        In July and December 2000, we entered into leases for 10,500 and 10,600
square feet of space, respectively, near our existing facility in Sunnyvale,
California. Additionally, in December 2000, the Company purchased approximately
8,200 square feet of space immediately adjacent to our leased facility in
Tu-Cheng City, Taiwan for $797,000 and leased 27,000 square feet of space for
manufacturing in China. In April 2001 we entered into a lease but cancelled it,
without penalty, in the third quarter of 2001. As of March 31, 2002, we had a
lease for a facility in the Shenzhen area totaling approximately 12,000 square
feet, which will expire in December 2002. The future minimum lease payments
under our operating leases are as follows:


<TABLE>
<S>                                       <C>
Nine months ending December 31, 2002      $1,316
Years ending December 31,:
       2003                                1,883
       2004                                1,055
                                          ------
Total                                     $4,254
                                          ======
</TABLE>


        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


                                       15
<PAGE>

planned product development and marketing efforts, which could harm our
business, financial condition and operating results.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board ("FASB") issued
two Statements: Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations"; and SFAS No. 142, "Goodwill and Other Intangible
Assets". The Statements:

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

    -   Establish a new accounting standard for goodwill acquired in a business
        combination. Goodwill will continue to be recognized as an asset but
        will not be amortized.

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

        SFAS No. 141 applies to all business combinations completed after June
30, 2001. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. The adoption of these new Statements did not have a material effect on
the Company's Consolidated Financial Statements.

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



                         FACTORS THAT MAY AFFECT RESULTS

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

        We incurred operating losses of approximately $2.8 million and $5.7
million in the first quarter of fiscal 2001 and 2002, 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 March 31, 2002, we had an
accumulated deficit of approximately $39.4 million.

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


                                       16
<PAGE>

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

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

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

        Sales of our OPMS products accounted for over 97% of our revenues in the
quarter ended March 31, 2002 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 the quarter ended March 31, 2002, we determined that OPMS inventory of $1.0
million no longer met current customer specifications and was deemed to be
obsolete. In addition, we believe that our future growth and a significant
portion of our future revenues will depend on the commercial success of our
DWDM-related products, which we began shipping commercially in July 2000. Demand
for these products declined sharply starting in mid fiscal 2001 and continued to
decline in the first quarter of 2002. Based on the reduced demand and reduced
revenue projections for this product line, we took a charge of $6.5 million
against excess DWDM in the quarter ended June 30, 2001 and a charge of $1.2
million against excess DWDM-related inventory in the quarter ended March 31,
2002. If demand for these products does not increase and our target customers do
not adopt and purchase our DWDM-related products, our revenues may decline
further and we may have to write-off additional inventory currently on our
books.

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

        The United States economy experienced a significant slowdown in
consumption and demand for most of 2001 as well as the start of 2002. The
September 11, 2001 terrorist attacks could have contributed to the further
slowdown of the already slumping market demand for goods, including fiber optics
equipment. We may experience further decreases in the demand for our products
due to a recession as the fiber optics industry copes with the effects of
terrorism, war and political instability. Even if the general economy
experiences a mild recovery, the activity of United States telecommunications
industry may lag behind the recovery of the overall United States economy.

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

        The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of common stock on The Nasdaq National Market. The current
requirements affecting us include (i) having net tangible assets of at least $4
million and (ii) maintaining a minimum bid price per share of $1. As of March
31, 2002, our stock price closed at $0.99. Also, effective November 1, 2002, we
will also have to comply with the Nasdaq National Market's revised quantitative
maintenance criteria including a new minimum requirement of $10 million in
stockholders' equity. There can be no assurance that we will be


                                       17
<PAGE>

able to comply with the quantitative maintenance criteria or any of The Nasdaq
National Market's rules in the future. If we fail to maintain continued listing
on The Nasdaq National Market and must move to a market with less liquidity, our
financial condition could be harmed and our stock price would likely decline. If
we are delisted, it could have a material adverse effect on the market price of,
and the liquidity of the trading market for, our common stock.

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

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

    -   customer unwillingness to implement our products;

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

    -   the success of our customers;

    -   new product introductions by our competitors;

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

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

        The downturn in the economy has affected the telecommunications
industry. Telecommunications companies have cut back on their capital
expenditure budgets, which has decreased and may continue to further decrease
demand for equipment and parts, including our products. This decrease has had
and may continue to have an adverse effect on the demand for fiber optic
products and negatively impact the growth of our customer base.

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

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

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

        Several of our existing and potential customers are also current and
potential competitors of ours. These companies may develop or acquire additional
competitive products or technologies in the future and subsequently reduce or
cease their purchases from us. In light of the consolidation in the optical
networking industry, we also believe that the size of suppliers will be an
increasingly important part of a


                                       18
<PAGE>

purchaser's decision-making criteria in the future. We may not be able to
compete successfully with existing or new competitors, nor can we ensure that
the competitive pressures we face will not result in lower prices for our
products, loss of market share, or reduced gross margins, any of which could
harm our business.

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

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

        We rapidly expanded our operations domestically and internationally in
the final two quarters of 2000. We had to carefully manage and re-evaluate this
expansion given the sudden and dramatic downturn in demand for our products
experienced in 2001 and continuing to date. Additionally, we implemented a
reduction in force to reduce employees during the second and third quarter of
2001 to match our operations to this decreased demand for our products. As of
March 31, 2002, we had a total of 139 full-time employees in Sunnyvale,
California, 196 full-time employees in Taiwan, and 30 full-time employees in
China. Matching the scale of our operations with the recent demand fluctuations,
combined with the challenges of expanding and managing geographically dispersed
operations, has placed, and will continue to place, a significant strain on our
management and resources. To manage the expected fluctuations in our operations
and personnel, we will be required to:

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

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

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

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

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

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


                                       19
<PAGE>

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 $1.7 million and $2.1 million for the
quarters ended March 31, 2001 and 2002, respectively. We intend to continue to
invest a substantial amount of funds in our research and product development
efforts, which could have a negative impact on our earnings in future periods.

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

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

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

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

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

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

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

        We depend on third parties to supply the raw materials and components we
use to manufacture our products. To be competitive, we must obtain from our
suppliers, on a timely basis, sufficient


                                       20
<PAGE>

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

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

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

        Because we experience long lead times for materials and components and
are often required to purchase significant amounts of materials and components
far in advance of product shipments, we may not effectively manage our inventory
levels, which could harm our operating results. We recorded significant charges
for excess and obsolete inventory in the quarters ended June 30, 2001 and March
31, 2002. Alternatively, if we underestimate our raw material 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 the past, have to carry or write off excess inventory and
our gross margins will decline. Either situation could cause our results of
operations to be below the expectations of investors and public market analysts,
which could, in turn, cause the price of our common stock to decline. The time
our customers require to incorporate our products into their own can vary
significantly and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our forecasts. Even if
we receive these orders, the additional manufacturing capacity that we add to
meet our customer's requirements may be underutilized in a subsequent quarter.

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

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

        Our success depends to a significant degree upon the continued
contributions of the principal members of our technical sales, marketing,
engineering and management personnel, many of whom perform important management
functions and would be difficult to replace. We particularly depend upon the
continued services of our executive officers, particularly Peter Chang, our
President and Chief Executive Officer, David Hubbard, our Vice President, Sales
and Marketing, and other key engineering, sales, marketing, finance,
manufacturing and support personnel. In addition, we depend upon the continued
services of key management personnel at our Taiwanese subsidiary. None of our
officers or key employees is bound by an employment agreement for any specific
term, and may terminate their


                                       21
<PAGE>

employment at any time. In addition, we do not have "key person" life insurance
policies covering any of our employees.

        In order to continue to expand our product offerings both in the United
States and abroad, we must hire a number of research and development personnel.
In addition, in order to continue strengthening our research and development
efforts in the United States, we must hire additional manufacturing and research
and development personnel. Our ability to continue to attract and retain highly
skilled personnel will be a critical factor in determining whether we will be
successful in the future. We may have difficulty hiring skilled engineers at our
manufacturing facility in Taiwan. If we are not successful in attracting,
assimilating or retaining qualified personnel to fulfill our current or future
needs, our business may be harmed.

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

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

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

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

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

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

        In addition, some of our customers require that our products be
subjected to standards-based qualification testing, which can take up to nine
months or more. While our customers are evaluating our products and before they
place an order with us, we may incur substantial sales and marketing and


                                       22
<PAGE>

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

    -   loss of customers;

    -   damage to our reputation;

    -   failure to attract new customers or achieve market acceptance;

    -   diversion of development and engineering resources; and

    -   legal actions by our customers.

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

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

        Our future success depends on the continued growth of the Internet as a
widely used medium for communications and commerce, and the growth of optical
networks to meet the increased demand for capacity to transmit data, or
bandwidth. If the Internet does not continue to expand as a medium for
communications and commerce, the need to significantly increase bandwidth across
networks and the market for fiber optic components may not continue to develop.
If this growth does not continue, sales of our products may continue to decline
and would adversely affect our revenues. Additionally, if growth in demand for
our products exceeds the demand for our customers' products, our customers may
experience an oversupply of inventory and decrease orders of our products.
Future demand for our


                                       23
<PAGE>

products is uncertain and will depend heavily on the continued growth and
upgrading of optical networks, especially in the long-haul, metropolitan, last
mile, and enterprise access segments of the networks. Decreased spending by
telecommunications companies over the last year has resulted in decreased demand
for our products. The rate at which communication service providers and other
fiber optic network users have built new fiber optic networks or installed new
systems in their existing fiber optic networks has fluctuated in the past and
these fluctuations may continue in the future. These fluctuations may result in
reduced demand for new or upgraded fiber optic systems that utilize our products
and, therefore, may result in reduced demand for our products. Recent declines
in the development of new networks and installation of new systems have resulted
in a decrease in demand for our products, an increase in our inventory, and
erosion in the average selling prices.

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

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

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

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

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

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

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

        The fiber optic component market is a highly competitive industry in
which we, and most other participants, rely on a combination of patent,
copyright, trademark and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect proprietary rights. The
competitive nature of our industry, rapidly changing technology, frequent new
product introductions, changes in customer requirements and evolving industry
standards heighten the importance of protecting proprietary technology rights.
Since the United States Patent and Trademark Office keeps patent applications
confidential until a patent is issued, our pending patent applications may
attempt to protect proprietary technology claimed in a third party patent
application. Our existing and future patents may not be sufficiently broad to
protect our proprietary technologies as policing unauthorized use of our
products is difficult and we cannot be certain that the steps we have taken will
prevent the misappropriation or unauthorized use of our technologies,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as United States laws. Our competitors may independently develop
similar


                                       24
<PAGE>

technology, duplicate our products, or design around any of our patents or other
intellectual property. If we are unable to adequately protect our proprietary
technology rights, others may be able to use our proprietary technology without
having to compensate us, which could reduce our revenues and negatively impact
our ability to compete effectively.

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

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

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

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

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

        For the year ended December 31, 2001 and the three months ended March
31, 2002, sales to customers located outside of North America were 17.8% and
7.4% 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.


                                       25
<PAGE>

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

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

ITEM 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 March 31, 2002, $5.6 million, or 11.7% of our investments,
had maturities of less than three months. We will continue to invest a
significant portion of our existing cash in interest bearing, investment grade
securities, with maturities of less than 12 months. We do not believe that our
investments, in the aggregate, have significant exposure to interest rate risk.

EXCHANGE RATE SENSITIVITY

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

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

                           PART II: OTHER INFORMATION

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits.

               10.1 Employment Offer Letter to Phil Rehkemper dated November 14,
               2001.

        (b)    Reports on Form 8-K.

        The Company filed one report on Form 8-K with the Securities and
Exchange Commission during the quarter ended March 31, 2002 as follows:


                                       26
<PAGE>

        (i)    Current Report on Form 8-K, filed February 20, 2002, reporting
               under Item 5, the May 17, 2002 date for the Company's 2002 Annual
               Meeting of Stockholders.


                                       27
<PAGE>

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:  May 3, 2002

                         ALLIANCE FIBER OPTIC PRODUCTS, INC.



                         By                    /s/ Philip J. Rehkemper
                             -----------------------------------------
                                          Philip J. Rehkemper
                                        Chief Financial Officer
                          (Principal Financial and Accounting Officer and Duly
                                         Authorized Signatory)

                                       28
<PAGE>
                               INDEX TO EXHIBITS

<Table>
<S>     <C>
10.1    Employment Offer Letter to Phil Rehkemper dated November 14, 2001.
</Table>