##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 *
 or o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-31581 OPLINK COMMUNICATIONS, INC.  Delaware(State or other jurisdiction of
incorporation or organization)
    
    No. 77-0411346(I.R.S. Employer
Identification No.)
 46335 Landing Parkway, Fremont, California 94538(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (510) 933-7200 Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes þ No o The number of shares of the Registrants common stock outstanding as of April 30, 2005 was
148,720,202.   *




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OPLINK COMMUNICATIONS, INC. FORM 10-Q TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):Condensed
Consolidated Balance Sheets  
March 31, 2005 and June 30, 2004
    
    
    3Condensed
Consolidated Statements of Operations 
 Three and nine months ended March 31, 2005 and 2004
    
    
    4Condensed
Consolidated Statements of Cash Flows  
Nine months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4.
    
    Controls and Procedures
    
    
    49PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    50Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3.
    
    Defaults Upon Senior Securities
    
    
    50Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    50Item 5.
    
    Other Information
    
    
    50Item 6.
    
    Exhibits
    
    
    51SIGNATURES
    
    
    52EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1- FINANCIAL STATEMENTS OPLINK COMMUNICATIONS,
INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 March 31,
    
    
    June 30,2005
    
    
    2004(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,859
    
    
    $
    56,690Short-term investments
    
    
    100,948
    
    
    
    78,549Accounts receivable, net
    
    
    7,135
    
    
    
    7,545Inventories
    
    
    6,037
    
    
    
    4,767Prepaid expenses and other current assets
    
    
    2,625
    
    
    
    2,814Total current assets
    
    
    145,604
    
    
    
    150,365Long-term investments
    
    
    55,769
    
    
    
    55,204Property, plant and equipment, net
    
    
    26,853
    
    
    
    26,426Intangible assets
    
    
    369
    
    
    
    507Other assets
    
    
    230
    
    
    
    401Total assets
    
    $
    228,825
    
    
    $
    232,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,837
    
    
    $
    4,926Accrued liabilities
    
    
    6,853
    
    
    
    8,090Current portion of capital lease obligations
    
    
    
    
    
    
    81Total current liabilities
    
    
    11,690
    
    
    
    13,097Accrued restructuring costs, non current
    
    
    
    
    
    
    104Total liabilities
    
    
    11,690
    
    
    
    13,201Contingencies (Note 14)Stockholders equity:Common stock
    
    
    148
    
    
    
    147Additional paid-in capital
    
    
    444,936
    
    
    
    444,125Notes receivable from stockholders
    
    
    (26
    )
    
    
    (38
    )Deferred stock compensation
    
    
    (54
    )
    
    
    (158
    )Accumulated other comprehensive income
    
    
    86
    
    
    
    66Accumulated deficit
    
    
    (227,955
    )
    
    
    (224,440
    )Total stockholders equity
    
    
    217,135
    
    
    
    219,702Total liabilities and stockholders equity
    
    $
    228,825
    
    
    $
    232,903
   (1) The condensed consolidated balance sheet at June 30, 2004 has been derived from the audited
financial statements at that date.
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. 3




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OPLINK COMMUNICATIONS, INC. OPLINK COMMUNICATIONS,
INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    8,421
    
    
    $
    9,200
    
    
    $
    25,473
    
    
    $
    24,639Cost of revenues:Cost of revenues
    
    
    6,260
    
    
    
    6,088
    
    
    
    19,152
    
    
    
    16,763Non-cash compensation expense
    
    
    
    
    
    
    32
    
    
    
    27
    
    
    
    160Total cost of revenues
    
    
    6,260
    
    
    
    6,120
    
    
    
    19,179
    
    
    
    16,923Gross profit
    
    
    2,161
    
    
    
    3,080
    
    
    
    6,294
    
    
    
    7,716Operating expenses:Research and development:Research and development
    
    
    1,929
    
    
    
    1,961
    
    
    
    5,629
    
    
    
    4,979Non-cash compensation expense
    
    
    
    
    
    
    32
    
    
    
    2
    
    
    
    437Total research and development
    
    
    1,929
    
    
    
    1,993
    
    
    
    5,631
    
    
    
    5,416Sales and marketing:Sales and marketing
    
    
    935
    
    
    
    946
    
    
    
    2,889
    
    
    
    2,562Non-cash compensation expense
    
    
    
    
    
    
    22
    
    
    
    5
    
    
    
    41Total sales and marketing
    
    
    935
    
    
    
    968
    
    
    
    2,894
    
    
    
    2,603General and administrative:General and administrative
    
    
    1,518
    
    
    
    1,354
    
    
    
    4,825
    
    
    
    5,054Non-cash compensation expense
    
    
    22
    
    
    
    293
    
    
    
    93
    
    
    
    916Total general and administrative
    
    
    1,540
    
    
    
    1,647
    
    
    
    4,918
    
    
    
    5,970In-process research and development
    
    
    
    
    
    
    704
    
    
    
    
    
    
    
    1,565Merger fees
    
    
    (904
    )
    
    
    
    
    
    
    (904
    )
    
    
    Amortization of intangible and other assets
    
    
    45
    
    
    
    1
    
    
    
    137
    
    
    
    11Total operating expenses
    
    
    3,545
    
    
    
    5,313
    
    
    
    12,676
    
    
    
    15,565Loss from operations
    
    
    (1,384
    )
    
    
    (2,233
    )
    
    
    (6,382
    )
    
    
    (7,849
    )Interest and other income, net
    
    
    1,193
    
    
    
    800
    
    
    
    3,044
    
    
    
    1,926(Loss) gain on disposal of assets
    
    
    (168
    )
    
    
    (20
    )
    
    
    (177
    )
    
    
    105Net loss
    
    $
    (359
    )
    
    $
    (1,453
    )
    
    $
    (3,515
    )
    
    $
    (5,818
    )Basic and diluted net loss per share
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )Basic and diluted weighted average shares outstanding
    
    
    148,219
    
    
    
    146,529
    
    
    
    147,895
    
    
    
    144,887
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. 4




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OPLINK COMMUNICATIONS,
INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (3,515
    )
    
    $
    (5,818
    )Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:Depreciation and amortization of property, plant and equipment
    
    
    5,809
    
    
    
    6,293Amortization of intangible and other assets
    
    
    137
    
    
    
    11Amortization of deferred stock compensation
    
    
    127
    
    
    
    1,554Stock options issued for sales commissions
    
    
    79
    
    
    
    Amortization of premium on investments
    
    
    827
    
    
    
    147Loss (gain) on disposal of assets
    
    
    177
    
    
    
    (105
    )Acquired in-process research and development
    
    
    
    
    
    
    1,565Other
    
    
    (11
    )
    
    
    56Change in assets and liabilities:Accounts receivable
    
    
    410
    
    
    
    (2,102
    )Inventories
    
    
    (1,270
    )
    
    
    (1,203
    )Prepaid expenses and other current assets
    
    
    (273
    )
    
    
    (437
    )Other assets
    
    
    171
    
    
    
    207Accounts payable
    
    
    (89
    )
    
    
    224Accrued liabilities and accrued restructuring costs
    
    
    (1,274
    )
    
    
    (1,433
    )Net cash provided by (used in) operating activities
    
    
    1,305
    
    
    
    (1,041
    )Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (92,460
    )
    
    
    (101,388
    )Sales of available-for-sale investments
    
    
    96,700
    
    
    
    128,279Purchases of held-to-maturity investments
    
    
    (33,000
    )
    
    
    (64,275
    )Sales of held-to-maturity investments
    
    
    5,000
    
    
    
    10,000Proceeds from sales of property, plant and equipment
    
    
    452
    
    
    
    500Purchases of property, plant and equipment
    
    
    (6,402
    )
    
    
    (225
    )Acquisition of businesses, net of cash and cash equivalents acquired
    
    
    (67
    )
    
    
    404Net cash used in investing activities
    
    
    (29,777
    )
    
    
    (26,705
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    710
    
    
    
    3,526Repayment of notes receivable from stockholders
    
    
    12
    
    
    
    Repayment of capital lease obligations
    
    
    (81
    )
    
    
    (1,353
    )Net cash provided by financing activities
    
    
    641
    
    
    
    2,173Net decrease in cash and cash equivalents
    
    
    (27,831
    )
    
    
    (25,573
    )Cash and cash equivalents, beginning of period
    
    
    56,690
    
    
    
    74,498Cash and cash equivalents, end of period
    
    $
    28,859
    
    
    $
    48,925
 The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements. 5




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OPLINK COMMUNICATIONS,
INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Description of Business. Oplink Communications, Inc. (Oplink or the Company)
provides design, integration and Optical Manufacturing Solutions (OMS) for optical networking
components and subsystems that expand optical bandwidth, amplify optical signals, monitor and
protect wavelength performance, redirect light signals, reshape light profile to enable extended
signal reach and provide signal transmission and reception within an optical network. The Companys
product portfolio includes solutions for next-generation, all-optical Dense and Coarse Wavelength
Division Multiplexing (DWDM and CWDM, respectively), optical amplification, switching and
routing, monitoring and conditioning, dispersion management and line transmission applications. As
a photonic foundry, Oplink offers its customers expert OMS for the production and packaging of
highly-integrated optical subsystems and turnkey solutions based upon a customers specific product
design and specifications. The Companys broad line of products and services is designed to
increase the performance of optical networks and enable optical system manufacturers to provide
flexible and scalable bandwidth to support the increase of data traffic on the Internet and other
public and private networks. The Company offers advanced and cost-effective optical-electrical
components and subsystem manufacturing through its facilities in Zhuhai and Shanghai, China. In
addition, the Company maintains optical-centric front-end design, application, and customer service
functions at its headquarters in Fremont, California. The Companys customers include
telecommunications, data communications and cable TV equipment manufacturers located around the
globe. The Company was incorporated in September 1995, began selling its products in 1996 and
established operations in Zhuhai, China in April 1999. The Company is headquartered in Fremont,
California and its primary manufacturing facility and component research and development resources
are in Zhuhai, China. The Company conducts its business within one business segment and has no
organizational structure dictated by product, service lines, geography or customer type. 2. Basis of Presentation. The unaudited condensed consolidated financial statements
included herein have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted pursuant to such rules and
regulations. The financial statements  presented herein have been prepared by management, without
audit by an independent registered public accounting firm that does not express an opinion thereon,
and should be read in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended June 30, 2004 included in the Companys Annual Report on Form
10-K. In the opinion of management, these unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments) necessary to present
fairly the financial position of the Company at March 31, 2005, the results of its operations for
the three and nine-month periods ended March 31, 2005 and 2004 and its cash flows for the nine-month periods ended
March 31, 2005 and 2004. The results of operations for the periods presented are not necessarily
indicative of those that may be expected for the full year. 6




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The Company operates and reports using a fiscal year that ends on the Sunday closest to June
30. Interim fiscal quarters end on the Sundays closest to each calendar quarter end. For
presentation purposes, the Company presents each fiscal year as if it ended on June 30. The Company
presents each of the fiscal quarters as if it ended on the last day of each calendar quarter. April
3, 2005 and March 28, 2004 represent the Sunday closest to the period ended March 31, 2005 and
March 31, 2004, respectively. The first quarter of fiscal 2005 was a 14-week quarter, one week more
than a typical quarter. Fiscal year 2005 will consist of 53 weeks, one week more than a typical
year. The Companys condensed consolidated financial statements for all periods presented account
for the Shanghai operation as part of continuing operations rather than as a discontinued
operation. In May 2003, the Company adopted a plan to sell its Shanghai operation. As the sale of
the Shanghai operation represented a disposal of a component of an entity as defined in Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets (SFAS No. 144), the Shanghai operation was accounted for as a discontinued
operation. In May 2004, one year following the planned sale of its Shanghai operation and after
considering growth in the telecommunications market, the Company determined that this facility is
more strategic to its operations than in prior periods due to the need to ensure a supply of the
parts manufactured at the Shanghai facility as a result of an increase in demand for these types of
parts in the market and the acquisition of one of the Companys suppliers by one of the Companys
competitors. Therefore, the Company decided not to dispose of this facility and returned it to
continuing operations. Amounts in the financial statements and related notes for all periods
presented are reclassified to reflect the Shanghai operation as part of continuing operations in
accordance with SFAS No. 144. 3. Net Loss Per Share. The Company computes net loss per share in accordance with SFAS No.
128, Earnings Per Share, and SEC Staff Accounting Bulletin (SAB) No. 98. Under the provisions
of SFAS No. 128 and SAB No. 98, basic net loss per share is computed by dividing the 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 shares outstanding during the period and common equivalent shares
outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are
composed of the incremental common shares issuable upon the exercise of stock options. The
following is a reconciliation of the numerators and denominators of the basic and diluted net loss
per share computations for the periods presented (in thousands, except per share data): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net loss
    
    $
    (359
    )
    
    $
    (1,453
    )
    
    $
    (3,515
    )
    
    $
    (5,818
    )Denominator:Weighted average shares outstanding
    
    
    148,219
    
    
    
    146,529
    
    
    
    147,895
    
    
    
    144,887Net loss per share  basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )Antidilutive stock options not included in net
loss per share calculation
    
    
    19,541
    
    
    
    19,439
    
    
    
    19,541
    
    
    
    19,439
 7




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4. Comprehensive Loss. Comprehensive loss is defined as the change in equity of a
business enterprise during a period from transactions and other events and circumstances from
non-owner sources, including foreign currency translation adjustments and unrealized gains and
losses on investments. The reconciliation of net loss to comprehensive loss for the three and nine months ended March
31, 2005 and 2004 is as follows (in thousands): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (359
    )
    
    $
    (1,453
    )
    
    $
    (3,515
    )
    
    $
    (5,818
    )Unrealized gains on investments
    
    
    16
    
    
    
    119
    
    
    
    31
    
    
    
    165Change in cumulative translation adjustments
    
    
    2
    
    
    
    3
    
    
    
    (11
    )
    
    
    56Total comprehensive loss
    
    $
    (341
    )
    
    $
    (1,331
    )
    
    $
    (3,495
    )
    
    $
    (5,597
    )
 5. Short-Term and Long-Term Investments. The Company generally invests its excess
cash in debt instruments of the U.S. Treasury, government agencies and corporations with strong
credit ratings. Such investments are made in accordance with the Companys investment policy,
which establishes guidelines relative to diversification and maturities designed to maintain
safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. Investments in auction rate securities have been reclassified from cash equivalents to
short-term investments. Auction rate securities are variable rate bonds tied to short-term interest
rates with maturities on the face of the underlying securities in excess of 90 days. Auction rate
securities have interest rate resets through a modified Dutch auction, at pre-determined short-term
intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any
interest payment date at the option of the issuer. Interest paid during a given period is based
upon the interest rate determined during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded
as short-term instruments because of the liquidity provided through the interest rate reset. The
Company had historically classified these instruments as cash equivalents if the period between
interest rate resets was 90 days or less, which was based on our ability to either liquidate our holdings or roll our
investment over to the next reset period. Based upon the Companys re-evaluation of these securities, the Company has reclassified its
auction rate securities, previously classified as cash equivalents, as short-term investments as of
June 30, 2004. This resulted in a reclassification from cash and cash equivalents to short-term
investment of $53.7 million on the June 30, 2004 condensed consolidated balance sheet. In addition,
purchases of investments and sales of investments, included in the accompanying condensed
consolidated statements of cash flows, have been revised to reflect the purchase and sale of
auction rate securities during the periods presented. The Company accounts for its marketable
securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Investments in auction rate securities are classified as available for sale and are
reported at fair value in the Companys balance sheets. The short-term nature and structure, the
frequency with which the interest rate resets and the ability to sell auction rate securities at
par and at the Companys discretion indicates that such securities should more appropriately be
classified as short-term investments with the intent of meeting the Companys short-term working
capital requirements. Short-term and long-term investments at March 31, 2005 consist of the following (in
thousands): 8




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March 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueShort-term investments:Obligations of states and political subdivisions
    
    $
    52,900
    
    
    $
    
    
    
    $
    
    
    
    $
    52,900U.S. corporate securities
    
    
    26,062
    
    
    
    
    
    
    
    (29
    )
    
    
    26,033United States government agencies
    
    
    22,000
    
    
    
    
    
    
    
    (110
    )
    
    
    21,890Total short-term investments
    
    
    100,962
    
    
    
    
    
    
    
    (139
    )
    
    
    100,823Long-term investments:U.S. corporate securities
    
    
    5,757
    
    
    
    
    
    
    
    (165
    )
    
    
    5,592United States government agencies
    
    
    50,012
    
    
    
    
    
    
    
    (579
    )
    
    
    49,433Total long-term investments
    
    
    55,769
    
    
    
    
    
    
    
    (744
    )
    
    
    55,025Total investments
    
    $
    156,731
    
    
    $
    
    
    
    $
    (883
    )
    
    $
    155,848
 The amortized cost and fair value of available-for-sale and held-to-maturity investments
at March 31, 2005 and June 30, 2004 are presented in the following tables (in thousands): March 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale investments:Obligations of states and political subdivisions
    
    $
    52,900
    
    
    $
    
    
    
    $
    
    
    
    $
    52,900U.S. corporate securities
    
    
    15,969
    
    
    
    
    
    
    
    (8
    )
    
    
    15,961United States government agencies
    
    
    5,000
    
    
    
    
    
    
    
    (6
    )
    
    
    4,994Total available-for-sale investments
    
    
    73,869
    
    
    
    
    
    
    
    (14
    )
    
    
    73,855Held-to-maturity investments:U.S. corporate securities
    
    
    15,850
    
    
    
    
    
    
    
    (186
    )
    
    
    15,664United States government agencies
    
    
    67,012
    
    
    
    
    
    
    
    (683
    )
    
    
    66,329Total held-to-maturity investments
    
    
    82,862
    
    
    
    
    
    
    
    (869
    )
    
    
    81,993Total investments
    
    $
    156,731
    
    
    $
    
    
    
    $
    (883
    )
    
    $
    155,848
 9




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June 30, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale investments:Obligations of states and political subdivisions
    
    $
    48,700
    
    
    $
    
    
    
    $
    
    
    
    $
    48,700U.S. corporate securities
    
    
    24,956
    
    
    
    
    
    
    
    (84
    )
    
    
    24,872United States government agencies
    
    
    5,000
    
    
    
    
    
    
    
    (23
    )
    
    
    4,977Total available-for-sale investments
    
    
    78,656
    
    
    
    
    
    
    
    (107
    )
    
    
    78,549Held-to-maturity investments:U.S. corporate securities
    
    
    16,182
    
    
    
    
    
    
    
    (197
    )
    
    
    15,985United States government agencies
    
    
    39,022
    
    
    
    
    
    
    
    (322
    )
    
    
    38,700Total held-to-maturity investments
    
    
    55,204
    
    
    
    
    
    
    
    (519
    )
    
    
    54,685Total investments
    
    $
    133,860
    
    
    $
    
    
    
    $
    (626
    )
    
    $
    133,234
 The amortized cost and estimated fair value of debt securities at March 31, 2005, by
contractual maturities, are shown below (in thousands): Amortized
    
    
    EstimatedCost
    
    
    Fair ValueAvailable-for-sale investments:Due in one year or less
    
    $
    7,769
    
    
    $
    7,755Due in one year to five years
    
    
    
    
    
    
    Due in five years to ten years
    
    
    
    
    
    
    Due after ten years
    
    
    66,100
    
    
    
    66,10073,869
    
    
    
    73,855Held-to-maturity investments:Due in one year or less
    
    
    27,093
    
    
    
    26,968Due in one year to five years
    
    
    55,769
    
    
    
    55,02582,862
    
    
    
    81,993Total investments
    
    $
    156,731
    
    
    $
    155,848
 One security which was categorized as held-to-maturity was called by the issuer in
September 2004. No gain or loss was recognized as the security was called at the purchase price. 6. Inventories. Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist of (in thousands): March 31,
    
    
    June 30,2005
    
    
    2004Inventories:Raw materials
    
    $
    9,937
    
    
    $
    9,751Work-in-process
    
    
    4,298
    
    
    
    4,282Finished goods
    
    
    2,746
    
    
    
    4,592Sub-total
    
    
    16,981
    
    
    
    18,625Less: Reserves for
excess and obsolete
inventory
    
    
    (10,944
    )
    
    
    (13,858
    )Total
    
    $
    6,037
    
    
    $
    4,767
 10




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7. Property, Plant and Equipment. Property, plant and equipment consist of (in
thousands): March 31,
    
    
    June 30,2005
    
    
    2004Property, plant and equipment:Production and engineering equipment
    
    $
    33,652
    
    
    $
    33,356Computer equipment and software
    
    
    6,102
    
    
    
    5,970Buildings and improvements
    
    
    14,115
    
    
    
    11,064Land
    
    
    1,949
    
    
    
    Sub-total
    
    
    55,818
    
    
    
    50,390Less: Accumulated depreciation and
amortization
    
    
    (28,965
    )
    
    
    (23,964
    )Total
    
    $
    26,853
    
    
    $
    26,426
 In July 2004, the Company completed the purchase of a building in Fremont, California for
$4.8 million in cash to house its U.S. operation. The facility consists of approximately 52,000
square feet. 8. Accrued Liabilities. Accrued liabilities consist of (in thousands): March 31,
    
    
    June 30,2005
    
    
    2004Accrued liabilities:Payroll and related expenses
    
    $
    676
    
    
    $
    684Accrued sales commission
    
    
    307
    
    
    
    971Accrued warranty
    
    
    960
    
    
    
    700Accrued restructuring costs
    
    
    182
    
    
    
    1,795Remaining amounts payable for
acquisitions
    
    
    683
    
    
    
    750Other
    
    
    4,045
    
    
    
    3,190Total
    
    $
    6,853
    
    
    $
    8,090
 9. Product Warranties. The Company provides reserves for the estimated cost of
product warranties at the time revenue is recognized based on its historical experience of
known product failure rates and expected material and labor costs to provide warranty
services. The Company generally provides a one-year warranty on its products. Additionally,
from time to time, specific warranty accruals may be made if unforeseen technical problems
arise. Alternatively, if estimates are determined to be greater than the actual amounts
necessary, the Company may reverse a portion of such provisions in future periods. Changes in the warranty liability, which is included as a component of accrued liabilities
on the condensed consolidated balance sheet, is as follows (in thousands): 11




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Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    960
    
    
    $
    700
    
    
    $
    700
    
    
    $
    700Accrual for warranties issued during the period
    
    
    169
    
    
    
    210
    
    
    
    762
    
    
    
    630Adjustments related to pre-existing warranties
including expirations and changes in estimates
    
    
    (128
    )
    
    
    (42
    )
    
    
    (315
    )
    
    
    (66
    )Cost of warranty repair
    
    
    (41
    )
    
    
    (168
    )
    
    
    (187
    )
    
    
    (564
    )Balance at end of period
    
    $
    960
    
    
    $
    700
    
    
    $
    960
    
    
    $
    700
 10. Restructuring Costs and Other Charges. A summary of the changes in accrued
restructuring costs in the nine months ended March 31, 2005 is as follows (in thousands): Consolidation ofExcess Facilitiesand Other ChargesBalance at June 30, 2004
    
    $
    1,899Less: accrued restructuring costs, current
    
    
    1,795Accrued restructuring costs, non current
    
    
    104Cash payments
    
    
    (535
    )Balance at September 30, 2004
    
    
    1,364Less: accrued restructuring costs, current
    
    
    1,343Accrued restructuring costs, non current
    
    
    21Cash payments
    
    
    (636
    )Balance at December 31, 2004
    
    
    728Less: accrued restructuring costs, current
    
    
    728Accrued restructuring costs, non current
    
    
    Cash payments
    
    
    (546
    )Balance at March 31, 2005
    
    
    182Less: accrued restructuring costs, current
    
    
    182Accrued restructuring costs, non current
    
    $
    
 11. Stock-Based Compensation. The Company accounts for its stock-based compensation
issued to employees using the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock issued to Employees. SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), establishes accounting and disclosure requirements
using a fair value method of accounting for stock-based employee compensation plans as well as
stock and other equity instruments issued to non-employees which are accounted for in accordance
with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18 and valued using the Black-Scholes
option-pricing model. The following table sets forth the pro forma information as if the provisions of SFAS No. 123
had been 12




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applied to account for stock-based employee compensation (in thousands, except per share
data): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss as reported
    
    $
    (359
    )
    
    $
    (1,453
    )
    
    $
    (3,515
    )
    
    $
    (5,818
    )Stock-based employee compensation expense
included in reported net loss
    
    
    22
    
    
    
    379
    
    
    
    127
    
    
    
    1,554Pro forma stock compensation expense computed
under the fair value method for all awards
    
    
    (660
    )
    
    
    (1,522
    )
    
    
    (2,631
    )
    
    
    (4,894
    )Pro forma net loss
    
    $
    (997
    )
    
    $
    (2,596
    )
    
    $
    (6,019
    )
    
    $
    (9,158
    )Basic and diluted net loss per share, as reported
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )Pro forma basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )
 The Company calculated the fair value of each option grant on the date of grant in
accordance with SFAS No. 123 using the following weighted average assumptions: Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Risk-free interest rate
    
    
    3.31
    %
    
    
    3.01
    %
    
    
    3.31
    %
    
    
    3.27
    %Expected life of option
    
    4 years
    
    4 years
    
    4 years
    
    4 yearsExpected dividends
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    55
    %
    
    
    70
    %
    
    
    55
    %
    
    
    70
    %
 12. Repurchase of Common Stock. On September 26, 2001, the Companys Board of
Directors authorized a program to repurchase up to an aggregate of $21.2 million of the Companys
common stock. On September 19, 2002, the Companys Board of Directors approved an increase in the
Companys buyback plan to repurchase up to an aggregate of $40.0 million of the Companys common
stock. Such repurchases may be made from time to time on the open market at prevailing market
prices or in negotiated transactions. As of March 31, 2005, repurchases of an aggregate of $35.2
million of the Companys common stock have been made under the Companys repurchase program. The
Company did not repurchase any common stock during the nine-month period ended March 31, 2005. 13. Recent Accounting Pronouncements. On December 16, 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123(R)). SFAS No. 123(R) requires the Company to measure all employee stock-based compensation
awards using a fair value method and record such expense in the Companys consolidated financial
statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting related to
the income tax effects and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107) which provides guidance regarding the application of SFAS No. 123(R). SAB 107
expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staffs views regarding the valuation of share-based payment
arrangements for public companies. In particular, SAB 107 provides guidance related to share-based
payment transactions with nonemployees, the transition from nonpublic to public entity status,
valuation methods (including assumptions such as expected volatility and expected term), the
accounting for certain redeemable financial 13




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instruments issued under share-based payment
arrangements, the classification of compensation expense, non-GAAP financial measures, first-time
adoption of SFAS No. 123(R) in an interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax effects of share-based payment
arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to
adoption of SFAS 123(R) and disclosures in Managements Discussion and Analysis (MD&A) subsequent
to adoption of SFAS 123(R). SFAS No. 123(R) is effective beginning in the Companys first quarter of fiscal 2006. The
adoption of SFAS No. 123(R) could have a material impact on the Companys financial position,
results of operations and cash flows. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (SFAS No. 151). The amendments made by SFAS No. 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 24, 2004. The Company believes the adoption of SFAS No. 151 will not
have a material impact on its financial position, results of operations or cash flows. On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets (SFAS
No. 153), an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges
of nonmonetary assets and redefines the scope of transactions that should be measured based on the
fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges
beginning in the Companys first quarter of fiscal 2006. The Company believes the adoption of SFAS
No. 153 will not have a material impact on its financial position, results of operations or cash
flows. In various areas, including revenue recognition and stock option accounting, accounting
standards and practices continue to evolve. Additionally, the SEC and the FASBs Emerging Issues
Task Force continue to address revenue and stock option related accounting issues. The management
of the Company believes it is in compliance with all of the rules and related guidance as they
currently exist. However, any changes to generally accepted accounting principles in these areas
could impact the Companys future accounting for its operations. 14. Contingencies. In November 2001, the Company and certain of its officers and directors
were named as defendants in a class action shareholder complaint filed in the United States
District Court for the Southern District of New York, now captioned In re Oplink Communications,
Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the amended complaint,
the plaintiffs allege that the Company, certain of the Companys officers and directors and the
underwriters of the Companys initial public offering, or IPO, violated Section 11 of the
Securities Act of 1933 based on allegations that the Companys registration statement and
prospectus failed to disclose material facts regarding the compensation to be received by, and the
stock allocation practices of, the IPO underwriters. The complaint also contains a claim for
violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that this
omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and
other relief. Similar complaints were filed by plaintiffs (the Plaintiffs) against hundreds of
other public companies (the Issuers) that went public in the late 1990s and early 2000s
(collectively, the IPO Lawsuits). 14




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##### Table of Contents



On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United
States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, the Company
joined in a global motion filed by all of the Issuers (among others) to dismiss the IPO Lawsuits.
On October 9, 2002, the court entered an order dismissing the Companys named officers and
directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of
limitations with respect to these officers and directors until September 30, 2003. On February 19,
2003, the court issued a decision denying the motion to dismiss the Section 11 claims against the
Company and almost all of the Issuers, and granting the motion to dismiss the Section 10(b) claim
against the Company without leave to amend. In June 2003, the Issuers and Plaintiffs reached a tentative settlement agreement and entered
into a memorandum of understanding, providing for, among other things, a dismissal with prejudice
and full release of the Issuers and their officers and directors from all liability resulting from
Plaintiffs claims, and the assignment to Plaintiffs of certain potential claims that the Issuers
may have against the underwriters. In addition, the tentative settlement guarantees that, in the
event that the Plaintiffs recover less than $1 billion in settlement or judgment against the
underwriter defendants in the IPO Lawsuits, the Plaintiffs would be entitled to payment by each
participating Issuers insurer of a pro rata share of any shortfall in the Plaintiffs guaranteed
recovery. In such event, the Companys obligation would be limited to reimbursement of the
Companys insurer up to the amount remaining under the deductible of the Companys insurance
policy. In September 2003, in connection with the tentative settlement, the Companys officers and
directors who had entered tolling agreements with the Plaintiffs (described above) agreed to extend
those agreements so that they would not expire prior to any settlement being finalized. In June
2004, the Company executed a formal settlement agreement with the Plaintiffs pursuant to the terms
of a memorandum of understanding. On February 15, 2005, the Court issued a decision certifying a
class action for settlement purposes and granting preliminary approval of the settlement subject to
modification of certain bar orders contemplated by the settlement. In addition, the settlement is
still subject to statutory notice requirements as well as final judicial approval. Pending final
approval of the settlement, the Company continues to believe that the action against the Company is
without merit and intends to defend against it vigorously. On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively,
OZ) sued four individuals and the Company in California Superior Court for the County of Alameda.
One of the four individual defendants is Zeynep Hakimoglu, who joined the Company on November 1,
2001 as Vice President of Product Line Management. The other three are unrelated to the Company.
Zeynep Hakimoglus employment with the Company terminated on December 17, 2002. The complaint
alleged trade secret misappropriation and related claims against the four individuals and the
Company concerning OZs alleged polarization mode dispersion technology. The plaintiffs sought
actual damages against the four individuals and the Company in the amounts of approximately
$17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and
attorney fees, and other relief. The plaintiffs sought a temporary restraining order in December
2001, which the court denied, and withdrew their preliminary injunction motion against the Company.
The Company answered the complaint on January 22, 2002, denying plaintiffs claims. In August 2004,
the Company settled the lawsuit with respect to the claims against the Company and OZ agreed to
dismiss the case against the Company with prejudice. To the Companys knowledge OZ is continuing to
pursue its lawsuit against all the defendants other than the Company, and the Company may be
obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her prior employment
with the Company. In the event that the Company incurs such an obligation, the Company believes it
has obtained sufficient director and officer liability insurance to cover this contingency. The Company is subject to legal proceedings and claims, either asserted or unasserted, that
arise in the ordinary course of business. While the outcome of these proceedings and claims cannot
be predicted with 15




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certainty, management does not believe that the outcome of any of these legal
matters will have a material adverse effect on the Companys consolidated financial position,
results of operations or cash flows. 15. Merger Fees. On October 28, 2004, the Company and its newly-formed, wholly-owned
Cayman Islands subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase
agreement with all the shareholders of EZconn Corporation (EZconn), a privately-held Taiwanese
company that manufactures cable and photonics components for broadband access equipment
manufacturers. Pursuant to the stock purchase agreement and related ancillary agreements, the
Company was to purchase all of the shares of EZconn and certain assets related to the business of
EZconn. On January 17, 2005, the Company and EZconn agreed to terminate all agreements relating to
the Companys proposed acquisition of EZconn, due to recent market changes and competitive
circumstances. The Company and EZconn entered into a settlement agreement whereby EZconn paid $2.0
million to the Company in termination fees. The Company
incurred approximately $1.1 million of expenses including withholding tax in connection with the
terminated transaction and recorded a gain of $904,000 for the three and nine months ended March
31, 2005. 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-looking statements This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding our expectations, beliefs, intentions, or future strategies that
are signified by the words expects, anticipates, intends, believes, or similar language.
All forward-looking statements included in this document are based on information available to us
on the date hereof, and we assume no obligation to update any such forward-looking statements.
Actual results could differ materially from those projected in the forward-looking statements. In
evaluating our business, prospective investors should carefully consider the information set forth
below under the caption Risk Factors in addition to the other information set forth herein. We
caution investors that our business and financial performance are subject to substantial risks and
uncertainties. The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial statements and related
notes thereto in this report, and Managements Discussion and Analysis of Financial Condition and
Results of Operations, related financial information and audited consolidated financial statements
contained in our Form 10-K for the fiscal year ended June 30, 2004 as filed with the Securities and
Exchange Commission on September 10, 2004. In May 2003, we adopted a plan to sell our Shanghai operation. As the sale of the Shanghai
operation represented a disposal of a component of an entity as defined in Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets (SFAS No. 144), the Shanghai operation was accounted for as a discontinued operation. In
May 2004, one year following the planned sale of our Shanghai operation and after considering
growth in the telecommunications market, we determined that this facility is more strategic to our
operations than in prior periods due to the need to ensure a supply of the parts manufactured at
the Shanghai facility as a result of an increase in demand for these types of parts in the market
and the acquisition of one of our suppliers by one 16




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of our competitors. Therefore, we have decided
not to dispose of this facility and have returned it to continuing operations. Operating results of
the Shanghai operation have been reclassified from discontinued to continuing operations for all
periods presented. Overview We provide design, integration and Optical Manufacturing Solutions (OMS) for optical
networking components and subsystems that expand optical bandwidth, amplify optical signals,
monitor and protect wavelength performance, redirect light signals, reshape light profile to enable
extended signal reach and provide signal transmission and reception within an optical network. Our
product portfolio includes solutions for next-generation, all-optical Dense and Coarse Wavelength
Division Multiplexing (DWDM and CWDM, respectively), optical amplification, switching and
routing, monitoring and conditioning, dispersion management and line transmission applications. As a photonic foundry, we offer our
customers expert OMS for the production and packaging of highly-integrated optical subsystems and
turnkey solutions based upon a customers specific product design and specifications. Our broad
line of products and services is designed to increase the performance of optical networks and
enable optical system manufacturers to provide flexible and scalable bandwidth to support the
increase of data traffic on the Internet and other public and private networks. We offer advanced
and cost-effective optical-electrical components and subsystem manufacturing through our facilities
in Zhuhai and Shanghai, China. In addition, we maintain optical-centric front-end design,
application, and customer service functions at our headquarters in Fremont, California. Our
customers include telecommunications, data communications and cable TV equipment manufacturers
located around the globe. Our management team, on an internal basis, informally monitors worldwide economic trends and
in particular activity within the telecommunication sector. This includes known contracts being
placed by end users with our current or potential new customers. Over the past several quarters, we
have noticed a general increase in spending activity in the telecommunications sector as well as a
general improvement in the worldwide economic environment. We have also noticed a general increase
in the number of contracts being placed by end users with our current or potential new customers,
which we believe indicates a trend towards increasing opportunities for growth in our revenues.
However, our belief that our current or potential new customers are receiving orders does not
necessarily mean we will be a beneficiary of such orders, but does provide us with an early notice
of potential activity. To obtain orders from our current or potential new customers, we would need
to be selected as a potential vendor and, subsequently, would need to demonstrate we can meet all
of the order and quality requirements of our current or potential new customers. To the extent we
receive new orders, these orders may be only for trial units and future full deployment orders may
not necessarily follow. Revenues. We generate substantially all of our revenues from the sale of fiber optic components
and subsystems. To date, we have developed over 160 standard products that are sold or integrated
into customized solutions for our customers. Our products are generally categorized into two major
groups: (i) bandwidth creation products, which include wavelength expansion and optical
amplification products; and (ii) bandwidth management products, which include wavelength
performance monitoring and protection, and optical switching products. A majority of our revenues
are derived from sales of our bandwidth creation products, which include our wavelength expansion
products, in particular, multiplexers. Acquisition.On October 28, 2004, we and our newly-formed, wholly-owned Cayman Islands subsidiary,
Cayman Oplink Communications, Inc., entered into a stock purchase agreement with all the
shareholders of EZconn Corporation (EZconn), a privately-held Taiwanese company that manufactures
cable and photonics components for broadband access equipment manufacturers. Pursuant to the stock
purchase 17




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agreement and related ancillary agreements, we were to purchase all of the shares of
EZconn and certain assets related to the business of EZconn. On January 17, 2005, we and EZconn
agreed to terminate all agreements relating to our proposed acquisition of EZconn, due to recent
market changes and competitive circumstances. We and EZconn entered into a settlement agreement
whereby EZconn paid $2.0 million to us in termination fees. We incurred approximately $1.1 million
of expenses including withholding tax in connection with the terminated transaction and recorded a
gain of $904,000 for the three and nine months ended March 31, 2005. Use of Estimates and Critical Accounting Policies The preparation of our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure. On
an ongoing basis, we evaluate our estimates, including those related to product returns, accounts
receivable, inventories, tangible and intangible assets, warranty obligations, restructuring,
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 value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates due to actual
outcomes being different from those on which we based our assumptions. These estimates and
judgments are reviewed by management on an ongoing basis, and by the audit committee of our board
of directors at the end of each quarter prior to the public release of our financial results. We
believe the following critical accounting policies, and our procedures relating to these policies,
affect our more significant judgments and estimates used in the preparation of our consolidated
financial statements. We have identified the policies below as critical to our business operations and understanding
of our financial condition and results of operations. A critical accounting policy is one that is
both material to the presentation of our financial statements and requires us to make difficult,
subjective or complex judgments that could have a material effect on our financial condition and
results of operations. These policies may require us to make assumptions about matters that are
highly uncertain at the time of the estimate, and different estimates that we could have used, or
changes in the estimate that are reasonably likely to occur, may have a material impact on our
financial condition or results of operations. Our critical accounting policies cover the following
areas: - revenue recognition and product returns; - warranty obligations; - risk evaluation; - allowance for doubtful accounts; - excess and obsolete inventory; - long-lived asset valuation; and - business combination. 18




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Additional information about these critical accounting policies may be found in the
Managements Discussion & Analysis of Financial Condition and Results of Operations section
included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004. Results of Operations Revenues: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004Revenues
    
    $
    8,421
    
    
    $
    9,200
    
    
    $
    (779
    )
    
    
    (8.5
    )%
    
    $
    25,473
    
    
    $
    24,639
    
    
    $
    834
    
    
    
    3.4
    %
 The decrease in revenue for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004 was primarily due to a decline in sales to selected customers as a
result of manufacturing-related problems at our China manufacturing facilities and decreases in
average selling prices of our products. We have identified and believe we have remedied these
manufacturing-related problems. However, we have no assurance that we can prevent such problems
from reoccurring in the future. In addition, we have no assurance that the customers who were
affected by our manufacturing-related problems will continue to place orders with us in the future.
The increase in revenue for the nine months ended March 31, 2005 compared to the nine months ended
March 31, 2004 was primarily due to increased unit shipments of our wavelength expansion products
to existing and new customers primarily as a result of a general increase in spending activity in
the telecommunications industry. This increase was partially offset by a decline in revenue from
selected customers due to manufacturing-related issues at our China facilities as well as decreases
in the average selling prices of our products during the nine months ended March 31, 2005 as
compared to the nine months ended March 31, 2004. We anticipate that there will be further declines in average selling prices through the fiscal
year ending June 30, 2005 and this trend may continue in future periods. We also expect our revenue
in the fourth quarter of fiscal 2005 to increase slightly compared to the third quarter of fiscal
2005. Gross Profit: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004Gross profit
    
    $
    2,161
    
    
    $
    3,080
    
    
    $
    (919
    )
    
    
    (29.8
    )%
    
    $
    6,294
    
    
    $
    7,716
    
    
    $
    (1,422
    )
    
    
    (18.4
    )%Gross margin
    
    
    25.7
    %
    
    
    33.5
    %
    
    
    
    
    
    
    
    
    
    
    24.7
    %
    
    
    31.3
    %
 The decrease in gross profit for the three months ended March 31, 2005 compared to the
three months ended March 31, 2004 was primarily due to a decrease in revenue, higher depreciation
expense resulting from the return of our Shanghai operation to continuing operations from
discontinued operations and a higher excess inventory charge, partially offset by a benefit as a
result of the resolution of vendor liabilities. Our gross profit for the three months ended March
31, 2005 and 2004 was positively impacted by the 19




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unexpected sale of fully reserved inventory of
$86,000 and $167,000, respectively. Unexpected sales of fully reserved inventory has decreased over
the past several quarters except for the third quarter of fiscal 2005. However, we have no way of
predicting the amount of such sales in the future, if any. The decrease in gross profit for the nine months ended March 31, 2005 compared to the nine
months ended March 31, 2004 was primarily due to a smaller benefit from the unexpected sales of
fully reserved inventory, higher depreciation expense resulting from the return of our Shanghai
operation to continuing operations from discontinued operations, a higher excess inventory charge
and higher warranty expenses, partially offset by greater revenue. Our gross profit for the nine
months ended March 31, 2005 and 2004 was positively impacted by the unexpected sale of fully
reserved inventory of $190,000 and $922,000,
respectively. The increase in warranty expense was due to manufacturing-related problems at
our China manufacturing facilities. Our gross margin decreased for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004 primarily due to a higher excess inventory charge, lower revenue
resulting in higher manufacturing costs relative to our production volume and higher depreciation
expense resulting from the return of our Shanghai operation to continuing operations from
discontinued operations, partially offset by a benefit as a result of the resolution of vendor
liabilities. Our gross margin decreased for the nine months ended March 31, 2005 compared to the
nine months ended March 31, 2004 due to a smaller benefit from the unexpected sales of fully
reserved inventory, higher depreciation expense resulting from the return of our Shanghai operation
to continuing operations from discontinued operations and a higher excess inventory charge. We expect our gross margin in the fourth quarter of fiscal 2005 to remain approximately the
same as our gross margin in the third quarter of fiscal 2005. Research and Development: (In thousands, except
percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004Research and development
    
    $
    1,929
    
    
    $
    1,993
    
    
    $
    (64
    )
    
    
    (3.2
    )%
    
    $
    5,631
    
    
    $
    5,416
    
    
    $
    215
    
    
    
    4.0
    %
 The decrease in research and development expenses for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 was primarily due to lower depreciation expense
partially offset by higher non-recurring engineering charges. The increase in research and
development expenses for the nine months ended March 31, 2005 compared to the nine months ended
March 31, 2004 was primarily due to higher personnel costs as a result of the acquisitions of
RedClover Networks, Inc., Accumux Technologies, Inc. and Gigabit Optics Corporation in fiscal 2004
and higher non-recurring engineering charges, partially offset by lower depreciation expense and
lower non-cash compensation expense. We believe that developing customer solutions at the prototype
stage is critical to our strategic product development objectives. We further believe that, in
order to meet the changing requirements of our customers, we will need to fund investments in
several concurrent product development projects. We expect our quarterly research and development
expenses to remain approximately flat in the fourth quarter of fiscal 2005 compared to the third
quarter of fiscal 2005. 20




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##### Table of Contents



Sales and Marketing: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004Sales and marketing
    
    $
    935
    
    
    $
    968
    
    
    $
    (33
    )
    
    
    (3.4
    )%
    
    $
    2,894
    
    
    $
    2,603
    
    
    $
    291
    
    
    
    11.2
    %
 The decrease in sales and marketing expenses for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 was primarily due to lower non-cash compensation
expense. The increase in sales and marketing expenses for the nine months ended March 31, 2005
compared to the nine months ended March 31, 2004 was primarily due to a one-time settlement of
commission payable to an external sales representative in the second quarter of fiscal 2005. We
expect our quarterly sales and marketing expenses to remain approximately flat in the fourth
quarter of fiscal 2005 compared to the third quarter of fiscal 2005. General and Administrative: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004General and administrative
    
    $
    1,540
    
    
    $
    1,647
    
    
    $
    (107
    )
    
    
    (6.5
    )%
    
    $
    4,918
    
    
    $
    5,970
    
    
    $
    (1,052
    )
    
    
    (17.6
    )%
 The decrease in general and administrative expenses for the three months ended March 31,
2005 compared to the three months ended March 31, 2004 was primarily due to lower non-cash
compensation expense. The decrease in general and administrative expenses for the nine months
ended March 31, 2005 compared to the nine months ended March 31, 2004 was primarily due to
lower non-cash compensation expense and no expenses incurred in connection with the
exploration of strategic business opportunities, partially offset by increased legal and
settlement costs resulting from two legal issues. In the nine months ended March 31, 2004, we
incurred $890,000 of expenses associated with the exploration of strategic business
opportunities. We expect our general and administrative expenses to increase in the fourth
quarter of fiscal 2005 compared to the third quarter of fiscal 2005 due to professional fees
to comply with the regulatory requirements of the Sarbanes-Oxley Act of 2002. Non-Cash Compensation Expense: 21




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##### Table of Contents



(In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004Non-cash compensation
expense
    
    $
    22
    
    
    $
    379
    
    
    $
    (357
    )
    
    
    (94.2
    )%
    
    $
    127
    
    
    $
    1,554
    
    
    $
    (1,427
    )
    
    
    (91.8
    )%
 From July 1, 1998 through March 31, 2005, we have recorded an aggregate of $59.0 million in
deferred non-cash compensation, net of recoveries resulting from stock option cancellations. The
decreases in non-cash compensation expenses for the three and nine months ended March 31, 2005
compared to the three and nine months ended March 31, 2004 were primarily due to the method under
which the deferred non-cash compensation was amortized, as set out in FASB Interpretation No. 28,
which results in higher compensation expense in the earlier vesting periods of the related options. Restructuring Costs and Other Charges.A summary of the changes in accrued restructuring
costs in the nine months ended March 31, 2005 is as follows (in thousands): Consolidation ofExcess Facilitiesand Other ChargesBalance at June 30, 2004
    
    $
    1,899Less: accrued restructuring costs, current
    
    
    1,795Accrued restructuring costs, non current
    
    
    104Cash payments
    
    
    (535
    )Balance at September 30, 2004
    
    
    1,364Less: accrued restructuring costs, current
    
    
    1,343Accrued restructuring costs, non current
    
    
    21Cash payments
    
    
    (636
    )Balance at December 31, 2004
    
    
    728Less: accrued restructuring costs, current
    
    
    728Accrued restructuring costs, non current
    
    
    Cash payments
    
    
    (546
    )Balance at March 31, 2005
    
    
    182Less: accrued restructuring costs, current
    
    
    182Accrued restructuring costs, non current
    
    $
    
 In-Process Research and Development (IP R&D): (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004In-process research
and development
    
    $
    
    
    
    $
    704
    
    
    $
    (704
    )
    
    
    N/A
    
    
    $
    
    
    
    $
    1,565
    
    
    $
    (1,565
    )
    
    
    N/A
 22




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We acquired RedClover, Accumux and Gigabit in November 2003, February 2004 and March 2004,
respectively. As a result of these acquisitions, we recorded $704,000 and $1.6 million of IP R&D
for the three and nine months ended March 31, 2004, respectively. The value of the IP R&D products was determined by estimating the net cash flows from the sale
of the products resulting from the completion of the respective R&D projects, reduced by the
portion of the net cash flows from the revenue attributable to core technology. The resulting cash
flows were then discounted back to their present value using a discount rate ranging from 35% to
45%. At the time of the acquisitions, these products had not yet reached technological feasibility
and had no alternative future use. The fair value assigned to the IP R&D in connection with the
acquisitions of RedClover, Accumux and Gigabit was charged to expense at the time of each
acquisition, respectively. Interest and Other Income, Net: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004Interest and other
income, net
    
    $
    1,193
    
    
    $
    800
    
    
    $
    393
    
    
    
    49.1
    %
    
    $
    3,044
    
    
    $
    1,926
    
    
    $
    1,118
    
    
    
    58.0
    %
 The increases in interest income for the three and nine months ended March 31, 2005 compared
to the three and nine months ended March 31, 2004 were primarily due to higher yields on our
investments. The average rate of return for the three months ended March 31, 2005 was 2.5% as
compared to the average rate of return of 1.5% for the three months ended March 31, 2004. (Loss) Gain on Disposal of Assets: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    Percentage
    
    
    Nine Months Ended
    
    
    
    
    
    
    PercentageMarch 31,
    
    
    Change
    
    
    Change
    
    
    March 31,
    
    
    Change
    
    
    Change2005
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004(Loss) gain on disposal
of assets
    
    $
    (168
    )
    
    $
    (20
    )
    
    $
    (148
    )
    
    
    740.0
    %
    
    $
    (177
    )
    
    $
    105
    
    
    $
    (282
    )
    
    
    (268.6
    )%
 We recorded losses of $168,000 and $177,000 for the three and nine months ended March 31,
2005, respectively, and a loss of $20,000 and a gain of $105,000 for the three and nine months
ended March 31, 2004, respectively, from the disposal of fixed assets and intangible assets less
than or greater than the carrying amount of these assets. Provision for Income Taxes. We have recorded a gross deferred tax asset of $56.4 million as
of March 31, 2005, which net of a valuation allowance reduces the net deferred tax asset to zero,
an amount that management believes will more likely than not be realized. Merger Fees. On October 28, 2004, we and our newly-formed, wholly-owned Cayman Islands
subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase agreement with all
the shareholders of EZconn Corporation (EZconn), a privately-held Taiwanese company that
manufactures cable and photonics components for broadband access equipment manufacturers. Pursuant
to the stock 23




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purchase agreement and related ancillary agreements, we were to purchase all of the
shares of EZconn and certain assets related to the business of EZconn. On January 17, 2005, we and
EZconn agreed to terminate all agreements relating to our proposed acquisition of EZconn, due to
recent market changes and competitive circumstances. We and EZconn entered into a settlement
agreement whereby EZconn paid $2.0 million to us in termination fees. We incurred approximately
$1.1 million of expenses including withholding tax in connection with the terminated transaction
and recorded a gain of $904,000 for the three and nine months ended March 31, 2005. 24




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##### Table of Contents



Liquidity and Capital Resources Since our inception, we have financed our operations primarily through issuances of equity,
which totaled approximately $319.4 million in aggregate net proceeds, partially offset by $24.3
million in common stock repurchases, net of proceeds from the exercise of stock options, employee
stock purchase plan and warrants through March 31, 2005. In August 2000, we received $50.0 million
in connection with the issuance to Cisco Systems, Inc. of a convertible promissory note, which
along with the related interest expense automatically converted into 3,298,773 shares of our common
stock upon the closing of our initial public offering in October 2000. As of March 31, 2005, we had
cash, cash equivalents and short-term and long-term investments of $185.6 million and working
capital of $133.9 million. We estimate that the sum of our cash, cash equivalents and short-term
and long-term investments at the end of the fourth quarter of fiscal 2005 will be comparable with
the sum of our cash, cash equivalents and short-term and long-term investments at the end of the
third quarter of fiscal year 2005. Nine Months Ended March 31, 2005 Our operating activities provided cash of $1.3 million in the nine months ended March 31, 2005
as a result of our net loss for the nine months ended March 31, 2005 of $3.5 million adjusted by
$7.1 million primarily for the non-cash charges of depreciation and amortization, amortization of
premium on investments and amortization of deferred stock compensation, partially offset by a net
change in assets and liabilities of $2.3 million. On January 17, 2005, we and EZconn Corporation
(EZconn) agreed to terminate all agreements relating to our proposed acquisition of EZconn, due
to recent market changes and competitive circumstances. According to the termination agreement with
Ezconn, Ezconn paid us $2.0 million in termination fees in January 2005. We incurred approximately
$1.1 million of expenses including withholding tax in connection with the terminated transaction
and recorded a gain of $904,000 for the nine months ended March 31, 2005. In the nine months ended March 31, 2005, the changes in assets and liabilities were primarily
the result of changes in accounts receivable, inventories and accrued liabilities and accrued
restructuring costs. Accounts receivable provided $410,000 of cash primarily due to decreased
shipments during the three months ended March 31, 2005 compared to the three months ended June 30,
2004 even though days sales outstanding in accounts receivable ended the third quarter of fiscal
2005 at 77 days, as compared to 71 days at the end of the fourth quarter of fiscal 2004. Inventories used $1.3 million of cash during the nine months ended March 31, 2005 primarily
due to purchases of inventory to address longer lead time for materials as well as increased
customer demands in the next quarter. Accrued liabilities and accrued restructuring costs consumed $1.3 million in cash in the nine
months ended March 31, 2005 as we paid for obligations we had accrued at the time we incurred
restructuring charges. The payments were primarily for operating leases of excess facilities. We typically bill customers on an open account basis with net thirty to ninety day payment
terms. We would generally expect the level of accounts receivable at the end of any quarter to
reflect the level of sales in that quarter and to change from one period to another in a direct
relationship to the change in the level of sales. Our level of accounts receivable would also
increase if customers delayed their payments or if we offered extended payment terms to our
customers. 25




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##### Table of Contents



Additionally, in order to maintain an adequate supply of products for our customers, we must
carry a certain level of inventory. Our inventory level may vary based primarily upon orders
received from our customers, our forecast of demand for these products and lead time for materials.
These considerations are balanced against risk of obsolescence or potentially excess inventory
levels. We generally expect the level of inventory to vary from one period to another as a result
of changes in the level of sales. Our investing activities used cash of $29.8 million in the nine months ended March 31, 2005.
The net cash used in investing activities in the nine months ended March 31, 2005 was primarily due
to purchases of investments of $125.5 million, partially offset by sales of investments of $101.7
million. We invested a significant amount of our excess cash to purchase investments in the nine
months of fiscal 2005 in an effort to take advantage of higher yields and increase returns on our
investments. We used approximately $4.8 million to purchase a building in Fremont, California to
house our US operations and approximately $1.2 million to purchase equipment primarily for our
Shanghai operation in the nine months ended March 31, 2005. During the remaining three months of
fiscal 2005, we expect to use approximately $400,000 for capital expenditures worldwide. Our financing activities provided cash of $641,000 in the nine months ended March 31, 2005,
primarily due to proceeds from issuance of our common stock of $710,000 in connection with the
exercise of stock options and the employee stock purchase plan and partial repayment of a note
receivable from a stockholder of $12,000, partially offset by repayment of capital lease
obligations of $81,000. Nine Months Ended March 31, 2004 Our operating activities used cash of $1.0 million in the nine months ended March 31, 2004 as
a result of our net loss of $5.8 million during the period, adjusted by $9.5 million primarily for
the non-cash charges of depreciation and amortization, amortization of deferred stock compensation
and in-process research and development, partially offset by a net change in assets and liabilities
of $4.7 million. In the nine months ended March 31, 2004, the changes in assets and liabilities were primarily
the result of changes in accounts receivable, inventory and accrued liabilities and accrued
restructuring costs. Accounts receivable used $2.1 million of cash primarily due to increased
shipments during the nine months ended March 31, 2004. Days sales outstanding in accounts
receivable ended the third quarter of fiscal 2004 at 68 days, as compared to 72 days at the end of
the fourth quarter of fiscal 2003. Inventories used $1.2 million of cash during the nine months ended March 31, 2004 primarily as
a result of increased volumes of sales and associated purchases of inventory required to meet
customer demand. Accrued liabilities and accrued restructuring costs consumed $1.4 million in cash in the nine
months ended March 31, 2004 as we paid for obligations we had accrued at the time we incurred
restructuring charges. The payments were primarily for operating leases of excess facilities. Our investing activities used cash of $26.7 million in the nine months ended March 31, 2004.
The net cash used by investing activities in the nine months ended March 31, 2004 was primarily due
to purchases of investments of $165.7 million, partially offset by sales of investments of $138.3
million and proceeds from sales of property and equipment of $500,000. Our financing activities provided cash of $2.2 million in the nine months ended March 31, 2004
primarily due to proceeds from the issuance of our common stock of $3.5 million in connection with
the 26




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exercise of stock options and employee stock purchase plan, partially offset by repayment of
capital lease obligations of $1.4 million. Contractual Obligations Our contractual obligations as of March 31, 2005 have been summarized below (in thousands): Contractual Obligations Due by PeriodTotal
    
    
    Less than 1 year
    
    
    1-3 yearsContractual ObligationsOperating leases
    
    $
    238
    
    
    $
    236
    
    
    $
    2Purchase obligations
    
    
    3,539
    
    
    
    3,539
    
    
    
    Total
    
    $
    3,777
    
    
    $
    3,775
    
    
    $
    2
 Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS
No. 123(R)). SFAS No. 123(R) requires us to measure
all employee stock-based compensation awards using a fair value method and record such expense in
our consolidated financial statements. In addition, the adoption of SFAS No. 123(R) requires
additional accounting related to the income tax effects and additional disclosure regarding the
cash flow effects resulting from share-based payment arrangements. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 (SAB 107) which provides guidance regarding the application of SFAS No. 123(R). SAB 107
expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staffs views regarding the valuation of share-based payment
arrangements for public companies. In particular, SAB 107 provides guidance related to share-based
payment transactions with nonemployees, the transition from nonpublic to public entity status,
valuation methods (including assumptions such as expected volatility and expected term), the
accounting for certain redeemable financial instruments issued under share-based payment
arrangements, the classification of compensation expense, non-GAAP financial measures, first-time
adoption of SFAS No. 123(R) in an interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax effects of share-based payment
arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to
adoption of SFAS 123(R) and disclosures in Managements Discussion and Analysis (MD&A) subsequent
to adoption of SFAS 123(R). SFAS No. 123(R) is effective beginning in our first quarter of fiscal 2006. The adoption of
SFAS No. 123(R) could have a material impact on our financial position, results of operations and
cash flows. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (SFAS No. 151). The amendments made by SFAS No. 151 will improve financial reporting
by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of the production facilities.
SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning
after November 24, 2004. We believe 27




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##### Table of Contents



the adoption of SFAS No. 151 will not have a material impact on
our financial position, results of operations or cash flows. On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets (SFAS
No. 153), an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges
of nonmonetary assets and redefines the scope of transactions that should be measured based on the
fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges
beginning in our first quarter of fiscal 2006. We believe the adoption of SFAS No. 153 will not
have a material impact on our financial position, results of operations or cash flows. In various areas, including revenue recognition and stock option accounting, accounting
standards and practices continue to evolve. Additionally, the SEC and the FASBs Emerging Issues
Task Force continue to address revenue and stock option related accounting issues. We believe we
are in compliance with all of the rules and related guidance as they currently exist. However, any
changes to generally accepted accounting principles in these areas could impact our future
accounting for our operations. 28




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RISK FACTORS We operate in a rapidly changing environment that involves many risks, some of which are
beyond our control. The following is a discussion that highlights some of these risks.
Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business, operations or financial results. RISKS RELATED TO OUR BUSINESS We have incurred significant losses, and our failure to increase our revenues while controlling
costs and operating expenses could prevent us from achieving profitability. We have incurred significant losses since our inception in 1995 and expect to incur losses in
the future. We incurred net losses of $3.5 million, $6.4 million, $36.8 million and $68.4 million
for the nine months ended March 31, 2005 and the fiscal years ended June 30, 2004, 2003 and 2002,
respectively. We have not achieved profitability on a quarterly or annual basis since inception. As
of March 31, 2005, we had an accumulated deficit of $228.0 million. Moreover, we will need to
generate significantly greater revenues while controlling costs and operating expenses to achieve
profitability. Our revenues may not grow in future quarters, and we may never generate sufficient
revenues to achieve profitability. We may also continue to incur significant operating losses if
the markets for our products do not grow. We depend upon a small number of customers for a substantial portion of our revenues, and any
decrease in revenues from, or loss of, these customers without a corresponding increase in revenues
from other customers would harm our operating results. We depend upon a small number of customers for a substantial portion of our revenues. Our top
five customers, although not the same five customers for each period, together accounted for 62%,
64%, 69%, 56% and 49% of our revenues in the three and nine months ended March 31, 2005 and the
fiscal years ended June 30, 2004, 2003 and 2002, respectively. Flextronics Canada, Inc.
(Flextronics) and Marubun Corporation (Marubun) each accounted for greater than 10% of our
revenues for the three months ended March 31, 2005. For the three months ended March 31, 2005,
primarily all of our shipments to Flextronics, a contract manufacturer, were to fulfill purchase
orders placed by Nortel Networks Corporation (Nortel). Through Flextronics and through direct
sales, Nortel accounted for greater than 10% of our revenues for the three months ended March 31,
2005. For the three months ended March 31, 2005, a substantial portion of our shipments to Marubun
were to fulfill purchase orders placed by Fujitsu Limited (Fujitsu). Through Marubun and through
direct sales, Fujitsu accounted for greater than 10% of our revenues for the three months ended
March 31, 2005. Nortel, including sales through Flextronics, and Fujitsu, including sales through
Marubun, together accounted for approximately 40% of our revenues in the three months ended March
31, 2005. Nortel and Hua Wei Technologies Co. Ltd. (Hua Wei) each accounted for greater than 10%
of our revenues for the nine months ended March 31, 2005. Nortel, including sales through
Flextronics, and Hua Wei together accounted for approximately 43% of our revenues for the nine
months ended March 31, 2005. Nortel, Sanmina-SCI Corporation (Sanmina) and Marubun each accounted for greater than 10% of
our revenues for the fiscal year ended June 30, 2004. For the fiscal year ended June 30, 2004, a
substantial portion of our shipments to Sanmina, a contract manufacturer, were to fulfill purchase
orders placed by Tellabs, Inc. (Tellabs). Through Sanmina and through direct sales, Tellabs
accounted for greater than 10% of our revenues for the fiscal year ended June 30, 2004. For the
fiscal year ended June 30, 2004, a substantial portion of our shipments to Marubun were to fulfill
purchase orders placed by Fujitsu through 29




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Marubun. Through Marubun and through direct sales, Fujitsu accounted for greater than 10% of
our revenues for the fiscal year ended June 30, 2004. Nortel, Adva AG Optical Networking and
Marubun each accounted for greater than 10% of our revenues for the fiscal year ended June 30,
2003. A substantial portion of our shipments to Marubun during fiscal 2003 were to fulfill purchase
orders placed by Fujitsu and NEC Corporation (NEC). Neither Fujitsu nor NEC accounted for greater
than 10% percent of our revenues for fiscal 2003. We expect that we will continue to depend upon a
small number of customers, although potentially not the same customers, for a substantial portion
of our revenues. For instance, Tellabs accounted for greater than 10% of our revenues for the
quarter ended June 30, 2004, March 31, 2004 and December 31, 2003 and the fiscal year ended June
30, 2004, respectively. However, it did not account for greater 10% of our revenues for the
quarters ended March 31, 2005, December 31, 2004 and September 30, 2004. Our revenues generated from these customers, individually or in the aggregate, may not reach
or exceed historic levels in any future period. We may not be the sole source of supply to our
customers, and they may choose to purchase products from other vendors. Furthermore, the businesses
of some of our existing customers are currently experiencing slow growth following a protracted
downturn, which is resulting, in some instances, in significantly decreased sales to these
customers and harming our results of operations. Loss or cancellations of orders from, or any
further downturn in the business of, any of our customers without an increase in sales from other
customers could harm our business. Our dependence on a small number of customers may increase if
the fiber optic components and subsystems industry and our other target markets continue to
consolidate. Our quarterly revenues and operating results are difficult to predict and may continue to fluctuate
significantly from quarter to quarter and, therefore, may vary from public market analysts or
investors expectations, which could cause our stock price to drop. It is difficult to forecast our revenues accurately. Moreover, our revenues, gross margins,
expenses and operating results have varied significantly from quarter to quarter in the past and
may continue to fluctuate significantly in the future. The factors, many of which are more fully
discussed in the other risk factors below, that are likely to cause these variations include, among
others:  -
    economic downturn and uncertainty of the fiber optic industry;-
    economic conditions specific to the communications and related industries and the
development and size of the markets for our products;-
    fluctuations in demand for, and sales of, our products;-
    changes in customer, geographic or product mix and the average selling prices of our products;-
    cancellations or delays of orders or shipment rescheduling by our customers;-
    the ability of our manufacturing operations in China to timely produce and deliver
products in the quantity and of the quality our customers require;-
    the availability of raw materials used in our products or increases in the price of
these raw materials;-
    our ability to successfully improve our manufacturing capabilities and achieve
acceptable production yields in our facilities in China; 30




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-
    the tendency of communications equipment suppliers to sporadically place large orders
with short lead times;-
    competitive factors, including introductions of new products, new technologies and
product enhancements by competitors, consolidation of competitors in the fiber optic
components and subsystems market and pricing pressures;-
    our ability to develop, introduce, manufacture and ship new and enhanced optical
networking products in a timely manner and in production quantities without defects or
other quality issues; and-
    costs associated with, and the outcomes of, any intellectual property or other
litigation to which we are, or may become, a party. Due to the factors noted above and other risks discussed in this section, we believe that
quarter-to-quarter comparisons of our operating results will not be meaningful. Moreover, if we
experience difficulties in any of these areas, our operating results could be significantly and
adversely affected and our stock price could decline. Also, it is possible that in some future
quarter our operating results may be below the expectations of public market analysts or investors,
which could cause our stock price to fall. If we fail to effectively manage our manufacturing capability, produce products that meet our
customers quality requirements and achieve acceptable production yields in China, we may not be
able to deliver sufficient quantities of products that meet all of our customers order
requirements in a timely manner, which would harm our operating results. We manufacture substantially all of our products in our facilities in Zhuhai and Shanghai,
China. The quality of our products and our ability to ship products on a timely basis may suffer if
we cannot effectively maintain the necessary expertise and resources to effectively manage our
manufacturing activities in China. We have in the past received unexpectedly large numbers of
product returns due to manufacturing defects in our products. For example, in the second quarter of
fiscal 2005, we experienced greater than anticipated manufacturing defects in our subsystem
products and, as a result, increased our warranty reserves. We have identified and believe we have
remedied these problems. However, if we cannot prevent these problems from reoccurring, we may lose
customers and revenue, and our operating results will be severely harmed. Because manufacturing our products involves complex and precise processes and the majority of
our manufacturing costs are relatively fixed, manufacturing yields are critical to our results of
operations. Factors that affect our manufacturing yields include the quality of raw materials used
to make our products, the quality of workmanship and our manufacturing processes. Our or our
suppliers inadvertent use of defective materials could significantly reduce our manufacturing
yields. Furthermore, because of the large labor component in, and complexity of, our manufacturing
processes, quality of workmanship is critical to achieving acceptable yields. We cannot assure you
that we will be able to hire and train a sufficient number of qualified personnel to produce our
products cost-effectively with the quality and in the quantities required by our customers. Changes in our manufacturing processes or those of our suppliers could also impact our yields.
In some cases, existing manufacturing techniques, which involve substantial manual labor, may not
allow us to meet our manufacturing yield goals cost-effectively so that we maintain acceptable
gross margins while meeting 31




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the cost targets of our customers. We will need to develop new manufacturing processes and
techniques that will involve higher levels of automation in order to increase our gross margins and
help achieve the targeted cost levels of our customers. We may not achieve manufacturing cost
levels that will allow us to achieve acceptable gross margins or fully satisfy customer demands.
Additionally, our competitors are automating their manufacturing processes. If we are unable to
achieve higher levels of automation and our competitors are successful, it will harm our gross
margins. Additional risks associated with managing our manufacturing processes and capability in China
include:  -
    a potential lack of availability of qualified management and manufacturing personnel;-
    our ability to maintain quality;-
    our ability to effectively manage headcount, particularly if we undertake to expand our
manufacturing operations;-
    our ability to procure the necessary raw materials and equipment on a timely basis; and-
    our ability to quickly and efficiently implement an adequate set of financial controls
to effectively track and control inventory levels and inventory mix and to accurately
predict inventory requirements. Communications equipment suppliers typically require that their vendors commit in advance to
provide specified quantities of products over a given period of time. We may not be able to pursue
many large orders from these suppliers if we do not have sufficient manufacturing capabilities to
enable us to commit to provide them with their specified quantities of products. If we are unable
to commit to deliver sufficient quantities of our products to satisfy a customers anticipated
needs, we likely will lose the order and the opportunity for significant sales to that customer for
a lengthy period of time. Furthermore, if we fail to fulfill orders to which we have committed, we
will lose revenue opportunities and our customer relationships may be harmed. Our products may have defects that are not detected until full deployment of a customers
equipment, which could result in a loss of customers, damage to our reputation and substantial
costs. Our products are deployed in large and complex optical networks and must be compatible with
other system components. Our products can only be fully tested for reliability when deployed in
these networks for long periods of time. Our customers may discover errors, defects or
incompatibilities in our products after they have been fully deployed and operated under peak
stress conditions. Our products may also have errors, defects or incompatibilities that are not
found until after a system upgrade is installed. For example, in the second quarter of fiscal 2005,
we experienced greater than anticipated defects in our subsystem products and, as a result,
increased our warranty reserves. Errors, defects, incompatibilities or other problems with our
products could result in:  -
    loss of customers;-
    loss of or delay in revenues;-
    loss of market share;-
    damage to our brand and reputation; 32




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-
    inability to attract new customers or achieve market acceptance;-
    diversion of development resources;-
    increased service and warranty costs;-
    legal actions by our customers; and-
    increased insurance costs. If any of these occur, our operating results could be harmed. We depend on the growth and success of the communications industry, which has experienced a
significant economic downturn as well as rapid consolidation and realignment, including outsourced
manufacturing, and may not continue to demand fiber optic products at historical rates. We depend on the continued growth and success of the communications industry, which depends,
in part, on the continuing growth of the Internet as a widely-used medium for commerce and
communication and the continuing demand for increased bandwidth over communications networks. As a
result of the economic downturn and overall reduced capital spending in the communications industry
since year 2000, our ability to acquire new customers or to obtain additional orders from existing
customers has been impeded. As a result of market conditions like this, our ability to sustain or
grow our business in the future, if at all, may be substantially diminished compared to our
historical rate of growth. Moreover, although we have noticed a general increase in spending
activity in the communications industry over the past several quarters, we cannot assure you that
this spending activity will continue at its current rate or at all, or that we will benefit from
this spending activity. Furthermore, the rate at which communications 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 from historical rates for new or upgraded fiber optic
systems that utilize our products and, therefore, may result in reduced demand for our products. The communications industry is also experiencing rapid consolidation and realignment, as
industry participants seek to capitalize on the rapidly changing competitive landscape developing
around the Internet and new communications technologies such as fiber optic and wireless
communications networks. As the communications industry consolidates and realigns to accommodate
technological and other developments, our customers may consolidate or align with other entities in
a manner that harms our business. Our customers continued outsourcing may result in their utilizing large well-established
contract manufacturers to provide final system assembly, rather than utilizing us for final system
assembly. We may therefore be required to provide lower level components to these contractor
manufacturers rather than final system assembly to our current customers, potentially resulting in
reduced revenues and lower gross margins and profits. Furthermore, these contract manufacturers may
seek other source of components, which could harm our operating results. In the event that the communications industry grows and we are unable to sell and deliver the
products our target customers require, our operating results may be adversely affected. 33




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Because none of our customers are obligated to purchase our products, they may cancel or defer
their purchases at any time and on short notice, which could harm our operating results. We are substantially dependent on orders we receive and fill on a short-term basis. We do not
have contracts with our customers that provide any assurance of future sales, and sales are
typically made pursuant to individual purchase orders, often with extremely short lead times.
Accordingly, our customers:  -
    may stop purchasing our products or defer their purchases at any time without penalty;-
    are free to purchase products from our competitors;-
    are not required to make minimum purchases; and-
    may cancel orders that they place with us. As a result, we cannot rely on orders in backlog as a reliable and consistent source of future
revenue. Sales to any single customer may and do vary significantly from quarter to quarter. Our
customers generally do not place purchase orders far in advance. In addition, our customers
purchase orders have varied significantly from quarter to quarter. This means that customers who
account for a significant portion of our revenues in one quarter may not and often do not place any
orders in the succeeding quarter, which makes it difficult to forecast our revenues in future
periods. Moreover, our expense levels are based in part on our expectations of future revenue, and
we may be unable to adjust costs in a timely manner in response to further revenue shortfalls. This
can result in significant quarterly fluctuations in our operating results. Because we depend on third parties to supply some of our raw materials and equipment, we may not be
able to obtain sufficient quantities of these materials and equipment, or these materials may
become unavailable due to technological changes, which could limit our ability to fill customer
orders and harm our operating results. Difficulties in obtaining raw materials 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. We depend on third parties to
supply the raw materials and equipment we use to manufacture our products. To be competitive, we
must obtain from our suppliers, on a timely basis, sufficient quantities of raw materials at
acceptable prices. We obtain most of our critical raw materials 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 at any time without penalty. Due to
the severe downturn in the optical and communications industries, manufacturers and vendors that we
rely upon for raw materials may scale back their operations or cease to do business entirely as a
result of financial hardship or other reasons. In addition, our suppliers could terminate the
supply of a particular material due to technological changes, which would require us to redesign
our products, identify and qualify acceptable replacement suppliers. However, we cannot be certain
that we could obtain qualifications for such replacements from our customers. Furthermore, some of
our suppliers are competitors who may chose not to supply raw materials to us in the future, or who
may sell their capability to parties that may be adverse to our goals. In addition, some of the
equipment we use is relatively complex and, in periods of high market demand, the lead times from
order to delivery of this equipment could be as long as six months. 34




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Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could adversely effect our business and operating results, impair the
reliability of our financial statements, cause us to delay filing our Annual Report on Form 10-K
for fiscal 2005, harm our reputation and adversely effect our stock price. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we
establish and maintain an adequate internal control structure and procedures for financial
reporting and include a report of management on our internal control over financial reporting
(Managements Report on Internal Control Over Financial Reporting) in our Annual Report on Form
10-K for fiscal 2005 (the 2005 Form 10-K). Managements Report on Internal Control Over Financial
Reporting must contain an assessment by management of the effectiveness of our internal control
over financial reporting and must include disclosure of any material weaknesses in internal control
over financial reporting that our management has identified. In addition, our independent
registered public accounting firm must attest to and report on managements assessment of the
effectiveness of our internal control over financial reporting in the 2005 Form 10-K. Our
management has determined that the Company should implement improvements to certain of the
Companys internal control processes and procedures. Our management has not concluded that any
material weaknesses exist as of March 31, 2005 with respect to those internal control processes and
procedures that the Companys management has determined should be improved. However, there can be
no assurance that our management will not conclude that material weaknesses exist in our internal
control over financial reporting as of June 30, 2005 or that the Companys independent registered
public accounting firm will agree with the conclusions of our management as of June 30, 2005 with
respect to the Companys internal control over financial reporting. If our management is unable to
assert in the Managements Report on Internal Control Over Financial Reporting to be included in
the 2005 Form 10-K that the Companys internal control over financial reporting is effective as of
June 30, 2005, or if the Companys independent registered public accounting firm is unable to
attest that Managements Report on Internal Control Over Financial Reporting is fairly stated or it
is unable to express an opinion on the effectiveness of the Companys internal control over
financial reporting, our business and operating results could be adversely affected, the
reliability of our financial statements could be impaired, we may be unable to timely file with the
Securities and Exchange Commission (the SEC) the 2005 Form 10-K and the Companys reputation
could be harmed, any of which could adversely effect our stock price. In addition, if we are not
otherwise able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely
manner or with adequate compliance, we could become subject to sanctions or investigation by
regulatory authorities, such as the SEC or The Nasdaq Stock Market, Inc (Nasdaq). Changes in existing financial accounting standards or practices or taxation rules or practices may
adversely affect our results of operations. Changes in existing accounting or taxation rules or practices, new accounting pronouncements
or taxation rules, or varying interpretations of current accounting pronouncements or taxation
practice could have a significant adverse effect on our results of operations or the manner in
which we conduct our business. Further, such changes could potentially affect our reporting of
transactions completed before such changes are effective. For example, for purposes of our 2005
fiscal year quarterly and annual financial reports, we are not required to expense stock-based
compensation charges in connection with stock option grants to our employees and stock purchases
under our employee stock purchase plan. However, the Financial Accounting Standards Board (FASB)
has adopted a proposal to change generally accepted accounting principles in the United States
that, unless revoked, will require us to expense stock-based compensation charges for employee
stock option grants and stock purchases effective as of the start of our 2006 fiscal year on July
1, 2005. Such charges will negatively impact our operating results. To mitigate 35




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future impact, we may revise our equity compensation program. This may negatively impact our
ability to attract and retain highly skilled employees. Because a high percentage of our expenses is fixed in the short term, our operating results are
likely to be harmed if we do not experience growth in generating and recognizing revenues. A high percentage of our expenses, including those related to manufacturing, engineering,
research and development, sales and marketing and general and administrative functions, is fixed in
the short term. As a result, if we do not experience growth in generating and recognizing revenues,
we are likely to continue to experience quarterly operating losses. New product development and introduction can also result in a mismatching of research and
development expenses and sales and marketing expenses that are incurred in one quarter with
revenues that are not recognized, if at all, until a subsequent quarter when the new product is
introduced and commercially accepted. If growth in our revenues does not exceed the increase in our
expenses, our results of operations will be harmed. We compete in a highly competitive industry, and if we are unable to compete successfully or
develop new products and product enhancements that achieve market acceptance, our revenues could
decline, which would harm our operating results. The market for fiber optic components and subsystems is intensely competitive. We believe that
our principal competitors are the major manufacturers of optical components and subsystems,
including vendors selling to third parties and business divisions within communications equipment
suppliers. 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, or to deliver competitive products at lower prices. 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. 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 thereby reduce or cease their purchases from us. In light of the consolidation in the
optical networking industry, we also believe that the size of the optical component and subsystem
suppliers will become increasingly important to our current and potential customers in the future.
Our current and potential suppliers may also consolidate with our competitors and thereby reduce or
cease providing materials and equipment to us. Also, we expect to pursue optical contract
manufacturing opportunities in the future. We may not be able to compete successfully with existing
or new competitors, and the competitive pressures we face may result in lower prices for our
products, loss of market share, the unavailability of materials and equipment used in our products,
or reduced gross margins, any of which could harm our business. The communications industry is characterized by rapid technological changes, frequent new
product introductions, changes in customer requirements and evolving industry standards. As a
result, the introduction of new products incorporating new technologies or the emergence of new
industry standards could make our existing products obsolete. For example, new technologies are
being developed in the design of wavelength division multiplexers that compete with the thin film
filters that we incorporate in our products. These technologies include arrayed waveguide grating,
and planar lightwave circuit. Additionally, 36




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a new technology being developed in the design of equalization and switching is
microelectro-mechanical systems that compete with bulk micro-optics that we incorporate into our
product. Our future success depends on our ability to anticipate market needs and to develop
products that address those needs. 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. In this
regard, we are currently developing bandwidth creation products as well as bandwidth management
products. If the development of these products or any other future products takes longer than we
anticipate, or if we are unable to develop and introduce these products to market, our revenues
could suffer and we may not gain market share. Even if we are able to develop and commercially
introduce these new products, the new products may not achieve widespread market acceptance.
Furthermore, we have implemented, and may continue to implement in the future, significant
cost-cutting measures such as reductions in our workforce, including reductions in research and
development and manufacturing personnel, that may weaken our research and development efforts or
cause us to have difficulty responding to sudden increases in customer orders. In addition, we recently expanded our operations to include optical contract manufacturing
services. We cannot, however, assure you that we will be able to successfully manage our
manufacturing capabilities to produce quality products in a cost-effective manner or gain market
acceptance with respect to any optical contract manufacturing service offerings. In addition,
because profit margins with respect to optical contract manufacturing services may be smaller than
the margins applicable to our current and past product offerings, our gross margins may decline and
our business may be harmed. Disruption to commercial activities in the United States or in other countries, particularly in
China, may adversely impact our results of operations, our ability to raise capital or our future
growth. We derive a substantial portion of our revenues from customers located outside the United
States and a substantial portion of our operations are located in China. Our international
operations expose us to a number of additional risks associated with international operations,
including, without limitation:  -
    disruptions to commercial activities or damage to our facilities as a result of natural
disasters, political unrest, war, terrorism, labor strikes, and work stoppages;-
    difficulties and costs of staffing and managing foreign operations with personnel who
have expertise in optical network technology;-
    unexpected changes in regulatory or certification requirements for optical systems or
networks;-
    disruptions in the transportation of our products and other risks related to the
infrastructure of foreign countries;-
    economic instability.-
    any future outbreak of severe acute respiratory syndrome (SARS) and other epidemics
or illnesses; and-
    power shortages at our manufacturing facilities in China, which may lead to production
delays. To the extent that such disruptions interfere with our commercial activities, our results of
operations could be harmed. 37




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Substantially all of our manufacturing operations are located in China and are subject to the
laws and regulations of China. Our operations in China may be adversely affected by changes in the
laws and regulations of China, such as those relating to taxation, import and export tariffs,
environmental regulations, land use rights, property and other matters. Chinas central or local
governments may impose new, stricter regulations or interpretations of existing regulations, which
would require additional expenditures. In April 2004, Chinese leaders noted concerns regarding
Chinas recent economic growth and indicated, without providing specific details, that they may
take very forceful measures to bring the economy under control. On October 28, 2004, the Peoples
Bank of China, Chinas central bank, announced that it will raise both lending and deposit interest
rates 0.27 percentage effective October 29, 2004. Chinas economy differs from the economies of
many countries in terms of structure, government involvement, specificity and enforcement of
governmental regulations, level of development, growth rate, capital reinvestment, allocation of
resources, self-sufficiency and rate of inflation, among others. Our results of operations and
financial condition may be harmed by changes in the political, economic or social conditions in
China. In addition, events in China over which we have no control, such as political unrest,
terrorism, war, labor strikes and work stoppages, could disrupt our operations. There is currently
political tension between the United States and North Korea and the United States and China, which
could, in either case, result in hostilities or a deterioration in relations that would impact our
trade relations with China. There is also significant tension between China and Taiwan, which could
result in hostilities or lead to a breakdown in trade relations between China and the United
States. Additionally, China continues its condemnation of the United States pledge of military
support to Taiwan, which could lead to hostilities. Moreover, anti-Japanese sentiment in China may
lead to business disruptions. If hostilities or other events cause a disruption in our operations,
it would be difficult for us to establish manufacturing operations at an alternative location on
comparable terms. We are exposed to currency rate fluctuations and exchange controls that could adversely impact our
operating results. A significant portion of our operations are conducted in currencies other than the United
States dollar, particularly in Chinese Renminbi. Our operating results are therefore subject to
fluctuations in foreign currency exchange rates. To the extent that the United States dollar
weakens relative to other currencies, our sales made in foreign currencies would be positively
impacted, although intercompany payments from our China subsidiaries to our parent corporation that
are made in United States dollars would be negatively impacted. Conversely, to the extent that the
United States dollar strengthens relative to other currencies, our sales made in foreign currencies
would be negatively impacted, although intercompany payments from our China subsidiaries to our
parent corporation that are made in United States dollars would be positively impacted. A number of
commentators have recently suggested that a strengthening of the Chinese Renminbi relative to the
United States dollar is anticipated at some point in the future; however, governmental authorities
in China have been noncommittal to date. To reduce our gains and losses associated with converting
foreign currencies into United States dollars, we may elect in the future to enter into foreign
exchange forward contracts to hedge our foreign currency exposure. However, we cannot be certain
that any such hedging activities will be effective, or available to us at commercially reasonable
rates. As a result, we will continue to experience foreign currency gains and losses. Moreover, Chinas government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China. Any shortages in the
availability of foreign currency may restrict the ability of our Chinese subsidiaries to obtain and
remit sufficient foreign currency to pay dividends to us or otherwise satisfy their foreign
currency denominated obligations, such as 38




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payments to us for components which we export to them and for technology licensing fees. Such
shortages may also cause us to experience difficulties in completing the administrative procedures
necessary to obtain and remit needed foreign currency. Under the current foreign exchange control
system, sufficient foreign currency is presently available for our Chinese subsidiaries to purchase
imported components or to repatriate profits to us, but as demands on Chinas foreign currency
reserves increase over time to meet its commitments, sufficient foreign currency may not be
available to satisfy Chinas currency needs. Our business could be negatively impacted if we are unable to convert and remit our sales
received in Renminbi into U.S. dollars. Under existing foreign exchange laws, Renminbi held by our
Chinese subsidiaries can be converted into foreign currencies and remitted out of China to pay
current account items such as payments to suppliers for imports, labor services, payment of
interest on foreign exchange loans and distributions of dividends so long as our subsidiaries have
adequate amounts of Renminbi to purchase the foreign currency. Expenses of a capital nature such as
the repayment of bank loans denominated in foreign currencies, however, require approval from
appropriate governmental authorities before Renminbi can be used to purchase foreign currency for
remittance out of China. This system could be changed at any time by executive decision of the
State Council to impose limits on current account convertibility of the Renminbi or other similar
restrictions. Moreover, even though the Renminbi is intended to be freely convertible on current accounts,
the State Administration of Foreign Exchange, which is responsible for administering Chinas
foreign currency market, has a significant degree of administrative discretion in interpreting and
implementing foreign exchange control regulations. From time to time, the State Administration of
Foreign Exchange has used this discretion in ways that effectively limit the convertibility of
current account payments and restrict remittances out of China. Furthermore, in many circumstances
the State Administration of Foreign Exchange must approve foreign currency conversions and
remittances. Under the current foreign exchange control system, sufficient foreign currency may not
always be available in the future at a given exchange rate to satisfy our currency demands. If tax benefits available to our subsidiaries located in China are reduced or repealed, our
business could suffer. Our subsidiaries located in China enjoy tax benefits in China that are generally available to
foreign investment enterprises, including full exemption from national enterprise income tax for
two years starting from the first profit-making year and a 50% reduction in national income tax
rate for the following three years. In addition, local enterprise income tax is often waived or
reduced during this tax holiday/incentive period. Furthermore, under current regulations in China,
foreign investment enterprises that have been accredited as technologically advanced enterprises
are entitled to an additional three-year reduction in national income tax by 50%, with a provision
that the income tax rate as so reduced may not be lower than 10%. However, the Chinese government
recently announced that preferential tax treatment for foreign enterprises may be repealed
beginning in 2006. If China elects to repeal or reduce the tax benefits available to us in the
future or we fail to continue to qualify for the tax benefits, our financial condition and results
of operations may be adversely impacted. Our wavelength expansion products have accounted for a majority of our revenues, and our revenues
could be harmed if the price of, or demand for, these products further declines or if these
products fail to achieve broader market acceptance. We believe that our future growth and a significant portion of our future revenues will depend
on the commercial success of our wavelength expansion products. Customers that have purchased
wavelength 39




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expansion products may not continue to purchase these products from us. Although we currently
offer a broad spectrum of products, sales of our wavelength expansion products accounted for a
majority of our revenues in the nine months ended March 31, 2005 and the fiscal years ended June
30, 2004, 2003 and 2002. These products include, among others, dense wavelength division
multiplexers (DWDMs). These products accounted for 62%, 65%, 67% and 66% of our revenues in the
nine months ended March 31, 2005 and the fiscal years ended June 30, 2004, 2003 and 2002,
respectively. Any decline in the price of, or demand for, our wavelength expansion products, or
their failure to achieve broader market acceptance, could harm our revenues. The optical networking component industry is experiencing declining average selling prices, which
could cause our gross margins to decline and harm our operating results. The optical networking component industry is experiencing declining average selling prices
(ASPs) as a result of increasing competition and declining market demand. We anticipate that ASPs
will continue to decrease in the future in response to product and new technology introductions by
competitors, price pressures from significant customers and greater manufacturing efficiencies
achieved through increased automation in the manufacturing process. These declining ASPs have
contributed and may continue to contribute to a decline in our gross margins, which could harm our
results of operations. If we are unable to protect our proprietary technology, our ability to succeed will be harmed. Our ability to compete successfully and achieve future growth will depend, in part, on our
ability to protect our proprietary technology. We rely on a combination of patent, copyright,
trademark, and trade secret laws and restrictions on disclosure to protect our intellectual
property rights. However, the steps we have taken may not prevent the misappropriation of our
intellectual property, particularly in foreign countries, such as China, where the laws may not
protect our proprietary rights as fully as in the United States. As of March 31, 2005, we had 71
issued patents, 9 allowed applications awaiting issuance and 33 pending patent applications in the
United States. In addition, we had 15 issued patents and 24 pending patent applications in the
Peoples Republic of China, 22 of which are counterparts to U.S. patents or patent applications. We
cannot assure you that patents will be issued from pending or future applications or that, if
patents are issued, they will not be challenged, invalidated or circumvented. Rights granted under
these patents may not provide us with meaningful protection or any commercial advantage. If we are
unable to protect our proprietary technology, our ability to succeed will be harmed. We may in the
future initiate claims or litigation against third parties for infringement of our proprietary
rights. These claims could result in costly litigation and the diversion of our technical and
management personnel. We may be involved in intellectual property disputes in the future, which will divert managements
attention and could cause us to incur significant costs and prevent us from selling or using the
challenged technology. Participants in the communications and fiber optic components and subsystems markets in which
we sell our products have experienced frequent litigation regarding patent and other intellectual
property rights. Numerous patents in these industries are held by others, including our competitors
and academic institutions. In addition, from time to time, we have become aware of the possibility
or have been notified that we may be infringing certain patents or other intellectual property
rights of others. Regardless of their merit, responding to such claims could be time consuming,
divert managements attention and resources and cause us to incur significant expenses. We have no
means of knowing that a patent application has been filed in the United States until the patent is
issued. Optical component suppliers may seek to gain a 40




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competitive advantage or other third parties may seek an economic return on their intellectual
property portfolios by making infringement claims against us. From time to time we may be involved in lawsuits as a result of alleged infringement of
others intellectual property. For example, in June 2000, Chorum Technologies, Inc. (Chorum)
filed a lawsuit against us and our wholly-owned subsidiary, Telelight Communication Inc., alleging,
among other things, infringement of two U.S. patents allegedly owned by Chorum relating to fiber
optical interleaving, based on our manufacture of and offer to sell various fiber optic interleaver
products. On May 7, 2001, we filed a lawsuit alleging, among other matters, that Chorum infringes
one of our patents relating to fiber optic couplers based on Chorums manufacture of, and offer to
sell, various DWDM products. In December 2001, Oz Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively, OZ)
filed a lawsuit against us and four individuals, including our former Vice President of Product
Line Management, Zeynep Hakimoglu (and three other unrelated individuals), alleging trade secret
misappropriation and other related claims. Under the complaint, the plaintiffs sought damages
against the four individuals in the amounts of approximately $17,550,000, and against us in the
amount of approximately $1,500,000, as well as enhanced damages, injunctive relief, costs and
attorney fees, and other relief. We settled the lawsuit against us in August 2004 and OZ agreed to
dismiss the case against us with prejudice. However, we cannot assure you that OZ will not choose
to pursue further litigation against us in the future. In addition, to our knowledge, OZ is
continuing to pursue its lawsuit against all of the defendants other than us, and we may be
obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her prior employment
with us. Both prosecuting and defending lawsuits involving our intellectual property may be costly and
time consuming and may also divert the efforts and attention of our management and technical
personnel. Intellectual property litigation is often highly complex and can extend for a protracted
period of time, which can substantially increase the cost of litigation. Accordingly, the expenses
and diversion of resources associated with intellectual property litigation to which we may become
a party could seriously harm our business and financial condition. Any intellectual property
litigation also could invalidate our proprietary rights and force us to do one or more of the
following:  -
    obtain from the owner of the infringed intellectual property right a license to sell
or use the relevant technology, which license may not be available on reasonable terms, or
at all;-
    stop selling, incorporating or using our products that use the challenged intellectual
property;-
    pay substantial money damages; or-
    redesign the products that use the technology. Any of these actions could result in a substantial reduction in our revenue and could result
in losses over an extended period of time. If we are unable to successfully integrate acquired businesses or technologies, our operating
results may be harmed. The optical components and subsystems industry is evolving rapidly and is highly competitive.
Accordingly, we have pursued and expect to continue to pursue acquisitions of businesses and
technologies, 41




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or the establishment of joint venture arrangements, that could expand our business. The
negotiation of potential acquisitions or joint ventures, as well as the integration of an acquired
or jointly developed business or technology, could cause diversion of managements time and other
resources or disrupt our operations. Future acquisitions could result in:  -
    additional operating expenses without additional revenues;-
    potential dilutive issuances of equity securities;-
    the incurrence of debt and contingent liabilities;-
    amortization of other intangibles;-
    research and development write-offs; and-
    other acquisition-related expenses. Furthermore, we may not be able to successfully integrate acquired businesses or joint
ventures with our operations, and we may not receive the intended benefits of any future
acquisition or joint venture. Any of these factors could harm our operating results. We are the target of a securities class action complaint and are at risk of securities class action
litigation, which will likely result in substantial costs and divert management attention and
resources. We are one of hundreds of defendants in a consolidated set of class action lawsuits, filed by
plaintiffs (the Plaintiffs) against hundreds of public companies (the Issuers) that went public
in the late 1990s and early 2000s (collectively, the IPO Lawsuits). In June 2003, Issuers and
Plaintiffs reached a tentative settlement agreement and entered into a memorandum of understanding,
providing for, among other things, a dismissal with prejudice and full release of the Issuers and
their officers and directors from all liability resulting from Plaintiffs claims, and the
assignment to Plaintiffs of certain potential claims that the Issuers may have against the
underwriters. In addition, the tentative settlement guarantees that, in the event that the
Plaintiffs recover less than $1 billion in settlement or judgment against the underwriter
defendants in the IPO Lawsuits, the Plaintiffs would be entitled to payment by each participating
Issuers insurer of a pro rata share of any shortfall in the Plaintiffs guaranteed recovery. In
such event, our obligation would be limited to reimbursement of our insurer up to the amount
remaining under the deductible of our insurance policy. In June 2004, we executed a settlement
agreement with the Plaintiffs pursuant to the terms of a memorandum of understanding. On February
15, 2005, the Court issued a decision certifying a class action for settlement purposes and
granting preliminary approval of the settlement subject to modification of certain bar orders
contemplated by the settlement. In addition, the settlement is still subject to statutory notice
requirements as well as final judicial approval. Pending final approval of the settlement, we
continue to believe that the action against us is without merit, and we intend to defend against it
vigorously. Our lengthy and variable qualification and sales cycle requires us to incur substantial costs to
make a sale, and if the sale does not occur then we will have incurred these expenses without
obtaining increased sales. Our customers typically expend significant efforts in evaluating and qualifying our products
and manufacturing process prior to placing an order. This evaluation and qualification process
frequently results in a lengthy sales cycle, typically ranging from nine to twelve months and
sometimes longer. While our 42




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customers are evaluating our products and before they place an order with us, we may incur
substantial sales, marketing, research and development expenses, expend significant management
efforts, increase manufacturing capacity and order long lead-time supplies. Even after this
evaluation process, it is possible that 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. Long sales cycles may cause our revenues and
operating results to vary significantly and unexpectedly from quarter to quarter, which could cause
volatility in our stock price. We depend on key personnel to manage our business effectively in a rapidly changing market, and if
we are unable to retain our key employees and hire additional personnel, our ability to sell our
products could be harmed. Our future success depends upon the continued services of our executive officers and other key
engineering, finance, sales, marketing, manufacturing and support personnel. In addition, we depend
substantially upon the continued services of key management personnel at our Chinese subsidiaries.
None of our officers or key employees are bound by an employment agreement for any specific term,
and these personnel 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. Competition for highly-skilled
personnel is intense. We may not be successful in attracting, assimilating or retaining qualified
personnel to fulfill our current or future needs. In addition, our management team has experienced
significant personnel changes over the past two years and may continue to experience changes in the
future. If our management team experiences further changes and does not work effectively together,
it could substantially harm our business. Because some of our third-party sales representatives and distributors carry products of one or
more of our competitors, they may not recommend our products over competitors products. Our sales representatives and distributors are independent organizations that generally have
exclusive geographic territories and generally are compensated on a commission basis. We are
currently migrating some of our larger customers to direct sales. We expect that we will continue
to rely on our independent sales representatives and distributors to market, sell and support many
of our products for a substantial portion of our revenues. Some of our third-party sales
representatives and distributors carry products of one or more of our competitors. As a result,
these sales representatives and distributors may not recommend our products over competitors
products. Our failure to comply with governmental regulations could subject us to liability. Our failure to comply with a variety of federal, state and local laws and regulations in the
United States and China could subject us to criminal, civil and administrative penalties. Our
products are subject to U.S. export control laws and regulations that regulate the export of
products and disclosure of technical information to foreign countries and citizens. In some
instances, these laws and regulations may require licenses for the export of products to, and
disclosure of technology in, some countries, including China, and disclosure of technology to
foreign citizens. With the exception of two commodity classifications we obtained from the
Department of Commerce in 2001 with respect to some of our current products, we have generally
relied on self-classification in determining whether an export license is required and have 43




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determined that export licenses are not required. As we develop and commercialize new products
and technologies, the list of products and technologies subject to U.S. export controls changes, or
in the event that the relevant export authorities disagree with the outcome of our
self-classification, we may be required to obtain export licenses or other approvals with respect
to those products and technologies and may possibly be subject to penalties under applicable laws.
We cannot predict whether these licenses and approvals will be required and, if so, whether they
will be granted. The failure to obtain any required license or approval could harm our business. We ship inventory and other materials to and from our facilities in China and, as a result,
are subject to various Chinese and U.S. customs-related laws. Given the geographic distance and
changing regulations and governmental standards, it can be difficult to monitor and enforce
compliance with customs laws. In fact, there have been inventory and other materials shipped to and
from our facilities in China for which, upon arrival of the goods, there was not sufficient
documentation to demonstrate the items comply with all local customs regulations. The U.S. Customs
Service may also require us to revise product classifications from time to time with respect to
various items imported into the United States. In such cases we may be required to pay any increase
in customs duty to account for the difference in duty actually paid by Oplink and the duty owed
under the amended product classification, and may also be subject to penalties under applicable
laws. In addition, from time to time we enter into transfer pricing arrangements with our
subsidiaries to establish sales prices for internal distributions of goods that have the effect of
allocating taxes between the parent corporation and our subsidiaries. In general, these transfer
prices have not been approved by any governmental entity and, therefore, may be challenged by the
applicable tax authorities. China tax authorities have recently announced that they plan to
increase transfer pricing audits, and have specifically identified telecommunications companies,
among others, as priority targets. We employ a number of foreign nationals in our U.S. operations and, as a result, we are
subject to various laws related to the status of those employees with the Bureau of Citizenship and
Immigration Services. We also send our U.S. employees to China from time to time and for varying
durations of time to assist with our Chinese operations. Depending on the durations of such
arrangements, we may be required to withhold and pay personal income taxes in respect of the
affected U.S. employees directly to the Chinese tax authorities, and the affected U.S. employees
may be required to register with various Chinese governmental authorities. Our failure to comply
with the foregoing laws and regulations or any other applicable laws and regulations could subject
us to liability. In addition, we are subject to laws relating to the storage, use, discharge and disposal of
toxic or otherwise hazardous or regulated chemicals or materials used in our manufacturing
processes. While we believe that we are currently in compliance in all material respects with these
laws and regulations, if we fail to store, use, discharge or dispose of hazardous materials
appropriately, we could be subject to substantial liability or could be required to suspend or
adversely modify our manufacturing operations. In addition, we could be required to pay for the
cleanup of our properties if they are found to be contaminated, even if we are not responsible for
the contamination. Recently enacted and proposed changes in securities laws and regulations are likely to increase our
costs. The Sarbanes-Oxley Act has required and will continue to require changes in some of our
corporate governance and securities disclosure or compliance practices. The Sarbanes-Oxley Act also
requires the SEC to promulgate new rules on a variety of subjects, in addition to rule proposals
already made, and we 44




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may need to make further changes in response to such new rules. In addition, Nasdaq has
revised its requirements for companies that are Nasdaq-listed, such as the Company. We expect these
developments (i) will require us to devote additional resources to our operational, financial and
management information systems procedures and controls to ensure our continued compliance with
current and future laws and regulations, (ii) will make it more difficult and more expensive for us
to obtain director and officer liability insurance, and we may be required to accept reduced
coverage, increase our level of self-insurance, or incur substantially higher costs to obtain
coverage, and (iii) could make it more difficult for us to attract and retain qualified members of
our board of directors, or qualified executive officers. We are presently evaluating and monitoring
regulatory developments and cannot estimate the timing or magnitude of additional costs we may
incur as a result. RISKS RELATED TO OUR COMMON STOCK Insiders continue to have substantial control over us, which may negatively affect your investment. Our current executive officers, directors and their affiliates owned, in the aggregate, as of
March 31, 2005, approximately 14.2% of our outstanding shares. As a result, these persons and/or
entities acting together will be able to substantially influence the outcome of all matters
requiring approval by our stockholders, including the election of directors and approval of
significant corporate transactions. This ability may have the effect of delaying a change in
control, which may be favored by our other stockholders, or entrenching current management. Because of the early stage of our business and the rapid changes taking place in the fiber optics
industry, we expect to experience significant volatility in our stock price, which could cause you
to lose all or part of your investment. Because of the early stage of our business and the rapid changes taking place in the fiber
optics industry, we expect the market price of our common stock to fluctuate significantly. For
example, the market price of our common stock has fluctuated from a high sales price of $40.81 to a
low sales price of $0.53 during the period from October 3, 2000, the date of our initial public
offering, to March 31, 2005. These fluctuations may occur in response to a number of factors, some
of which are beyond our control, including:  -
    economic downturn in the fiber optics industry;-
    preannouncement of financial results;-
    quarterly variations in our operating results;-
    changes in financial estimates by securities analysts and our failure to meet estimates;-
    changes in market values of comparable companies;-
    announcements by us or our competitors of new products or of significant acquisitions,
strategic partnerships or joint ventures;-
    any loss by us of a major customer; 45




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-
    the outcome of, and costs associated with, any litigation to which we are or may become a
party;-
    additions or departures of key management or engineering personnel; and-
    future sales of our common stock. The price of our common stock may also be affected by general economic and market conditions,
and the cost of operations in our product markets. While we cannot predict the individual effect
that these factors may have on the price of our common stock, these factors, either individually or
in the aggregate, could result in significant variations in price during any given period of time.
There can be no assurance that these factors will not have an adverse effect on the trading prices
of our common stock. Provisions of our charter documents and Delaware law may have anti-takeover effects that could
prevent any change in control, which could negatively affect your investment. Provisions of Delaware law and of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions permit us to:  -
    issue preferred stock with rights senior to those of the common stock without any
further vote or action by the stockholders;-
    provide for a classified board of directors;-
    eliminate the right of the stockholders to call a special meeting of stockholders;-
    eliminate the right of stockholders to act by written consent; and-
    impose various procedural and other requirements, which could make it difficult for
stockholders to effect certain corporate actions. On March 18, 2002, our Board of Directors adopted a share purchase rights plan, which has
certain additional anti-takeover effects. Specifically, the terms of the plan provide for a
dividend distribution of one preferred share purchase right for each outstanding share of common
stock. These rights would cause substantial dilution to a person or group that attempts to acquire
us on terms not approved by our Board of Directors. Any of the foregoing provisions could limit the price that certain investors might be willing
to pay in the future for shares of our common stock. If we are unable to maintain our listing on The Nasdaq National Market, the liquidity of our common
stock would be seriously impaired and we would become subject to various statutory requirements,
which would likely harm our business and place downward pressure on our common stock price. We may be subject to delisting from The Nasdaq National Market from time to time to the extent
our stock price falls below the minimum bid price requirements or we otherwise do not satisfy other
requirements for continued listing. For example, in October 2002, we received a determination
letter from The Nasdaq National Market that advised us that our common stock no longer met the
requirements for continued listing on The Nasdaq National Market. The notification was based on the
failure by us to 46




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maintain a minimum bid price of $1.00 as required by The Nasdaq National Markets listing
maintenance standards. In May 2003, The Nasdaq National Market confirmed that we had complied with
all requirements necessary for continued listing on The Nasdaq National Market and that our common
stock would continue to be listed on The Nasdaq National Market. There can be no assurance,
however, that The Nasdaq National Market will not again initiate delisting procedures against us if
we cannot maintain compliance with the listing maintenance standards. In the event that we fail to meet the continued listing maintenance standards, our common
stock may be delisted from The Nasdaq National Market and trade on The Nasdaq SmallCap Market or,
possibly, the over-the-counter bulletin board, commonly referred to as the pink sheets. Such
alternatives are generally considered less efficient markets and could seriously impair the
liquidity of our common stock and limit our potential to raise future capital through the sale of
our common stock, which could materially harm our business. If we are delisted from The Nasdaq
National Market, we will also face a variety of legal and other consequences that will likely
negatively affect us including, without limitation, the following:  -
    the state securities law exemptions available to us would be more limited and, as a
result, future issuances of our securities may require time-consuming and costly
registration statements;-
    due to the application of different securities law exemptions and provisions, we may
be required to amend our stock option and stock purchase plans and comply with
time-consuming and costly administrative procedures;-
    the coverage of us by securities analysts may decrease or cease entirely;-
    we may lose current or potential investors and customers;-
    we may be unable to regain or maintain compliance with the listing requirements of
either The Nasdaq SmallCap Market or The Nasdaq National Market; and-
    we may lose our exemption from the provisions of Section 2115 of the California
Corporations Code which imposes aspects of California corporate law on certain
non-California corporations operating within California. As a result, (i) our Board of
Directors would no longer be classified and our stockholders would elect all of our
directors at each annual meeting, (ii) our stockholders would be entitled to cumulative
voting, and (iii) we would be subject to more stringent stockholder approval requirements
and more stockholder-favorable dissenters rights in connection with certain strategic
transactions. In addition, some companies that face delisting as a result of bid prices below The Nasdaq
National Markets listing maintenance standards seek to maintain their listings by effecting
reverse stock splits. At our annual stockholders meeting in November 2004, our stockholders
approved a proposal to permit the Board of Directors to effect, at its sole discretion, a reverse
split of our common stock at any time prior to our next annual stockholders meeting. There is no
assurance, however, that effecting a reverse stock split (if our Board of Directors elects to
effect a split) would result in a sustained increase in the stock price and, as a result, our stock
price may be adversely affected. 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 47




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We are exposed to market risk related to fluctuations in interest rates and in foreign
currency exchange rates as follows: Interest Rate Exposure. The primary objective of our investment activities is to
preserve principal while maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we invest in are subject to market risk.
To minimize this risk, we maintain our portfolio of cash equivalents and investments in a variety
of securities, including commercial paper, money market funds, government and non-government debt
securities and corporate bonds. As of March 31, 2005, all of our short-term investments were in high quality corporate bonds
and government and non-government debt securities. At March 31, 2005, we invested $66.1 million in
auction rate securities, which were classified as short-term investments. Auction rate securities
have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals,
usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment
date at the option of the issuer. Interest paid during a given period is based upon the interest
rate determined during the prior auction. Although these securities are issued and rated as
long-term bonds, they are priced and traded as short-term instruments because of the liquidity
provided through the interest rate reset. We can sell these auction rate securities at par and at
our discretion at the interest rate reset date. As of March 31, 2005, our long-term investments primarily consisted of corporate bonds and
government debt securities with maturities of less than three years from March 31, 2005. We invest
our excess cash in long-term investments to take advantage of higher yields generated by these
investments. We intend to hold these long-term investments to maturity and we believe we have the
ability to hold them to maturity. However, liquidating our long-term investments before maturity
could have a material impact on our interest earnings. We do not hold any instruments for trading
purposes. Declines in interest rates could have a material impact on interest earnings for our
investment portfolio. The following table summarizes our current investment securities (in
thousands, except percentages): Carrying
    
    
    Average Rate
    
    
    Carrying
    
    
    Average RateValue at
    
    
    of Return at
    
    
    Value at
    
    
    of Return atMarch 31,
    
    
    March 31,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2005
    
    
    2004
    
    
    2004(Annualized)
    
    
    
    
    
    
    (Annualized)Investment Securities:Cash equivalents  variable rate
    
    $
    11,211
    
    
    
    2.5
    %
    
    $
    46,034
    
    
    
    1.1
    %Cash equivalents  fixed rate
    
    
    13,974
    
    
    
    2.7
    %
    
    
    5,219
    
    
    
    0.9
    %Short-term investments  variable rate
    
    
    5,001
    
    
    
    2.8
    %
    
    
    7,497
    
    
    
    1.0
    %Short-term investments  fixed rate
    
    
    95,947
    
    
    
    2.7
    %
    
    
    71,052
    
    
    
    1.4
    %Long-term investments  variable rate
    
    
    
    
    
    
    
    
    
    
    5,002
    
    
    
    1.2
    %Long-term investments  fixed rate
    
    
    55,769
    
    
    
    2.9
    %
    
    
    50,202
    
    
    
    2.3
    %Total
    
    $
    181,902
    
    
    
    
    
    
    $
    185,006
 Expected Fiscal Year Maturity Date2005
    
    
    2006
    
    
    2007
    
    
    Total
    
    
    Fair ValueLong-term investments  fixed rate
    
    $
    
    
    
    $
    10,012
    
    
    $
    45,757
    
    
    $
    55,769
    
    
    $
    55,025Average interest rate
    
    
    0.0
    %
    
    
    2.3
    %
    
    
    3.2
    %
    
    
    3.0
    %
 48




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Foreign Currency Exchange Rate Exposure. We operate in the United States, manufacture
our products in China, and the substantial majority of our sales to date have been made in U.S.
dollars. Certain expenses from our China operations are incurred in the Chinese Renminbi. We expect
that gains and losses from fluctuations in the currency exchange rate related to sales that are
made in Chinese Renminbi are likely to be substantially offset from fluctuations in the currency
exchange rate related to intercompany payments from our subsidiaries in China to our parent
corporation that are made in U.S. dollars. Accordingly, we believe that we currently have no
material exposure to foreign currency rate fluctuations. We expect our international revenues and expenses to be denominated largely in U.S. dollars.
We believe that our China operations will likely expand in the future and account for a larger
portion of our worldwide manufacturing capability and revenue. As a result, we anticipate that we
may experience increased exposure to the risks of fluctuating currencies and may choose to engage
in currency hedging activities to reduce these risks. However, we cannot be certain that any such
hedging activities will be effective, or available to us at commercially reasonable rates. 
 ITEM 4  CONTROLS AND PROCEDURES. Evaluation of disclosure controls and procedures. The Company maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed in the
reports the Company files or submits under the Securities Exchange Act of 1934, as amended
(the Exchange Act), is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management, including its Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely
decisions regarding required disclosure. In connection with the preparation of this Quarterly Report on Form 10-Q, the Company carried
out an evaluation under the supervision and with the participation of the Companys management,
including the CEO and CFO, as of March 31, 2005 of the effectiveness of the design and operation of
the Companys disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Based upon this evaluation, and subject to the limitations
described under -Limitations on the Effectiveness of Controls and Procedures below, the CEO and
CFO concluded that the Companys disclosure controls and procedures were effective as of March 31,
2005. Changes in internal controls. There were no significant changes in the Companys internal
control over financial reporting that occurred during the period covered by this Form 10-Q that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. The Companys management is reviewing the Companys internal control processes and procedures
in preparation for the issuance by management of its report on the Companys internal control over
financial reporting as of June 30, 2005, which will be included in the Companys Annual Report on
Form 10-K for fiscal 2005 as required under Section 404 of the Sarbanes-Oxley Act of 2002. As a
result of its review, the Companys management has determined that the Company should implement
improvements to certain of the Companys internal control processes and procedures. In particular,
the Companys management intends to further strengthen access controls to sensitive financial
systems, subsystems and data, improve documentation of testing financial application changes,
further segregate duties in critical functional areas, and strengthen control procedures and
practices over financial reporting processes. The Companys management has not concluded that any
material weaknesses exist as of March 31, 2005 with respect to those internal control processes and
procedures that the Companys management has determined should be 49




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improved, although there can be no assurance that Companys management will not reach such a
conclusion, or conclude that other material weaknesses exist, in connection with the assessment to
be conducted by the Companys management as required under Section 404 of the effectiveness of the
Companys internal control over financial reporting as of June 30, 2005. See Item 2 -
Managements Discussion and Analysis of Financial Condition and
Results of Operations - Risk
Factors - Risks Relating to Our Business - Failure to achieve and maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could adversely effect
our business and operating results, impair the reliability of our financial statements, cause us to
delay filing our Annual Report on Form 10-K for fiscal 2005, harm our reputation and adversely
effect our stock price. Limitations on the Effectiveness of Controls and Procedures. The Companys management,
including the CEO and CFO, does not expect that the Companys disclosure controls and
procedures, internal control over financial reporting and related procedures will necessarily
prevent all error and all fraud. A control system, no matter how well conceived and operated,
cannot provide absolute assurance that the objectives of the control system are met. Any
control system will reflect inevitable limitations, such as resource constraints, a
cost-benefit analysis based on the level of benefit of additional controls relative to their
costs, assumptions about the likelihood of future events and human error. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and may not be detected. Accordingly, the Companys control system is designed to
provide reasonable, not absolute, assurance that the objectives of the control system are met.
As set forth above, the Companys CEO and CFO have concluded, based on their evaluation as of
March 31, 2005, that the Companys disclosure controls and procedures were effective to provide
reasonable assurance that the objectives of the Companys disclosure controls and procedures
were met. 
 PART II. OTHER INFORMATION 
 ITEM 1- LEGAL PROCEEDINGS None. 
 ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. 
 ITEM 3  DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5  OTHER INFORMATION On October 28, 2004, we and our newly-formed, wholly-owned Cayman Islands subsidiary, Cayman
Oplink Communications, Inc., entered into a stock purchase agreement with all the shareholders of
EZconn 50




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Corporation (EZconn), a privately-held Taiwanese company that manufactures cable and
photonics components for broadband access equipment manufacturers. Pursuant to the stock purchase
agreement and related ancillary agreements, we were to purchase all of the shares of EZconn and
certain assets related to the business of EZconn. On January 17, 2005, we and EZconn agreed to
terminate all agreements relating to our proposed acquisition of EZconn, due to recent market
changes and competitive circumstances. We and EZconn entered into a settlement agreement whereby
EZconn paid to us $2.0 million in termination fees. We incurred approximately $1.1 million of
expenses including withholding tax in connection with the terminated transaction. 
 ITEM 6   EXHIBITS Exhibit No.
    
    Description3.1
    (1)
    Amended and Restated Certificate of Incorporation of the Registrant.3.2
    (1)
    Bylaws of the Registrant.3.3
    (2)
    Certificate of Designation of Series A Junior Participating Preferred Stock.31.1
    
    Certification of Chief Executive Officer Required under Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Required under Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.32.1
    *
    Certification of Chief Executive Officer Required under Rule 13a-14(b) or
Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
Section 1350).32.2
    *
    Certification of Chief Financial Officer Required under Rule 13a-14(b) or
Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350.
   (1)
    
    Incorporated by reference to the Registrants Registration Statement
on Form S-1/A, No. 333-41506, as filed on October 3, 2000.(2)
    
    Previously filed as an Exhibit to the Registrants Report on Form 8-K
filed on March 22, 2002 and incorporated herein by reference.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this Quarterly
Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall
not be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended. 51




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OPLINK COMMUNICATIONS, INC. (Registrant) DATE: May 13, 2005
    
    By:
    
    /s/ Bruce D. HornBruce D. HornChief Financial Officer(Principal Financial and Accounting Officer)
 52




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Exhibit Index Exhibit No.
    
    Description3.1
    (1)
    Amended and Restated Certificate of Incorporation of the Registrant.3.2
    (1)
    Bylaws of the Registrant.3.3
    (2)
    Certificate of Designation of Series A Junior Participating Preferred Stock.31.1
    
    Certification of Chief Executive Officer Required under Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Required under Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.32.1
    *
    Certification of Chief Executive Officer Required under Rule 13a-14(b) or
Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
Section 1350).32.2
    *
    Certification of Chief Financial Officer Required under Rule 13a-14(b) or
Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350.
   (1)
    
    Incorporated by reference to the Registrants Registration Statement
on Form S-1/A, No. 333-41506, as filed on October 3, 2000.(2)
    
    Previously filed as an Exhibit to the Registrants Report on Form 8-K
filed on March 22, 2002 and incorporated herein by reference.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this Quarterly Report on Form
10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 53