##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB

(Mark One)
          xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 2003

pTRANSITION 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 small business issuer as specified in its charter)


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

735 North Pastoria Avenue, Sunnyvale, California 94085

(Address of Principal Executive Offices)


(408) 736-6900

(Issuers telephone number)




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On May 9, 2003, 35,777,907 shares of the Registrants Common Stock, $0.001 par
value per share, were outstanding.

Transitional Small Business Disclosure Format (Check One): Yes
p  No x





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TABLE OF CONTENTS



|                              |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1: FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | Consolidated Balance Sheets               
|                              |                                                                                               | Consolidated Statements of Operations     
|                              |                                                                                               | Consolidated Statements of Cash Flows     
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3: CONTROLS AND PROCEDURES                                                              
|PART II: OTHER INFORMATION   
|                              | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                    
|CERTIFICATIONS               
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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ALLIANCE FIBER OPTIC PRODUCTS, INC.

FORM 10-QSB

QUARTERLY PERIOD ENDED MARCH 31, 2003

INDEX

|               |     |         |  |                                                                                          |    |      |    | 
|-------------- | --- | ------- |  | ---------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |     |         |  |                                                                                          |    | Page
|               |     |         |  |                                                                                          |    |     
|Part           | I:  |         |  | Financial Information                                                                    |    |      | 1  | 
|               |     | Item 1: |  | Financial Statements                                                                     |    |      | 1  | 
|               |     |         |  | Consolidated Balance Sheets at December 31, 2002 and March 31, 2003                      |    |      | 1  | 
|               |     |         |  | Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 and 2003 |    |      | 2  | 
|               |     |         |  | Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2003 |    |      | 3  | 
|               |     |         |  | Notes to Consolidated Financial Statements                                               |    |      | 4  | 
|               |     | Item 2: |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations    |    |      | 8  | 
|               |     | Item 3: |  | Controls and Procedures                                                                  |    |      | 23 | 
|Part           | II: |         |  | Other Information                                                                        |    |      | 24 | 
|               |     | Item 6: |  | Exhibits and Reports on Form 8-K                                                         |    |      | 24 | 
|Signature      |     |         |  |                                                                                          | 25 |     
|Certifications |     |         |  |                                                                                          | 26 |     

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PART I: FINANCIAL INFORMATION




ITEM 1: FINANCIAL STATEMENTS




ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Balance Sheets
(Unaudited, in thousands, except share data)

|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |         |        | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ | -------- | ----- | ------- | ------ | 
|                                         |                                                                                                                                                                              |                                            |       | Dec. 31, |        | Mar. 31,
|                                         |                                                                                                                                                                              |                                            |       | 2002     |        | 2003    
|                                         |                                                                                                                                                                              |                                            |       |          |        |         
|Assets                                   |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|Current assets:                          |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|                                         | Cash and cash equivalents                                                                                                                                                    |                                            | $     | 11,759   |        |          | $     | 5,638   |       
|                                         | Short-term investments                                                                                                                                                       |                                            |       | 31,216   |        |          |       | 35,248  |       
|                                         | Accounts receivable, net                                                                                                                                                     |                                            |       | 1,133    |        |          |       | 1,120   |       
|                                         | Inventories, net                                                                                                                                                             |                                            |       | 2,930    |        |          |       | 2,840   |       
|                                         | Prepaid expense and other current assets                                                                                                                                     |                                            |       | 967      |        |          |       | 966     |       
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |         |       
|                                         |                                                                                                                                                                              | Total current assets                       |       |          | 48,005 |          |       |         | 45,812 | 
|Property and equipment, net              |                                                                                                                                                                              |                                            | 5,313 |          |        |          | 5,080 |        
|Other assets                             |                                                                                                                                                                              |                                            | 362   |          |        |          | 371   |        
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|                                         |                                                                                                                                                                              | Total assets                               |       | $        | 53,680 |          |       | $       | 51,263 | 
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|Liabilities and Stockholders Equity     |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|Current liabilities:                     |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|                                         | Accounts payable                                                                                                                                                             |                                            | $     | 706      |        |          |       | 851     |       
|                                         | Income tax payable                                                                                                                                                           |                                            |       | 140      |        |          |       | 140     |       
|                                         | Accrued expenses                                                                                                                                                             |                                            |       | 2,156    |        |          |       | 1,751   |       
|                                         | Accrued excess facility charge-short term                                                                                                                                    |                                            |       | 892      |        |          |       | 905     |       
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |         |       
|                                         |                                                                                                                                                                              | Total current liabilities                  |       |          | 3,894  |          |       |         | 3,647  | 
|Accrued excess facility charge-long term |                                                                                                                                                                              |                                            | 547   |          |        |          | 312   |        
|Other long-term liabilities              |                                                                                                                                                                              |                                            | 276   |          |        |          | 281   |        
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|                                         |                                                                                                                                                                              | Total liabilities                          |       |          | 4,717  |          |       |         | 4,240  | 
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|Commitments and contingencies (Note 8)
: |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|Stockholders equity                     |                                                                                                                                                                              |                                            |       |          |        |          |       |         |       
|                                         | Common stock, $0.001 par value: 250,000,000 shares authorized;
35,580,871 and 35,605,871 shares issued and outstanding at
December 31, 2002 and March 31, 2003, respectively |                                            |       | 35       |        |          |       | 35      |       
|                                         | Additional paid-in-capital                                                                                                                                                   |                                            |       | 105,053  |        |          |       | 105,053 |       
|                                         | Receivables from stockholders                                                                                                                                                |                                            |       | (1,636   | )      |          |       | (1,306  | )     
|                                         | Deferred stock-based compensation                                                                                                                                            |                                            |       | (2,420   | )      |          |       | (2,021  | )     
|                                         | Accumulated deficit                                                                                                                                                          |                                            |       | (51,987  | )      |          |       | (54,652 | )     
|                                         | Accumulated other comprehensive loss                                                                                                                                         |                                            |       | (82      | )      |          |       | (86     | )     
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|                                         | Stockholders equity                                                                                                                                                         |                                            |       | 48,963   |        |          |       | 47,023  |       
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        
|                                         |                                                                                                                                                                              | Total liabilities and stockholders equity |       | $        | 53,680 |          |       | $       | 51,263 | 
|                                         |                                                                                                                                                                              |                                            |       |          |        |          |       |        

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

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ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)

|                                             |                            |                          |        |                             |        |      |        |       |        |  
|-------------------------------------------- | -------------------------- | ------------------------ | ------ | --------------------------- | ------ | ---- | ------ | ----- | ------ | -
|                                             |                            |                          |        | Three Months Ended Mar. 31,
|                                             |                            |                          |        |                            
|                                             |                            |                          |        | 2002                        |        | 2003
|                                             |                            |                          |        |                             |        |     
|Revenues                                     |                            | $                        | 3,532  |                             |        | $    | 2,376  |      
|Cost of revenues                             |                            |                          | 4,954  |                             |        |      | 2,292  |      
|                                             |                            |                          |        |                             |        |      |        |      
|                                             | Gross profit (loss)        |                          |        | (1,422                      | )      |      |        | 84    |       
|                                             |                            |                          |        |                             |        |      |        |      
|Operating expenses:                          |                            |                          |        |                             |        |      |        |      
|                                             | Research and development   |                          |        | 2,380                       |        |      |        | 1,396 |       
|                                             | Sales and marketing        |                          |        | 990                         |        |      |        | 571   |       
|                                             | General and administrative |                          |        | 1,212                       |        |      |        | 949   |       
|                                             |                            |                          |        |                             |        |      |        |      
|                                             |                            | Total operating expenses |        |                             | 4,582  |      |        |       | 2,916  |  
|                                             |                            |                          |        |                             |        |      |        |      
|Loss from operations                         |                            |                          | (6,004 | )                           |        |      | (2,832 | )    
|Interest and other income, net               |                            |                          | 313    |                             |        |      | 167    |      
|                                             |                            |                          |        |                             |        |      |        |      
|Loss before income taxes                     |                            |                          | (5,691 | )                           |        |      | (2,665 | )    
|Income tax provision                         |                            |                          |       |                             |        |      |       |      
|                                             |                            |                          |        |                             |        |      |        |      
|Net loss                                     |                            | $                        | (5,691 | )                           |        | $    | (2,665 | )    
|                                             |                            |                          |        |                             |        |      |        |      
|Net loss per share:                          |                            |                          |        |                             |        |      |        |      
|                                             |                            | Basic and diluted        |        | $                           | (0.17  | )    |        | $     | (0.08  | )
|                                             |                            |                          |        |                             |        |      |        |      
|Shares used in computing net loss per share: |                            |                          |        |                             |        |      |        |      
|                                             |                            | Basic and diluted        |        |                             | 34,362 |      |        |       | 35,045 |  
|                                             |                            |                          |        |                             |        |      |        |      
|Included in costs and expenses above:        |                            |                          |        |                             |        |      |        |      
|Stock based compensation charges             |                            |                          |        |                             |        |      |        |      
|                                             | Cost of revenue            |                          | $      | (215                        | )      |      | $      | 39    |       
|                                             | Research and development   |                          |        | 270                         |        |      |        | 241   |       
|                                             | Sales and marketing        |                          |        | 71                          |        |      |        | 42    |       
|                                             | General and administrative |                          |        | 376                         |        |      |        | 72    |       
|                                             |                            |                          |        |                             |        |      |        |      
|                                             |                            | Total                    |        | $                           | 502    |      |        | $     | 394    |  
|                                             |                            |                          |        |                             |        |      |        |      

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

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ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Statements of Cash Flows
(Unaudited, in thousands, except share data)

|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |        |     |      |        |  
|------------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------- | ----------------------------------------- | ----- | --------------------------- | ------ | ------ | --- | ---- | ------ | -
|                                                 |                                                                             |                                          |                                   |                                           |       | Three Months Ended Mar. 31,
|                                                 |                                                                             |                                          |                                   |                                           |       |                            
|                                                 |                                                                             |                                          |                                   |                                           |       | 2002                        |        | 2003  
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|Cash flows from operating activities:            |                                                                             |                                          |                                   |                                           |       |                             |        |       
|                                                 | Net loss                                                                    |                                          | $                                 | (5,691                                    | )     |                             | $      | (2,665 | )  
|                                                 | Adjustments to reconcile net loss to net cash used
in operating activities: |                                          |                                   |                                           |       |                             |        |        |    
|                                                 |                                                                             | Depreciation                             |                                   |                                           | 334   |                             |        |        | 349 |     
|                                                 |                                                                             | Amortization of stock-based compensation |                                   |                                           | 502   |                             |        |        | 394 |     
|                                                 |                                                                             | Provision for inventory                  |                                   |                                           | 2,208 |                             |        |        | 33  |     
|                                                 |                                                                             | Changes in assets and liabilities:       |                                   |                                           |       |                             |        |        |     |     
|                                                 |                                                                             |                                          | Accounts receivable, net          |                                           |       | 566                         |        |        |     | 13   |       
|                                                 |                                                                             |                                          | Inventories, net                  |                                           |       | (8                          | )      |        |     | 57   |       
|                                                 |                                                                             |                                          | Prepaid expenses and other assets |                                           |       | (91                         | )      |        |     | 11   |       
|                                                 |                                                                             |                                          | Accounts payable                  |                                           |       | (127                        | )      |        |     | 147  |       
|                                                 |                                                                             |                                          | Accrued expenses                  |                                           |       | 257                         |        |        |     | (393 | )     
|                                                 |                                                                             |                                          | Other assets                      |                                           |       |                            |        |        |     | (9   | )     
|                                                 |                                                                             |                                          | Other long-term liabilities       |                                           |       | 24                          |        |        |     | (230 | )     
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |        |    
|                                                 |                                                                             |                                          |                                   | Net cash used in operating activities     |       |                             | (2,026 | )      |     |      | (2,293 | )
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|Cash flows from investing activities:            |                                                                             |                                          |                                   |                                           |       |                             |        |       
|                                                 | Proceeds from short-term investments                                        |                                          |                                   | (9,330                                    | )     |                             |        | (4,037 | )  
|                                                 | Purchase of property and equipment                                          |                                          |                                   | (99                                       | )     |                             |        | (136   | )  
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |        |    
|                                                 |                                                                             |                                          |                                   | Net cash used in investing activities     |       |                             | (9,429 | )      |     |      | (4,173 | )
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|Cash flows from financing activities:            |                                                                             |                                          |                                   |                                           |       |                             |        |       
|                                                 | Proceeds from the exercise of common stock options                          |                                          |                                   | 14                                        |       |                             |        | 5      |    
|                                                 | Proceeds from the repayment of notes receivable                             |                                          |                                   | 88                                        |       |                             |        | 340    |    
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |        |    
|                                                 |                                                                             |                                          |                                   | Net cash provided by financing activities |       |                             | 102    |        |     |      | 345    |  
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|Net decrease in cash and cash equivalents        |                                                                             |                                          | (11,353                           | )                                         |       |                             | (6,121 | )     
|Cash and cash equivalents at beginning of period |                                                                             |                                          | 16,947                            |                                           |       |                             | 11,759 |       
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|Cash and cash equivalents at end of period       |                                                                             | $                                        | 5,594                             |                                           |       | $                           | 5,638  |       
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|Non-cash investing and financing activities:     |                                                                             |                                          |                                   |                                           |       |                             |        |       
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       
|                                                 | Repurchase of common stock via cancellation                                 |                                          |                                   |                                           |       |                             |        |        |    
|                                                 | of notes receivable from stockholders                                       |                                          | $                                 | 138                                       |       |                             | $      |       |    
|                                                 |                                                                             |                                          |                                   |                                           |       |                             |        |       

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

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ALLIANCE FIBER OPTIC PRODUCTS, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. 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 headquarters is located
in Sunnyvale, California, and it has operations in Taiwan and China.

2. Basis of presentation

The consolidated financial information as of March 31, 2003 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 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, 2002 included in the Companys Annual Report on Form 10-K, as filed on
March 27, 2003 with the Securities and Exchange Commission (SEC). The results
of operations for the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for any future periods.

Certain reclassifications have been made to amounts reported in prior
periods, none of which affect the Companys financial position, results of
operations, or cash flows.

3. Stock-based Compensation

The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees and Financial Accounting
Standards Board (FASB) issued Interpretations (FIN) No. 44 Accounting for
Certain Transactions Involving Stock Compensation  An Interpretation of APB
No. 25. Under APB Opinion No. 25 and FIN No. 44, compensation cost is, in
general, recognized based on the excess, if any, of the fair market value of
the Companys stock on the date of grant over the amount an employee must pay
to acquire the stock. In addition, the Company complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS
No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure.
Equity instruments issued to non-employees are accounted for in accordance with
the provisions of SFAS No. 123, SFAS 148 and Emerging Issues Task Force
(EITF) Issue No. 96-18, which require the award to be recorded at its fair
value.

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Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123, which also requires that the information
be determined as if the Company had accounted for its stock based awards under
the fair value method. The fair value of these stock based awards was
estimated using the Black-Scholes model.

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

|                                                                                                                |                                                    |   |                              |        |      |   |        |        |  
|--------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | - | ---------------------------- | ------ | ---- | - | ------ | ------ | -
|                                                                                                                |                                                    |   | Three Months Ended March 31,
|                                                                                                                |                                                    |   |                             
|                                                                                                                |                                                    |   | 2002                         |        | 2003
|                                                                                                                |                                                    |   |                              |        |     
|Net loss, as reported:                                                                                          |                                                    | $ | (5,691                       | )      |      | $ | (2,665 | )     
|Add: Stock-based employee compensation expense included
in reported net income                                  |                                                    |   | 341                          |        |      |   | 394    |       
|Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards |                                                    |   | (1,089                       | )      |      |   | (473   | )     
|                                                                                                                |                                                    |   |                              |        |      |   |        |       
|Pro forma net loss:                                                                                             |                                                    | $ | (6,439                       | )      |      | $ | (2,744 | )     
|                                                                                                                |                                                    |   |                              |        |      |   |        |       
|Net loss per share attributable to common stockholders,
basic and diluted:                                      |                                                    |   |                              |        |      |   |        |       
|                                                                                                                | As reported                                        |   | $                            | (0.17  | )    |   | $      | (0.08  | )
|                                                                                                                | Pro forma                                          |   | $                            | (0.19  | )    |   | $      | (0.08  | )
|                                                                                                                | Shares used in EPS calculation (basic and diluted) |   |                              | 34,362 |      |   |        | 35,045 |  

4. Inventories (in thousands)

|            |                                                 |   |          |        |          |   |       |        |  
|----------- | ----------------------------------------------- | - | -------- | ------ | -------- | - | ----- | ------ | -
|            |                                                 |   | Dec. 31, |        | Mar. 31,
|            |                                                 |   | 2002     |        | 2003    
|            |                                                 |   |          |        |         
|Inventories |                                                 |   |          |        |          |   |       |       
|            | Finished goods                                  |   | $        | 2,218  |          |   | $     | 2,201  |  
|            | Work-in-process                                 |   |          | 854    |          |   |       | 807    |  
|            | Raw materials                                   |   |          | 2,740  |          |   |       | 2,606  |  
|            | Less: Reserve for excess and obsolete inventory |   |          | (2,882 | )        |   |       | (2,774 | )
|            |                                                 |   |          |        |          |   |       |        |  
|            |                                                 | $ | 2,930    |        |          | $ | 2,840 |       
|            |                                                 |   |          |        |          |   |       |       

5. Impairment of Property and Equipment

As a result of the business decline and reduced headcount in the United
States, the Company consolidated its operations in the United States from three
buildings into two buildings in Sunnyvale, California. As a consequence, the
Company recorded excess facility charges of $1.8 million during 2002, comprised
of $1.6 million of future non-cancelable lease payments, which are expected to
be paid over the next two years, and $0.2 million of fixed assets that were
written-off. Cash payments in the quarter ended March 31, 2003 amounted to
$0.2 million and $1.2 million remains on the consolidated balance sheet in
accrued facility charges at March 31, 2003.

6. 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.

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As the Company is in a net loss position, diluted net loss per share
is the same as basic net loss per share.

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):

|                    |                                              |                                                        |   |                |        |      |   |        |        |  
|------------------- | -------------------------------------------- | ------------------------------------------------------ | - | -------------- | ------ | ---- | - | ------ | ------ | -
|                    |                                              |                                                        |   | Three Months  
|                    |                                              |                                                        |   | Ended Mar. 31,
|                    |                                              |                                                        |   |               
|                    |                                              |                                                        |   | 2002           |        | 2003
|                    |                                              |                                                        |   |                |        |     
|Numerator:          |                                              |                                                        |   |                |        |      |   |       
|                    | Net loss                                     |                                                        | $ | (5,691         | )      |      | $ | (2,665 | )     
|                    |                                              |                                                        |   |                |        |      |   |       
|Denominator:        |                                              |                                                        |   |                |        |      |   |       
|                    | Shares used in computing net loss per share: |                                                        |   |                |        |      |   |        |       
|                    |                                              | Weighted average of common shares outstanding          |   |                | 35,423 |      |   |        | 35,584 |  
|                    |                                              | Less: Weighted average of shares subject to repurchase |   |                | (1,061 | )    |   |        | (539   | )
|                    |                                              |                                                        |   |                |        |      |   |       
|                    |                                              | Basic and diluted                                      |   |                | 34,362 |      |   |        | 35,045 |  
|                    |                                              |                                                        |   |                |        |      |   |       
|Net loss per share: |                                              |                                                        |   |                |        |      |   |       
|                    |                                              | Basic and diluted                                      |   | $              | (0.17  | )    |   | $      | (0.08  | )
|                    |                                              |                                                        |   |                |        |      |   |       

All outstanding stock options and shares subject to repurchase by the
Company have been excluded from the calculation of diluted net loss per share
as all such securities were anti-dilutive for all periods presented. The total
number of shares excluded from the calculation of diluted net loss per share is
as follows (in thousands):

|                                                                  |  |                |       |      |  |  |       | 
|----------------------------------------------------------------- |  | -------------- | ----- | ---- |  |  | ----- | 
|                                                                  |  | Three Months  
|                                                                  |  | Ended Mar. 31,
|                                                                  |  |               
|                                                                  |  | 2002           |       | 2003
|                                                                  |  |                |       |     
|Options to purchase common stock and
shares subject to repurchase |  |                | 4,572 |      |  |  | 3,391 | 

7. Comprehensive Loss

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

|                                                 |                          |   |                |        |      |   |        |        |  
|------------------------------------------------ | ------------------------ | - | -------------- | ------ | ---- | - | ------ | ------ | -
|                                                 |                          |   | Three Months  
|                                                 |                          |   | Ended Mar. 31,
|                                                 |                          |   |               
|                                                 |                          |   | 2002           |        | 2003
|                                                 |                          |   |                |        |     
|Net loss                                         |                          | $ | (5,691         | )      |      | $ | (2,665 | )     
|Cumulative translation adjustments               |                          |   | (13            | )      |      |   | (2     | )     
|Unrealized gain (loss) on short-term investments |                          |   | (113           | )      |      |   | (2     | )     
|                                                 |                          |   |                |        |      |   |        |       
|                                                 | Total comprehensive loss |   | $              | (5,817 | )    |   | $      | (2,669 | )
|                                                 |                          |   |                |        |      |   |        |       

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8. 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):

|         |               |   |                             |       |      |   |       |       | 
|-------- | ------------- | - | --------------------------- | ----- | ---- | - | ----- | ----- | 
|         |               |   | Three Months Ended Mar. 31,
|         |               |   |                            
|         |               |   | 2002                        |       | 2003
|         |               |   |                             |       |     
|Revenues |               |   |                             |       |      |   |       |      
|         | United States |   | $                           | 3,530 |      |   | $     | 2,226 | 
|         | Taiwan        |   |                             | 2     |      |   |       | 150   | 
|         |               |   |                             |       |      |   |       |       | 
|         |               | $ | 3,532                       |       |      | $ | 2,376 |      
|         |               |   |                             |       |      |   |       |      

|                    |               |       |   |          |        |          |   |        |        | 
|------------------- | ------------- | ----- | - | -------- | ------ | -------- | - | ------ | ------ | 
|                    |               |       |   | Dec. 31, |        | Mar. 31,
|                    |               |       |   | 2002     |        | 2003    
|                    |               |       |   |          |        |         
|Identifiable Assets |               |       |   |          |        |          |   |       
|                    | United States |       | $ | 47,054   |        |          | $ | 45,144 |       
|                    | Taiwan        |       |   | 5,773    |        |          |   | 5,298  |       
|                    | China         |       |   | 853      |        |          |   | 821    |       
|                    |               |       |   |          |        |          |   |        |       
|                    |               | Total |   | $        | 53,680 |          |   | $      | 51,263 | 
|                    |               |       |   |          |        |          |   |       

The Companys identifiable assets in Taiwan and China consist of
manufacturing plants and machinery and inventory for the manufacturing of the
Companys products.

9. Contingencies

From time to time, the Company may be involved in litigation in the normal
course of business. As of the date of these financial statements, the Company
is not aware of any material legal proceedings pending or threatened against
the Company.

10. Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). Under that interpretation, certain
entities known as Variable Interest Entities (VIE) must be consolidated by
the primary beneficiary of the entity. The primary beneficiary is generally
defined as having the majority of the risks and rewards arising from the VIE.
For VIEs in which a significant (but not majority) variable interest is held,
certain disclosures are required. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not have any entities that
require disclosure or new consolidation as the result of adopting the
provisions of FIN 46.

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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 our sources of revenue, anticipated revenue levels, our
profitability, those actions necessary to achieve and maintain profitability,
the fluctuation of our cost of revenues as a percentage of revenues and the
factors contributing to these fluctuations, our net and operating losses, our
negative cash flow, our gross profit, the amount and mix of our anticipated
expenditures and expenses, expenditures required to remain competitive,
anticipated investments, increases or decreases in the level of our expenses,
market conditions, the need for additional inventory reserves or provisions,
customer demand for our products, strategies to increase business including
increasing sales to customers outside of the United States, our reliance on our
OPMS products sales levels, reliance on the commercial success of our
DWDM-related products, our success being tied to relationships with key
customers, our ability to establish and maintain relationships with key
customers, our plans to hire additional employees, our deferred stock-based
compensation, the adequacy of our capital resources and need for additional
funding, period-to-period comparisons of our operating results, our plans for a
reverse stock split, our ability to obtain raw materials and components and
maintain and develop supplier relationships, our anticipated use of resources,
our ability to maintain appropriate inventory, factors that affect a customers
decision to choose a supplier, our competitors, competition in our industry,
our competitive advantage and consolidation in our industry 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, further decreased demand for and sales
of our products, our ability to realize the benefits of our investment
strategy, continued domestic and international economic instability, as well as
competition including the impact of competitive products and pricing, timely
design acceptance by our customers, our success in attracting new customers,
loss of a key customer, our customers not adopting our new products, failure to
accurately predict market needs, timely introduction of new technologies, our
ability to ramp new products into volume production, our ability to attract and
retain highly skilled personnel, loss of a key supplier, industry wide shifts
in supply and demand for optical components and modules, industry overcapacity,
being delisted from the Nasdaq SmallCap Market, 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,
2002.

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

Critical Accounting Policies and Estimates

Managements discussion and analysis of our financial conditions and
results of operations are based on our Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, bad debts,
inventories, asset impairments, income taxes, contingencies, and litigation.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values for
8Table of Contents

assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

For additional information regarding our critical accounting policies and
estimates, see the section entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form
10-K, for the year ended December 31, 2002.

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, products. We have broadened our
OPMS product line to include attenuators and fused fiber products. In early
1999, we started developing a new product line based in part on our proprietary
technology. We started selling our dense wavelength division multiplexing, or
DWDM, and other wavelength management products in July 2000. Since
introduction, sales of DWDM-related products have fluctuated with the overall
market for these products.

From our inception through March 31, 2003, we derived substantially all of
our revenues from our OPMS product line. Our DWDM-related products contributed
revenues of $0.1 million and $0.4 million for the quarters ended March 31, 2002
and March 31, 2003, respectively. In the quarters ended March 31, 2002 and
March 31, 2003, our top 10 customers comprised 52.9% and 48.1% of our revenues,
respectively. For the quarters ended March 31, 2002 and March 31, 2003, 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. The percentage of our revenues
derived from sales outside of North America was 7.4%, and 11.7% for the
quarters ended March 31, 2002, and March 31, 2003, 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.

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 continue to invest in 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 our expenditures will result in higher

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revenues. In addition, we believe that our future success depends upon
establishing successful relationships with a variety of key customers.

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.

In connection with the grant of stock options to employees and
consultants, we recorded deferred stock-based compensation of approximately
$26.8 million in stockholders equity prior to our initial public offering,
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 $2.0 million
as of March 31, 2003 will be amortized on an accelerated basis over the vesting
periods of the option grants, which are generally four years.

In April 2003, Mr. Richard Black was elected to the Companys Board of
Directors.

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:

|                               |                             |                          |        |                             |       |      |        |      |       | 
|------------------------------ | --------------------------- | ------------------------ | ------ | --------------------------- | ----- | ---- | ------ | ---- | ----- | 
|                               |                             |                          |        | Three Months Ended Mar. 31,
|                               |                             |                          |        |                            
|                               |                             |                          |        | 2002                        |       | 2003
|                               |                             |                          |        |                             |       |     
|Revenues                       |                             |                          | 100.0  | %                           |       |      | 100.0  | %   
|Cost of revenues:              |                             |                          | 140.3  |                             |       |      | 96.5   |     
|                               |                             |                          |        |                             |       |      |        |     
|                               | Gross profit (loss)         |                          |        | (40.3                       | )     |      |        | 3.5  |      
|Operating expenses:            |                             |                          |        |                             |       |      |        |     
|                               | Research and development:   |                          |        | 67.4                        |       |      |        | 58.8 |      
|                               | Sales and marketing:        |                          |        | 28.0                        |       |      |        | 24.0 |      
|                               | General and administrative: |                          |        | 34.3                        |       |      |        | 39.9 |      
|                               |                             |                          |        |                             |       |      |        |     
|                               |                             | Total operating expenses |        |                             | 129.7 |      |        |      | 122.7 | 
|Loss from operations           |                             |                          | (170.0 | )                           |       |      | (119.2 | )   
|Interest and other income, net |                             |                          | 8.9    |                             |       |      | 7.0    |     
|                               |                             |                          |        |                             |       |      |        |     
|Loss before income taxes       |                             |                          | (161.1 | )                           |       |      | (112.2 | )   
|Income tax provision           |                             |                          |       |                             |       |      |       |     
|                               |                             |                          |        |                             |       |      |        |     
|Net loss                       |                             |                          | (161.1 | %)                          |       |      | (112.2 | %)  
|                               |                             |                          |        |                             |       |      |        |     

Revenues.Revenues were $3.5 million and $2.4 million for the three
months ended March 31, 2002 and 2003, respectively. Revenues decreased 31.4%
from the quarter ended March 31, 2002 to the same period in 2003 primarily due
to decreased volume shipments of our OPMS products as a result of poor market
conditions. Revenues from our DWDM-related products were $0.1 million and $0.4
million for the three months ended March 31, 2002 and 2003, respectively.

Cost of Revenues.Cost of revenues was $5.0 million and $2.3 million for
the three months ended March 31, 2002 and 2003, respectively. Cost of revenues
as a percentage of net revenues decreased from 140.3% for the three months
ended March 31, 2002 to 96.5% for the three months ended March 31, 2003. Cost
of revenues for the period ended March 31, 2002 was primarily impacted by
write-

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offs for excess and obsolete inventory resulting from a slowdown in
telecommunications capital spending and the general downturn in the United
States economy which resulted in a charge of $2.2 million.

Gross Profit (Loss).Gross profit (loss) changed from gross loss of $1.4
million, or negative 40.3% of revenues, for the three months ended March 31,
2002 to a gross profit of $0.1 million, or 3.5% of revenues, for the same
period in 2003. The primary reason for the improvement in gross profit (loss)
was because charges for excess and obsolete inventory were lower in the three
months ended March 31, 2003 than in the same period last year.

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 that 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 then 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 first quarter of 2002.

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. We had approximately $0.6 million in DWDM-related net
inventory and $2.3 million in OPMS-related net inventory on hand at March 31,
2003. 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
decreased from $2.4 million, or 67.4% of revenues, for the three months ended
March 31, 2002 to $1.4 million, or 58.8% of revenues, for the same period in
2003. This decrease was primarily due to lower headcount levels and related
expenditures, as well as tighter controls over discretionary spending. We
expect research and development expenses on our product development efforts to
remain relatively flat due to the uncertainty about customer demand for our
products in the current economic environment.

Sales and Marketing Expenses. Sales and marketing expenses decreased from
$1.0 million, or 28.0% of revenues, for the three months ended March 31, 2002
to $0.6 million, or 24.0% of revenues, for the same period in 2003. The
decrease was primarily due to lower sales force expenses resulting from a
reduction in headcount during 2002. We expect sales and marketing expenses to
remain relatively flat due to uncertainty about customer demand for our
products in the current economic environment.

General and Administrative Expenses. General and administrative expenses
decreased from $1.2 million for the three months ended March 31, 2002 to $0.9
million for the same period in 2003. The decrease was primarily due to lower
headcount levels and reduced expenditures as well as tighter controls over
discretionary spending. As a percentage of revenues, general and
administrative expenses increased from 34.3% in the three months ended March
31, 2002 to 39.9% for the same period in 2003 due to lower level of revenues.
We expect to maintain general and administrative expenses at the same level as
the first three months of 2003 with the exception of professional and legal
services which may increase due to higher fees and costs associated with
compliance with new laws.

Stock-Based Compensation. Total stock based compensation decreased from
$0.5 million for the three months ended March 31, 2002 to $0.4 million for the
same period in 2003. This decrease was partially due to our accounting policy
which requires the amortization of a larger proportion of deferred compensation
expense during the early vesting periods of the option grants.

Interest and Other Income, Net.Interest and other income, net, was $0.3
million and $0.2 million for the three months ended March 31, 2002 and 2003,
respectively. The decrease from 2002 to 2003 was due to a lower cash balance
and lower interest rates.

Income Taxes. We had no income tax expense for the three months ended
March 31, 2002 or 2003.

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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, 2003, we
had cash and cash equivalents of $5.6 million and short-term investments of
$35.2 million.

Net cash used in operating activities was $2.3 million for the three
months ended March 31, 2003 and was primarily due to our net loss of $2.7
million.

Cash used in investing activities was $9.4 million and $4.2 million for
the three months ended March 31, 2002 and 2003, respectively. In the three
months ended March 31, 2002, $9.3 million was invested in high-grade,
short-term investments, while $0.1 million was used to acquire property and
equipment. In the three months ended March 31, 2003, $4.0 million was invested
in high-grade, short-term investments, while $0.1 million was used to acquire
property and equipment.

Cash generated by financing activities was $0.1 million and $0.3 million
for the three months ended March 31, 2002 and 2003, respectively, resulting
from proceeds from exercise of options to purchase common stock and from
repayment of notes receivable. For the three months ended March 31, 2002 and
2003, proceeds from the repayment of notes receivable were $0.1 million and
$0.3 million respectively.

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. In September 2002, we consolidated our operations in California
into two buildings and vacated the 10,600 square foot facility. As a result of
the consolidation, we recorded an excess facility charge of $1.8 million in the
year ended December 31, 2002. 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 $0.8 million. In April 2001, we
entered into a lease in China but cancelled it, without penalty, in the third
quarter of 2001. We had a lease for a facility near the Shenzhen area of China
totaling approximately 12,000 square feet, which expired in December 2002. In
August 2002, we entered into a new lease for 62,000 square foot facility near
the same Shenzhen area which will expire in July 2007.

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.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). Under that interpretation, certain
entities known as Variable Interest Entities (VIE) must be consolidated by
the primary beneficiary of the entity. The primary beneficiary is generally
defined as having the majority of the risks and rewards arising from the VIE.
For VIEs in which a significant (but not majority) variable interest is held,
certain disclosures are required. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not have any entities that
require disclosure or new consolidation as the result of adopting the
provisions of FIN 46.

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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 $5.7 million and $2.7
million in the first quarter of fiscal 2002 and 2003, 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, 2003, we had
an accumulated deficit of approximately $54.7 million.

Although we are currently experiencing decreased demand for our products,
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.

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 83% of our revenues in the
quarter ended March 31, 2003 and substantially all of our historical revenues.
We expect to substantially depend on these products for our near-term revenues.
Any significant decline in the price of, or demand for, these products, or
failure to increase their market acceptance, would seriously harm our business.
In addition, we believe that our future growth and a significant portion of
our future revenues will depend on the commercial success of our DWDM-related
products, which we began shipping commercially in July 2000. Demand for these
products declined sharply starting in mid fiscal 2001. 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 that is currently on our books.

We are experiencing a decrease in market demand due to overcapacity in our
industry and an economy that is stymied by international terrorism, war and
political instability.

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The United States economy has experienced and continues to experience a
significant slowdown in consumption and demand since 2001. During the past few
years, telecommunication companies have decreased their spending which has
resulted in excess inventory, overcapacity and a decrease in demand for our
products. We may experience further decreases in the demand for our products
due to a weak domestic and international economy as the fiber optics industry
copes with the effects of oversupply of products, international terrorism, war
and political instability. Even if the general economy experiences a recovery,
the activity of the United States telecommunications industry may lag behind
the recovery of the overall United States economy.

The outbreak of Severe Acute Respiratory Syndrome, or SARS, poses a risk to the
Companys business.

The outbreak of SARS has developed into an international health concern,
especially in Asia. We have manufacturing facilities located in Taiwan and
China. An outbreak of SARS among our employees in Asia could disrupt our Asian
manufacturing operations for an extended period of time, which could limit our
ability to supply our products to our customers in sufficient quantities on a
timely basis. A shutdown of our Asian facilities due to fear of spread of
infection or because of a quarantine could result in our inability to supply
our customers. If we are unable to fulfill demand for our products, our
relationships with our customers would be harmed and our revenues could be
impacted. We also rely on companies in Asia for many of the components
necessary to manufacture our products. If our suppliers experience a
significant disruption in their businesses as a result of SARS, we may not be
able to obtain the parts necessary to make our products which could negatively
impact our revenues. In addition, if any of our customers experiences a
significant disruption in their business as a result of SARS, they may delay or
cancel purchases of our products which could harm our business. Also, certain
of our key employees travel to Asia to oversee our Asian operations and to meet
with our suppliers and customers. If any of our key employees are infected
with SARS on such a trip or if these employees are quarantined when they return
to the United States, our business could be negatively impacted. These
conditions and uncertainties make it difficult for us, our suppliers and our
customers to accurately forecast and plan future business activities.

Effective at the beginning of trading on November 8, 2002, the listing of our
common stock was transferred to the Nasdaq SmallCap Market and if we are unable
to maintain our listing on the Nasdaq SmallCap Market, the price and liquidity
of our common stock may decline.

Beginning at the commencement of trading on November 8, 2002, our common
stock was listed on the Nasdaq SmallCap Market. The transfer of our common
stock to the Nasdaq SmallCap Market may result in decreased liquidity of our
common stock and may further decrease the price per share of our common stock.

As a result of the transfer to the Nasdaq SmallCap Market, we may become
subject to certain sections of the California Corporations Code that may affect
our charter documents. For example, we may not be able to continue to have a
classified board or continue to eliminate cumulative voting. In addition,
certain provisions of our Certificate of Incorporation that call for
supermajority voting may need to be approved by stockholders every two years or
be eliminated. Also, in the event of a reorganization, stockholders may have
certain dissenting stockholder rights.

There can be no assurance that we will be able to satisfy all of the
quantitative maintenance criteria for continued listing on the Nasdaq SmallCap
Market including a continued minimum bid price of $1.00 per share. Although we
were unable to comply with this criteria for at least 10 consecutive trading
days before January 13, 2003, Nasdaq granted us an additional 180 days, or
until July 10, 2003, to comply with the minimum closing bid price requirement
because we met the initial listing requirements of
the Nasdaq SmallCap Market on that date. On March 24, 2003, Nasdaq
granted us an additional 90 days, or until October 10, 2003, to comply with the
minimum closing bid price requirement. If we are unable to comply with this
criteria for 10 consecutive trading days before October 10, 2003, or we are
unable to continue to meet any of the Nasdaq SmallCap Markets initial listing
requirements during the 270 days grace period, we may be delisted from the
Nasdaq SmallCap Market, which could further

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decrease the price per share and
the liquidity of our common stock, and make it more difficult for us to raise
capital in the future.

In addition, many companies that face delisting as a result of closing bid
prices that are below the Nasdaq SmallCap Markets continued listing standards
seek to maintain the listing of their securities by effecting reverse stock
splits. However, reverse stock splits do not always result in a sustained
closing bid price per share. We are currently considering the merits of
implementing a reverse split and have submitted a proposal to such effect in
our proxy materials for our 2003 annual meeting of stockholders. We will
continue to evaluate this option as well as other courses of action.

If we cannot attract more optical communications equipment manufacturers to
purchase our products, we may not be able to increase or sustain our revenues.

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



| |  |  | customer unwillingness to implement our products;                                                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | any delays or difficulties that we may incur in completing the
development and introduction of our planned products or product
enhancements;
|
| |  |  | the success of our customers;                                                                                                               
|
| |  |  | new product introductions by our competitors;                                                                                               
|
| |  |  | any failure of our products to perform as expected; or                                                                                      
|
| |  |  | any difficulty we may incur in meeting customers delivery requirements or product specifications.                                          

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

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

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

If we fail to effectively manage our operations, specifically given the recent
sudden and dramatic downturn in demand for our products, our operating results
could be harmed.

We rapidly expanded our operations domestically and internationally in the
final two quarters of 2000. We had to carefully manage and re-evaluate this
expansion given the sudden and dramatic downturn in demand for our products
experienced in 2001 and continuing to date. As of March 31, 2003, we had a
total of 83 full-time employees in Sunnyvale, California, 164 full-time
employees in Taiwan, and 74 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. During the
third quarter of 2002, we entered into a new lease for a new facility in China,
which continues through July 2007. 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 facility in China. Relocating a portion of our employees
could cause temporary disruptions in our operations and divert managements
attention.

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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 were approximately
$2.4 million and $1.4 million for the quarters ended March 31, 2002 and 2003,
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.

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 which would adversely affect our revenues. Our customers have
experienced an oversupply of inventory due to lower demand for their products
that has resulted in a decrease of orders for our products. Future demand for
our products is uncertain and will depend heavily on the continued growth and
upgrading of optical networks, especially in the metropolitan, last mile and
enterprise access segments of the networks.

Decreased spending by telecommunication companies over the past two years
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. 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 of our products.

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.

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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 or
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.
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.

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 March 31, 2002,
June 30, 2002 and September 30, 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
18Table of Contents

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.

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; Wei-shin Tsay, our senior Vice President of Product Development;
Anita Ho, our Acting Chief Financial Officer and Corporate Controller, 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.

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
facilities in the United States, Taiwan and China. 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 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.
19Table of Contents

Because the qualification and sales cycle associated with fiber optic
components is lengthy and varied, it is difficult to predict the timing of a
sale or whether a sale will be made, which may cause us to have excess
manufacturing capacity or inventory and negatively impact our operating
results.

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

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

If our customers do not qualify our manufacturing lines for volume shipments,
our optical networking components may be dropped from supply programs and our
revenues may decline.

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

Our fiber optic components are deployed in large and complex communications
networks and may contain defects that are not detected until after our products
have been installed, which could damage our reputation and cause us to lose
customers.

Our products are designed 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;

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| |  |  | 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.

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 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.

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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
have and may continue to 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, 2002 and the three months ended March 31,
2003, sales to customers located outside of North America were 9.6% and 11.7%
of our revenues, respectively. In order to expand our business, we must
increase our sales to customers located outside of North America. We have
limited experience in marketing and distributing our products internationally
and in developing versions of our products that comply with local standards.
Our international sales will be limited if we cannot establish relationships
with international distributors, establish additional foreign operations,
expand international sales channels, hire additional personnel and develop
relationships with international communications equipment manufacturers. Even
if we are able to successfully continue international operations, we may not be
able to maintain or increase international market demand for our products.

Because our manufacturing operations are located in active earthquake fault
zones in California and Taiwan, and our Taiwan location is susceptible to the
effects of a typhoon, we face the risk that a natural disaster could limit our
ability to supply products.

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

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ITEM 3: CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.We maintain
disclosure controls and procedures, as such term is defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the Exchange Act), that are
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Acting Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure
controls and procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.

Based on their evaluation as of a date within 90 days prior to the filing
date of this Quarterly Report on Form 10-QSB, our Chief Executive Officer and
Acting Chief Financial Officer have concluded that, subject to the limitations
noted above, our disclosure controls and procedures were effective to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-QSB
was being prepared.

(b) Changes in internal controls.There were no significant changes in
our internal controls or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

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PART II: OTHER INFORMATION




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|        |  |                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                         
|Number  |  | Title                                                                                                                                   
|        |  |                                                                                                                                         
|99.1    |  | Certification of Peter C. Chang, Chief Executive Officer of
Alliance Fiber Optic Products, Inc., pursuant to 18 U.S.C. Section
1350.    
|        |  |                                                                                                                                         
|99.2    |  | Certification of Anita K. Ho, Acting Chief Financial Officer of
Alliance Fiber Optic Products, Inc., pursuant to 18 U.S.C. Section
1350.



| | (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, 2003 as follows:



| | (i) |  | Current Report on Form 8-K, filed February 28, 2003,
reporting under Item 5, the date of the Companys 2003 Annual
Meeting of Stockholders.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------

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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 9, 2003

ALLIANCE FIBER OPTIC PRODUCTS,
INC.


By
    
    /s/ Anita K. HoAnita K. Ho
Acting Chief Financial Officer and Corporate Controller
(Principal Financial and Accounting Officer and Duly
Authorized Signatory)


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CERTIFICATIONS

I, Peter C. Chang, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of Alliance Fiber
Optic Products, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

/s/Peter C. Chang

Peter C. ChangChief Executive Officer


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##### Table of Contents



I, Anita K. Ho, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of Alliance Fiber
Optic Products, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

/s/ Anita K. Ho

Anita K. HoActing Chief Financial Officer


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EXHIBIT INDEX

|        |  |                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                         
|Number  |  | Title                                                                                                                                   
|        |  |                                                                                                                                         
|99.1    |  | Certification of Peter C. Chang, Chief Executive Officer of
Alliance Fiber Optic Products, Inc., pursuant to 18 U.S.C. Section
1350.    
|        |  |                                                                                                                                         
|99.2    |  | Certification of Anita K. Ho, Acting Chief Financial Officer of
Alliance Fiber Optic Products, Inc., pursuant to 18 U.S.C. Section
1350.