<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

        (Mark One)

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

                  For the Quarterly Period Ended March 31, 2001

                                       or

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

         For the transition period from _______________ to _______________

                         Commission File Number 0-31857

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.
             (Exact name of registrant as specified in its charter)


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


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

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

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

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


On May 1, 2001, 34,963,195 shares of the Registrant's Common Stock, $0.001 par
value per share, were outstanding.

<PAGE>   2

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.

                                    FORM 10-Q

                      QUARTERLY PERIOD ENDED MARCH 31, 2001

                                      INDEX

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

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

        Consolidated Balance Sheets at March 31, 2001 and
           December 31, 2000..................................................    1

        Consolidated Statements of Operations for the Three Months
           Ended March 31, 2001 and 2000......................................    2

        Consolidated Statements of Cash Flows for the Three Months
           Ended March 31, 2001 and 2000......................................    3

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

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

    Item 3:  Quantitative and Qualitative Disclosures About Market               20
        Risk and Interest Rate Risk...........................................

Part II:  Other Information...................................................   21

    Item 4:  Exhibits and Reports on Form 8-K.................................   21

Signature.....................................................................   22

Exhibit Index.................................................................   23

</TABLE>



<PAGE>   3
                          PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,      MARCH 31,
                                                                      ------------     ---------
                                                                          2000            2001
                                                                       ---------       ---------
<S>                                                                     <C>             <C>
ASSETS
Current Assets:
    Cash and cash equivalents                                          $  42,548       $  37,843
    Short-term investments                                                24,129          24,317
    Accounts receivable, net                                               5,302           4,520
    Inventories                                                            6,792          10,390
    Prepaid expenses and other current assets                                835             601
                                                                       ---------       ---------
       Total current assets                                               79,606          77,671

Property and equipment, net                                                8,590          10,855
Other assets                                                                 329             506
                                                                       ---------       ---------
       Total assets                                                    $  88,525       $  89,032
                                                                       =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                   $   3,234       $   3,255
    Income tax payable                                                       401             522
    Accrued expenses and other liabilities                                 2,210           2,197
                                                                       ---------       ---------
       Total current liabilities                                           5,845           5,974
Long-term liabilities                                                        181             163
                                                                       ---------       ---------
       Total liabilities                                                   6,026           6,137

Commitments and contingencies (Note 5)

Stockholders' equity
    Common stock, $0.001 par value; 250,000,000 shares authorized
       at December 31, 2000 and March 31, 2001, and 34,644,300
       and 34,739,225 shares issued and outstanding at December 31,
       2000 and March 31, 2001, respectively                                  35              35
    Additional paid-in capital                                           114,984         113,528
    Receivables from stockholders                                         (1,950)         (1,950)
    Deferred stock-based compensation                                    (20,813)        (16,322)
    Accumulated deficit                                                   (9,576)        (12,352)
    Accumulated other comprehensive losses                                  (181)            (44)
                                                                       ---------       ---------
       Total stockholders' equity                                         82,499          82,895
                                                                       ---------       ---------
              Total liabilities and stockholders' equity               $  88,525       $  89,032
                                                                       =========       =========
</TABLE>

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


                                       1
<PAGE>   4

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

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                                         MARCH 31,
                                                                -----------------------
                                                                 2000             2001
                                                                --------       --------

<S>                                                             <C>            <C>
Revenues                                                        $  3,143       $  7,369
Cost of revenues:
      Cost of revenues                                             1,763          4,557
      Non-cash compensation expense                                   34            485
                                                                --------       --------
           Total cost of revenues                                  1,797          5,042
                                                                --------       --------
      Gross profit                                                 1,346          2,327
Operating expenses:
    Research and development:
      Research and development                                       725          1,674
      Non-cash compensation expense                                   56          1,247
                                                                --------       --------
           Total research and development                            781          2,921
    Sales and marketing:
      Sales and marketing                                            328            809
      Non-cash compensation expense                                   35            293
                                                                --------       --------
           Total sales and marketing                                 363          1,102
    General and administrative:
      General and administrative                                     398            959
      Non-cash compensation expense                                  705            981
                                                                --------       --------
           Total general and administrative                        1,103          1,940
                                                                --------       --------
      Total operating expenses                                     2,247          5,963
                                                                --------       --------
Loss from operations                                                (901)        (3,636)
Interest and other income, net                                       122            983
                                                                --------       --------
Loss before income taxes                                            (779)        (2,653)
Income tax provision                                                  35            123
                                                                --------       --------
Net loss attributable to common stockholders                    $   (814)      $ (2,776)
                                                                ========       ========
Net loss per share attributable to common stockholders:
    Basic and diluted                                           $  (0.17)      $  (0.09)
                                                                ========       ========
Shares used in computing net loss per share attributable to
    common stockholders:
    Basic and diluted                                              4,845         31,876
                                                                ========       ========
Pro forma net loss per share attributable to common
    stockholders                                                $  (0.04)      $  (0.09)
                                                                ========       ========
Shares used in computing pro forma net loss per
    share                                                         22,046         31,876
                                                                ========       ========
</TABLE>

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


                                       2
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED
                                                                          MARCH 31,
                                                                    2000              2001
                                                                  --------       --------
<S>                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss:                                                     $   (814)      $ (2,776)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
       Depreciation                                                    194            420
       Amortization of deferred stock-based compensation               830          3,006
       Changes in assets and liabilities:
          Accounts receivable, net                                    (188)           788
          Inventories                                                 (695)        (3,579)
          Prepaid expenses and other assets                           (112)            60
          Accounts payable                                             892             32
          Income tax payable                                             -            121
          Accrued expenses and other liabilities                       144              6
          Other long-term liabilities                                   20            (24)
          Minority interest                                              5              6
                                                                  --------       --------
                 Net cash used in operating activities                 276         (1,940)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of short-term investments                                (444)           (92)
    Purchase of property, plant and equipment                         (947)        (2,684)
                                                                  --------       --------
                Net cash used in investing activities               (1,391)        (2,776)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from bank borrowings                                      276              -
    Repayments of bank borrowings                                      (16)             -
    Proceeds from the exercise of common stock options                   -             29
                                                                  --------       --------
                 Net cash provided by financing activities             260             29
Effect of exchange rate changes on cash and cash equivalents            (1)           (18)
                                                                  --------       --------
Net decrease in cash and cash equivalents                             (856)        (4,705)
Cash and cash equivalents at beginning of period                     6,139         42,548
                                                                  --------       --------
Cash and cash equivalents at end of period                        $  5,283       $ 37,843
                                                                  ========       ========
</TABLE>


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


                                       3
<PAGE>   6

                       ALLIANCE FIBER OPTIC PRODUCTS, INC.

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

BASIS OF PRESENTATION

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

            The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results will differ from those estimates, and such
differences may be material to the financial statements. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 2000 included in the
Company's Annual Report on Form 10-K, as filed on April 2, 2001, with the
Securities and Exchange Commission ("SEC"). The results of operations for the
three months ended March 31, 2001 are not necessarily indicative of the results
to be expected for any future periods.

REVENUE RECOGNITION

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

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board (" FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the income statement or as a component of comprehensive
income, depending on the type of hedging relationship that exists. The Company
has adopted SFAS No. 133 in the


                                       4
<PAGE>   7

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


2. INVENTORIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                                  DECEMBER 31,   MARCH 31,
                                     2000          2001
                                  ----------     --------
<S>                               <C>           <C>
           Finished goods          $ 2,107       $ 2,534
           Work-in-process           2,471         4,903
           Raw materials             2,214         2,953
                                   -------       -------
                                   $ 6,792       $10,390
                                   =======       =======
</TABLE>


3.  LOSS PER SHARE

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

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

PRO FORMA NET LOSS PER SHARE

        Basic and diluted pro forma net loss per share for the three months
ended March 31, 2000 and 2001 is computed using the weighted average number of
common shares outstanding, including the conversion of the Company's mandatorily
redeemable convertible preferred stock into common stock effective upon the
closing of the Company's initial public offering, as if such conversion occurred
at the beginning of the periods presented or the date of issuance of the
mandatorily redeemable convertible preferred stock, whichever is later. The
calculation of basic and diluted pro forma net loss per share excludes
incremental common stock subject to repurchase rights and common stock issuable
upon the exercise of stock options as the effect would be anti-dilutive.

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


                                       5
<PAGE>   8


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

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED MARCH 31,
                                                                           ----------------------------
                                                                               2000          2001
                                                                             --------       --------
<S>                                                                          <C>            <C>
    Basic net loss per share calculation:
    Numerator:
      Net loss attributable to common stockholders                           $   (814)      $ (2,776)
                                                                             ========       ========
    Denominator:
      Shares used in computing net loss per share:
       Weighted average of common shares outstanding                            4,849         33,966
       Less: Weighted average of shares subject to repurchase right                (4)        (2,090)
       Basic                                                                    4,845         31,876

       Add:  Effect of dilutive securities, including options, warrants
          and mandatorily redeemable convertible preferred stock                    -              -
       Diluted                                                                  4,845         31,876
                                                                             ========       ========

    Net loss per share attributable to common stockholders:
      Basic and diluted                                                      $  (0.17)      $  (0.09)
                                                                             ========       ========

    Anti-dilutive securities, including options, warrants and
       mandatorily redeemable convertible preferred stock, not
       included in net loss per share calculation                              20,239          4,289
                                                                             ========       ========

    Pro forma net loss per share calculation:
      Shares used above                                                         4,845         31,876

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

    Shares used in computing pro forma loss per share attributable to
      common stockholders:
       Basic and diluted                                                       22,046         31,876
                                                                             ========       ========
    Pro forma loss per share attributable to common stockholders:
       Basic and diluted                                                     $  (0.04)      $  (0.09)
                                                                             ========       ========

    The following outstanding options and mandatorily redeemable convertible
       preferred stock were excluded from the computation of basic and diluted
       net loss per share (in thousands):
<CAPTION>
                                                                           THREE MONTHS ENDED MARCH 31,
                                                                           ----------------------------
                                                                               2000          2001
                                                                             --------       --------
<S>                                                                          <C>            <C>
    Options to purchase common stock                                            3,038          4,289
    Mandatorily redeemable convertible preferred stock                         17,201              -
                                                                             --------       --------
                                                                               20,239          4,289
                                                                             ========       ========
</TABLE>


                                       6
<PAGE>   9

4. GEOGRAPHIC SEGMENT INFORMATION

        The Company operates in a single industry segment. This industry segment
is characterized by rapid technological change and significant competition.
Certain components used in manufacturing the Company's products have relatively
few alternative sources of supply, and establishing additional or replacement
suppliers for such components cannot be accomplished quickly.

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

<TABLE>
<CAPTION>
                          THREE MONTHS ENDED
                              MARCH 31,
                         --------------------
                           2000         2001
                         -------      -------
<S>                      <C>          <C>
REVENUES
United States            $ 2,879      $ 6,374
Taiwan                       264          995
                         -------      -------
Total                    $ 3,143      $ 7,369
                         =======      =======
</TABLE>

<TABLE>
<CAPTION>
                       DECEMBER 31,   MARCH 31,
                       ------------   --------
                           2000         2001
                       ------------   --------
<S>                     <C>            <C>
IDENTIFIABLE ASSETS
United States            $80,548      $80,283
Taiwan                     7,771        8,453
China                        206          296
                         -------      -------
Total                    $88,525      $89,032
                         =======      =======
</TABLE>


5. COMMITMENTS AND CONTINGENCIES

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


6. SUBSEQUENT EVENT

        In April 2001, the Company signed a lease for approximately 120,000
square feet of manufacturing space in the Guang Dong (Canton) province of the
People's Republic of China ("PRC"). The lease expires in May 2011. The Company's
PRC subsidiary plans to use this facility to manufacture some of the Company's
products and sub-components. The annual rental expense related to this facility
is approximately $326,000.


                                       7
<PAGE>   10

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 the impact of possible litigation on our financial statements, our need
for additional financing, our profitability, statements as to our net losses,
our operating expenses, our sources of revenue and anticipated revenue, our
ability to obtain raw materials and components and maintain and develop supplier
relationships, the fluctuation of our cost of revenues as a percentage of
revenues, the impact of the power crisis in California, our plans to expand our
product development efforts, our plans to expand our operations domestically and
internationally, our plans to hire additional employees, our exposure to
currency rate fluctuations, our investment strategy, the amount and mix of our
anticipated expenditures, our ability to establish and maintain relationships
with key customers, our plans to expand our manufacturing capacity, our ability
to maintain appropriate inventory, and factors that affect a customer's decision
to chose a supplier, are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below, as
well as the competition from other entities including the impact of competitive
products and pricing, timely design acceptance by our customers, our success
attracting new customers, our customers adopting our new products, timely
introduction of new technologies, our ability to ramp new products into volume
production, our ability to attract and retain highly skilled personnel, industry
wide shifts in supply and demand for optical components and modules, industry
overcapacity, financial stability in foreign markets and the matters discussed
in "Factors That May Affect Results." These forward-looking statements speak
only as of the date hereof. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.

OVERVIEW

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

        From our inception, we have derived nearly all of our revenues from our
OPIS products. Revenues from our DWDM products represented less than 10% of
revenues for the year ended December 31, 2000. In the first quarter of 2001, our
DWDM products contributed revenues of $901,000, or 12.2% of total 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.
For the three months ended March 31, 2000 and 2001, revenues derived from sales
outside of North America were 28.0% and 19.8%, respectively. Demand for products
in the telecommunications industry, including our products, fell dramatically
during the first quarter of 2001. We experienced a slowdown in customer orders,
as well as cancellations and rescheduling of orders to later quarters. As a
result, our revenues declined from the previous quarter.


                                       8
<PAGE>   11

        In November 2000, we completed our initial public offering by issuing
4,500,000 shares of common stock at a price of $11.00 per share. The proceeds of
the offering, net of costs associated with the registration and issuance of the
shares, totaled $44.4 million. Subsequent to the offering and in accordance with
the terms of the agreement with the underwriters, we repurchased approximately
76,000 shares of common stock at an aggregate purchase price of $782,000.

        In December 2000, we established a subsidiary under the laws of the
People's Republic of China. In April 2001, a lease for a new facility, totaling
120,000 square feet, was signed. This new facility, located in the Guang Dong
(Canton) province, will support our expanding manufacturing operations for both
our OPIS and DWDM products.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED
                                                          MARCH 31,
                                                     2000         2001
                                                    -----        -----
<S>                                                 <C>          <C>
Revenues ...................................        100.0%       100.0%
Cost of revenues ...........................         57.2         68.4
                                                    -----        -----
Gross profit ...............................         42.8         31.6

Operating expenses:
  Research and development .................         24.9         39.6
  Sales and marketing ......................         11.5         15.0
  General and administrative ...............         35.1         26.3
                                                    -----        -----
    Total operating expenses ...............         71.5         80.9
                                                    -----        -----
  Loss from operations .....................        (28.7)       (49.3)
  Interest and other income, net ...........          3.9         13.3
                                                    -----        -----
  Loss before income taxes .................        (24.8)       (36.0)
  Income tax provisions ....................          1.1          1.7
                                                    -----        -----
    Net loss ...............................        (25.9)%      (37.7)%
                                                    =====        =====
</TABLE>

        Revenues. Revenues were $3.1 million and $7.4 million for the three
months ended March 31, 2000 and 2001, respectively. Revenues increased 135% from
2000 to 2001 due to higher volume sales and expansion of our OPIS products and
the introduction of our DWDM products, which were introduced in the second half
of fiscal year 2000. Revenues from our DWDM products were $901,000 for the three
months ended March 31, 2001.

        Gross Profit. Gross profit, including non-cash compensation expense,
increased in absolute dollars from $1.3 million, or 42.8% of revenues, for the
three months ended March 31, 2000 to $2.3 million, or 31.6% of revenues, for the
same period in 2001. Excluding non-cash compensation expense, gross profit
increased from $1.4 million, or 43.9% of revenues for the three months ended
March 31, 2000, to $2.8 million, or 38.2% of revenues, for the same period in
2001. As a percentage of revenues, the decrease in gross profit from 2000 to
2001 excluding non-cash compensation expense was primarily due to start-up
manufacturing costs associated with the introduction of new products, including
start-up manufacturing costs of our recently introduced DWDM products, and
reductions in average selling prices, partially offset by manufacturing
economies of scale resulting from higher production volumes of our OPIS
products.

        We expect our gross profit as a percentage of revenues to continue to be
negatively impacted in the near term due to low production volumes and ramp up
costs associated with our DWDM products. Additionally, our inventory increased
approximately $3.6 million in the three months ended March 31, 2001, due
primarily to increases in DWDM inventory. The anticipated growth of our DWDM
product sales has been impacted by the overall industry slowdown. Although we
are taking steps to manage future inventory levels, there is a risk that
substantial write-downs of inventory may have to be taken in future periods if
orders for our DWDM products do not materialize.

        Research and Development Expenses. Research and development expenses,
including non-cash compensation expense, increased from $781,000, or 24.9% of
revenues, for the three months ended March 31, 2000 to $2.9 million, or 39.6% of
revenues, for the same period in 2001. Excluding non-cash compensation expense,
research and development expenses increased from $725,000, or 23.1% of revenues,
in 2000 to $1.7 million, or 22.7% of revenues, in 2001. Excluding non-cash
compensation expense, these increases in absolute dollars were


                                       9
<PAGE>   12

primarily due to costs related to the development of new products and increases
in the number of research and development personnel and related costs. We expect
our research and development expenses to continue to increase in absolute
dollars in the foreseeable future

        Sales and Marketing Expenses. Sales and marketing expenses, including
non-cash compensation expense, increased from $363,000, or 11.5% of revenues,
for the three months ended March 31, 2000 to $1.1 million, or 15.0% of revenues,
for the same period in 2001. Excluding non-cash compensation expense, sales and
marketing expenses increased from $328,000, or 10.4% of revenues, in 2000 to
$809,000, or 11.0% of revenues, in 2001. These increases were attributable
primarily to hiring additional sales and marketing personnel and expanding our
sales and marketing efforts. We expect our sales and marketing expenses to
be relatively flat in the near future.

        General and Administrative Expenses. General and administrative
expenses, including non-cash compensation expense, increased in absolute dollars
from $1.1 million, or 35.1% of revenues, for the three months ended March 31,
2000 to $1.9 million, or 26.3% of revenues, for the same period in 2001.
Excluding non-cash compensation expense, general and administrative expenses
increased from $398,000, or 12.7% of revenues, in 2000 to $959,000, or 13.0% of
revenues, in 2001. These increases were primarily due to hiring additional
personnel and associated expenses necessary to support our increased scale of
operations, as well as the requirements of being a public company. We expect our
general and administrative expenses to be relatively flat in the near future.

        Interest and Other Income, Net. Interest and other income, net was
$122,000 and $983,000 for the three months ended March 31, 2000 and 2001,
respectively. The increase was the result of significantly higher average cash
balances resulting from proceeds from a private round of preferred stock
financing and our initial public offering of common stock in 2000.

        Income Taxes. Income taxes were $35,000 and $123,000 for the three
months ended March 31, 2000 and 2001, respectively. The income tax expense in
these periods was the result of taxable income from our Taiwan subsidiary.
Non-cash compensation charges are not deductible for income tax purposes, which
contributed in the taxable income position.

LIQUIDITY AND CAPITAL RESOURCES

        Since inception, we have financed our operations primarily through
private sales of convertible preferred stock and bank debt. Additionally, in
November 2000, we completed our initial public offering of common stock, raising
approximately $44.4 million, net of costs and expenses. At March 31, 2001, we
had cash and cash equivalents of $37.8 million and short-term investments of
$24.3 million.

        Net cash generated by operating activities was $276,000 for the three
months ended March 31, 2000 and net cash used by operations was $1.9 million for
the three months ended March 31, 2001. Net cash generated in the three months
ended March 31, 2000 was primarily the result of $1.0 million in non-cash
expenses offsetting our net loss of $814,000. Net cash used in the three months
ended March 31, 2001 included our net loss of $2.8 million offset by non-cash
charges of $3.4 million, primarily related to non-cash compensation expense of
$3.0 million and depreciation of $420,000, which resulted in a net cash
contribution of $650,000. This contribution was offset by an increase in working
capital of $2.6 million. Our accounts receivable decreased by $788,000 due to a
decrease in revenues for the three months ended March 31, 2001 as compared to
the preceding quarter. This decrease was offset by an increase in inventories of
$3.6 million mainly due to an increase in DWDM inventories.

        Cash used in investing activities was $1.4 million and $2.9 million for
the three months ended March 30, 2000 and 2001, respectively. In 2000, $444,000
was invested in high-grade, short-term investments while $947,000 was used to
acquire property and equipment. In 2001, $92,000 was invested in high-grade,
short-term investments, while $2.7 million was used to acquire property and
equipment. We plan to judiciously invest in the expansion of our China
manufacturing facility in the near future, as well as support planned expansion
of our research and development capabilities.


                                       10
<PAGE>   13

        Cash generated by financing activities was $260,000 in the three months
ended March 31, 2000, resulting from net borrowings on our bank lending
facility. For the three months ended March 31, 2001, cash generated by financing
activities was $29,000, resulting from proceeds from the exercise of common
stock options.

        We entered into loan facilities in July 1999 and January 2000 with
Silicon Valley Bank for a maximum of $800,000, which was fully drawn down during
the course of fiscal year 2000. We repaid these loans with a portion of the
proceeds of our initial public offering. In July 2000, we arranged additional
facilities with Silicon Valley Bank: a $750,000 equipment lease line which is
fully available, and a $1 million line of credit under which we have obtained a
$641,000 letter of credit to secure a building lease. Certain equipment we own
secures the existing loan facilities. In addition, Silicon Valley Bank holds a
general lien on our assets.

        We believe that our current cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, our
future growth, including potential acquisitions, may require additional funding.
If cash generated from operations is insufficient to satisfy our long-term
liquidity requirements, we may need to raise capital through additional equity
or debt financings or additional credit facilities. If additional funds are
raised through the issuance of securities, these securities could have rights,
preferences and privileges senior to holders of common stock, and the terms of
any debt facility could impose restrictions on our operations. The sale of
additional equity or debt securities could result in additional dilution to our
stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition and operating results.

FACTORS THAT MAY AFFECT RESULTS

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

        We incurred losses of approximately $814,000 and $2.8 million in the
first quarter of fiscal 2000 and 2001, respectively, and expect that our net
losses and negative cash flows will continue for the foreseeable future as we
continue to invest in our business. As of March 31, 2001, we had an accumulated
deficit of approximately $12.4 million.

        We have recently expanded our manufacturing facilities, and we expect to
continue to incur significant and increasing expenses for expansion of our
manufacturing operations, research and development, sales and marketing, and
administration, and in developing direct sales and distribution channels. In
particular, given our early stage of development, our increasing operating
expenses and the rate at which competition in our industry is intensifying, 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 higher revenues while
maintaining reasonable cost and expense levels. We may not be able to achieve
and sustain profitability on a quarterly or an annual basis.

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

        We believe that period to period comparisons of our operating results
are not a good indication of our future performance. Our quarterly operating
results have fluctuated in the past and are likely to fluctuate significantly in
the future due to a number of factors. For example, the timing and expenses
associated with product introductions, the timing and extent of product sales,
and the mix of products sold 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 could significantly harm our
quarterly results of operations. Other factors, many of which are more fully
discussed in other risk factors below, may also cause our results to fluctuate.
Many of the factors which may cause our results to fluctuate are outside of our
control. If our quarterly or annual operating results do not meet the
expectations of investors and securities analysts, the trading price of our
common stock could significantly decline.


                                       11
<PAGE>   14

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

        Sales of our OPIS products accounted for over 87% of our revenues in the
quarter ended March 31, 2001 and substantially all of our historical revenues.
We expect to substantially depend on these products for our near-term revenues.
Any significant decline in the price of, or demand for, these products, or
failure to increase their market acceptance, would seriously harm our business.
In addition, we believe that our future growth and a significant portion of our
future revenues will depend on the commercial success of our thin-film
filter-based DWDM products, which we began shipping commercially in July 2000.
If our target customers do not widely adopt and purchase our DWDM products, our
revenues may not grow significantly, we may have to write-off significant
inventory currently on our books and our business will be seriously harmed. To
date, adoption of our DWDM products by our target customers has been slower than
expected. At March 31, 2001, substantially all of our backlog was related to our
OPIS products.

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. We are presently able to fill substantially all of our
customers' orders. However, if we do not successfully increase our manufacturing
capacity to meet the future production requirements of our customers, growth of
our business will be negatively impacted. In addition, we would be unable to
fill large orders if we do not have sufficient manufacturing capacity to enable
us to commit to provide customers with specified quantities of products.
However, if we build our manufacturing capacity and inventory in excess of
demand, we may produce excess inventory that may have to be written off.

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

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

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

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

        Because we experience long lead times for materials and components and
are often required to purchase significant amounts of materials and components
far in advance of product shipments, we may not effectively manage our inventory
levels, which could harm our operating results. In anticipation of market demand
for our DWDM products, we have been, and intend to continue, building inventory.
If we underestimate our requirements, we may have inadequate inventory, which
could result in delays in shipments and loss of customers. If we purchase raw
materials and increase production in anticipation of orders that do not
materialize or that shift to another quarter, we will 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.

                                       12
<PAGE>   15

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
Chief Executive Officer, David Hubbard, our Vice President, Sales and Marketing,
and other key engineering, sales, marketing, finance, manufacturing and support
personnel. In addition, we depend upon the continued services of key management
personnel at our Taiwanese subsidiary. None of our officers or key employees is
bound by an employment agreement for any specific term, and may terminate their
employment at any time. In addition, we do not have "key person" life insurance
policies covering any of our employees.

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

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

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

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

        Several of our existing and potential customers are also current and
potential competitors of ours. These companies may develop or acquire additional
competitive products or technologies in the future and subsequently reduce or
cease their purchases from us. One of our top ten customers, JDS Uniphase, is
also a competitor, however this customer accounted for less than 10% of our
revenues in the quarter ended March 31, 2001. In light of the consolidation in
the optical networking industry, we also believe that the size of suppliers will
be an increasingly important part of a purchaser's decision-making criteria in
the future. We may not be able to compete successfully with existing or new
competitors, nor can we ensure that the competitive pressures we face will not
result in lower prices for our products, loss of market share, or reduced gross
margins, any of which could harm our business.

        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


                                       13
<PAGE>   16

division multiplexers that compete with the technology that we incorporate in
our products. If our products do not incorporate technologies demanded by
customers, we could lose market share and our business would suffer.

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

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

        -  customer unwillingness to implement our products;

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

        -  the success of our customers;

        -  new product introductions by our competitors;

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

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

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


                                       14
<PAGE>   17

sometimes longer. Once they decide to use a particular supplier's product or
component, these potential customers design the product into their system, which
is known as a design-in win. Suppliers whose products or components are not
designed in are unlikely to make sales to that customer until at least the
adoption of a future redesigned system. Even then, many customers may be
reluctant to incorporate entirely new products into their new systems, as this
could involve significant additional redesign efforts. If we fail to achieve
design-in wins in our potential customers' qualification processes, we will lose
the opportunity for significant sales to those customers for a lengthy period of
time.

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

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 $725,000 and $1.7 million in the first
quarter of 2000 and 2001, respectively. We intend to continue to invest a
substantial amount of funds in our research and product development efforts,
which could have a negative impact on our earnings in future periods.

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

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

        -  loss of customers;

        -  damage to our reputation;


                                       15
<PAGE>   18

        -  failure to attract new customers or achieve market acceptance;

        -  diversion of development and engineering resources; and

        -  legal actions by our customers.

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

IF WE FAIL TO EFFECTIVELY MANAGE THE EXPANSION OF OUR OPERATIONS, INCLUDING THE
GROWTH IN OUR MANUFACTURING FACILITIES AND INCREASE IN THE NUMBER OF EMPLOYEES,
OUR OPERATING RESULTS COULD BE HARMED.

        We have rapidly expanded our operations domestically and internationally
in recent periods and expect to continue to do so. As of March 31, 2001, we had
a total of 207 full-time employees in Sunnyvale, California, 305 full-time
employees in Taiwan, and 50 full-time employees in China. If our revenues grow,
we may need to hire a number of employees in connection with the expansion of
our manufacturing operations, particularly in China. The growth in employees and
our operations, combined with the challenges of expanding and managing
geographically dispersed operations, has placed, and will continue to place, a
significant strain on our management and resources. Some of our existing senior
management personnel joined us within the last 12 months, including a number of
key managerial, technical and operations personnel whom we have not yet fully
integrated. To manage growth of 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;

        -  expand our manufacturing capacity; and

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

        In addition, we will need to coordinate our domestic and international
operations and establish the necessary infrastructure to implement our
international strategy. For example, in the last quarter of 2000, we established
manufacturing capabilities in mainland China. If we are not able to manage our
growth in an efficient and timely manner, our business will be severely harmed.

        Our success also depends, to a large degree, on the efficient and
uninterrupted operation of our facilities. We recently expanded our
manufacturing facilities in Taiwan and manufacture many of our products there.
We also established manufacturing capabilities in mainland China where we have
begun to manufacture some of our products. There is significant political
tension between Taiwan and China. If there is an outbreak of hostilities between
Taiwan and China, our manufacturing operations may be disrupted or we may have
to relocate our manufacturing operations.

                                       16
<PAGE>   19

Relocating a portion of our employees could cause temporary disruptions in our
operations and divert management's attention. As we grow, we will need to
implement additional systems, which we may fail to do on a timely basis.

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
and evolving industry standards. Our future success depends on our ability to
anticipate market needs and develop products that address those needs. As a
result, our products could quickly become obsolete if we fail to predict market
needs accurately or develop new products or product enhancements in a timely
manner. Our failure to predict market needs accurately or to develop new
products or product enhancements in a timely manner will harm market acceptance
and sales of our products. If the development or enhancement of these products
or any other future products takes longer than we anticipate, or if we are
unable to introduce these products to market, our sales will not increase. Even
if we are able to develop and commercially introduce these new products, the new
products may not achieve widespread market acceptance necessary to provide an
adequate return on our investment.

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

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

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

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

        For the year ended December 31, 2000 and the three months ended March
31, 2001, sales to customers located outside of North America were 20.9% and
19.8% of our revenues, respectively. In order to expand our business, we must
increase our sales to customers located outside of North America. We have
limited experience in marketing and distributing our products internationally
and in developing versions of our products that comply with local standards. Our
international sales will be limited if we cannot establish relationships with
international distributors, establish additional foreign operations, expand
international sales channels, hire additional personnel and develop
relationships with international communications equipment manufacturers. Even if
we are able to successfully continue international operations, we may not be
able to maintain or increase international market demand for our products.


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<PAGE>   20


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

        California is in the midst of an energy crisis that could disrupt our
manufacturing operations and increase our expenses. We rely on the major
Northern California public utility, Pacific Gas & Electric Company, or PG&E, to
supply electric power to our facilities in Northern California. Due to problems
associated with the deregulation of the power industry in California and
shortages in wholesale electricity supplies, customers of PG&E have been faced
with increased electricity prices, power shortages and rolling blackouts.
Increased energy prices will increase our expenses incurred in manufacturing
which will increase our cost of revenues and decrease our gross profits. If
blackouts interrupt our power supply, we may be temporarily unable to continue
our manufacturing operations at our facilities. Any such interruption in our
ability to continue our manufacturing operations could delay our ability to
develop new products, manufacture our existing products or provide services.
Such disruptions could damage our reputation and result in lost revenue, either
of which could substantially harm our business and results of operations.

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

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


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

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

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

WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE INTERNET AND THE
COMMUNICATIONS INDUSTRY, WHICH IS EXPERIENCING RAPID CONSOLIDATION AND
REALIGNMENT AND MAY NOT CONTINUE TO DEMAND FIBER OPTIC PRODUCTS, THEREBY
REDUCING DEMAND FOR OUR PRODUCTS.

        Our future success depends on the continued growth of the Internet as a
widely used medium for communications and commerce, and the growth of optical
networks to meet the increased demand for capacity to transmit data. 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 occur, sales of our products may decline, which would adversely affect
our revenues. Future demand for our products is uncertain and will depend
heavily on the continued growth and upgrading of optical networks and the
success of our customers, especially in the metropolitan and last mile access
segments of the networks. The rate at which communication service providers and
other fiber optic network users have built new fiber optic networks or installed
new systems in their existing fiber optic networks has recently dropped and
fluctuations may continue in the future. These fluctuations are currently
resulting in reduced demand for new or upgraded fiber optic systems that utilize
our products and, therefore, have resulted in reduced demand for our products.

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

THE MARKET FOR FIBER OPTIC COMPONENTS IS NEW AND UNPREDICTABLE AND CHARACTERIZED
BY RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES
NOT DEVELOP AND EXPAND AS WE ANTICIPATE, DEMAND FOR OUR PRODUCTS MAY DECLINE,
WHICH COULD ADVERSELY IMPACT OUR REVENUES.

        The market for fiber optic components is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is new, it is
difficult to predict its potential size or future growth rate. Widespread
adoption of optical networks, especially in the metropolitan and last mile
access segments of the networks, is critical to our future success. Potential
end-user customers who have invested substantial resources in their existing
copper lines or other systems


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may be reluctant or slow to adopt a new approach, such as optical networks. Our
success in generating revenues in this emerging market will depend on:

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

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

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE RISK

INTEREST RATE SENSITIVITY

        We currently maintain our funds primarily in money market funds and
highly liquid marketable securities. We do not have any derivative financial
instruments. As of March 31, 2001, $30.0 million, or 50.9% of our investments,
matured in less than three months. We plan to continue to invest a significant
portion of our existing cash in interest bearing, investment grade securities,
with maturities of less than 12 months. We do not believe that our investments,
in the aggregate, have significant exposure to interest rate risk.

EXCHANGE RATE SENSITIVITY

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

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


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                           PART II: OTHER INFORMATION

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits.

        None

        (b) Reports on Form 8-K.

        The Company filed two reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended March 31, 2001 as follows:

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

        (ii)   Current Report on Form 8-K, filed March 10, 2001, reporting under
               Item 5, the Company's announcement of a presentation, relating to
               certain products under development, at the Global Communications
               Investor Conference in New York City on March 12, 2001.


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<PAGE>   24

                                    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 15, 2001

                                     ALLIANCE FIBER OPTIC PRODUCTS, INC.



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


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