1122342--3/20/2009--ALLIANCE_FIBER_OPTIC_PRODUCTS

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{product, market, service}

{customer, product, revenue}

{condition, economic, financial}

{control, financial, internal}

{property, intellectual, protect}

{operation, natural, condition}

{stock, price, operating}

{cost, regulation, environmental}

{system, service, information}

{stock, price, share}

{gas, price, oil}

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We have a history of losses, may experience future losses and may not be able to generate sufficient revenues in the future to achieve and sustain profitability. Our connectivity products have historically represented a significant part of our revenues, and if we are unsuccessful in commercially selling our Optical Passive products, our business will be seriously harmed. Declining general economic or business conditions may have a negative impact on our business. We depend on a small number of customers for a significant portion of our total revenues and the loss of, or a significant reduction in orders from, any of these customers, would significantly reduce our revenues and harm our operating results. In the years ended December 31, 2008 and 2007 our top 10 customers comprised 62.3% and 58.1% of our revenues, respectively. One customer accounted for 15.7 % and 17.4% of our total revenues for the year ended December 31, 2008 and 2007, respectively. 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. ncertainty in the credit markets has and may continue to If we cannot attract more optical communications equipment manufacturers to purchase our products, we may not be able to increase or sustain our revenues. We are exposed to risks and increased expenses and business risk as a result of Restriction on Hazardous Substances, or RoHS directives. The market for fiber optic components is increasingly competitive, and if we are unable to compete successfully our revenues could decline. If we fail to effectively manage our operations, specifically given the past history of sudden and dramatic downturn in demand for our products, our operating results could be harmed. Because of the time it takes to develop fiber optic components, we incur substantial expenses for which we may not earn associated revenues. 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. Current and future demand for our products depends on the continued growth of the Internet and the communications industry, which is experiencing consolidation, realignment, fluctuations of product inventory and demand for fiber optic products. The communications industry is experiencing continued 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. We are experiencing fluctuations in market demand due to overcapacity in our industry and an economy that is stymied by the current financial and economic crisis, international terrorism, war and political instability. 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. 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. We depend on a limited number of third parties to supply key materials, components and equipment, such as ferrules, optical filters 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. 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. We are exposed to risks and increased expenses as a result of requiring companies to evaluate internal controls over financial reporting. 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. 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. 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. 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. 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. 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. If we fail to address changing market conditions, sales of our products may decline, which would adversely impact our revenues. If our common stock is not relisted on the Nasdaq Global Market, we will be subject to certain provisions of the California General Corporation Law that may affect our charter documents and result in additional expenses. If we are unable to maintain our listing on the Nasdaq Capital Market, the price and liquidity of our common stock may decline. 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. 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. 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. Because our manufacturing operations are located in active earthquake fault zones in California and Taiwan, and our Taiwan locations are susceptible to the effects of a typhoon, we face the risk that a natural disaster could limit our ability to supply products.

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1122342--3/20/2009--ALLIANCE_FIBER_OPTIC_PRODUCTS_INC