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UNITED STATES SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) [ X ]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
 or [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the
transition period fromto
 Commission file number 000-31581 OPLINK COMMUNICATIONS, INC.  Delaware
    
    No. 77-0411346(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3469 North First Street, San Jose, CA 95134(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (408) 433-0606 Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X]  No [   ] Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]  No [   ] The number of shares of the Registrants common stock outstanding as of April
30, 2004 was 147,448,144.




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OPLINK COMMUNICATIONS, INC. FORM 10-Q INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets 
March 31, 2004 and June 30, 2003
    
    
    3Condensed Consolidated Statements of Operations 
Three and nine months ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows 
Nine months ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 4. Controls and Procedures
    
    
    51PART II. OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    52Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    52Item 3.Defaults Upon Senior Securities
    
    
    52Item 4.Submission of Matters to a Vote of Security Holders
    
    
    52Item 5.Other Information
    
    
    53Item 6.Exhibits and Reports on Form 8-K
    
    
    53SIGNATURES
    
    
    55EXHIBIT 10.28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I. FINANCIAL INFORMATION 
  OPLINK COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 March 31,
    
    June 30,2004
    

2003(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    102,625
    
    
    $
    121,498Short-term investments
    
    
    27,988
    
    
    
    66,605Accounts receivable, net
    
    
    6,818
    
    
    
    4,716Inventories
    
    
    4,702
    
    
    
    3,436Prepaid expenses and other current assets
    
    
    2,666
    
    
    
    2,355Net assets of discontinued operation
    
    
    2,667
    
    
    
    2,667Total current assets
    
    
    147,466
    
    
    
    201,277Long-term investments
    
    
    59,319
    
    
    
    Property, plant and equipment, net
    
    
    25,850
    
    
    
    31,738Intangible assets
    
    
    553
    
    
    
    120Other assets
    
    
    401
    
    
    
    608Total assets
    
    $
    233,589
    
    
    $
    233,743LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,180
    
    
    $
    4,587Accrued liabilities
    
    
    8,256
    
    
    
    7,407Current portion of capital lease obligations
    
    
    208
    
    
    
    1,478Total current liabilities
    
    
    13,644
    
    
    
    13,472Capital lease obligations, non current
    
    
    
    
    
    
    83Accrued restructuring costs, non current
    
    
    136
    
    
    
    1,472Total liabilities
    
    
    13,780
    
    
    
    15,027Contingencies (Note 15)Stockholders equity:Common stock
    
    
    147
    
    
    
    142Additional paid-in capital
    
    
    468,909
    
    
    
    463,449Treasury stock
    
    
    (25,276
    )
    
    
    (25,276
    )Notes receivable from stockholders
    
    
    (53
    )
    
    
    (50
    )Deferred stock compensation
    
    
    (293
    )
    
    
    (1,521
    )Accumulated other comprehensive income (loss)
    
    
    192
    
    
    
    (29
    )Accumulated deficit
    
    
    (223,817
    )
    
    
    (217,999
    )Total stockholders equity
    
    
    219,809
    
    
    
    218,716Total liabilities and stockholders equity
    
    $
    233,589
    
    
    $
    233,743
 (1) The Condensed Consolidated Balance Sheet at June 30, 2003 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. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    9,152
    
    
    $
    5,621
    
    
    $
    24,457
    
    
    $
    16,661Cost of revenues:Cost of revenues
    
    
    6,037
    
    
    
    4,688
    
    
    
    16,822
    
    
    
    17,376Non-cash compensation expense (recovery)
    
    
    32
    
    
    
    (39
    )
    
    
    160
    
    
    
    (653
    )Total cost of revenues
    
    
    6,069
    
    
    
    4,649
    
    
    
    16,982
    
    
    
    16,723Gross profit (loss)
    
    
    3,083
    
    
    
    972
    
    
    
    7,475
    
    
    
    (62
    )Operating expenses:Research and development:Research and development
    
    
    1,952
    
    
    
    1,715
    
    
    
    4,959
    
    
    
    7,122Non-cash compensation expense (recovery)
    
    
    32
    
    
    
    (5
    )
    
    
    437
    
    
    
    (178
    )Total research and development
    
    
    1,984
    
    
    
    1,710
    
    
    
    5,396
    
    
    
    6,944Sales and marketing:Sales and marketing
    
    
    938
    
    
    
    588
    
    
    
    2,535
    
    
    
    3,474Non-cash compensation expense
    
    
    22
    
    
    
    84
    
    
    
    41
    
    
    
    106Total sales and marketing
    
    
    960
    
    
    
    672
    
    
    
    2,576
    
    
    
    3,580General and administrative:General and administrative
    
    
    1,316
    
    
    
    1,788
    
    
    
    4,945
    
    
    
    5,317Non-cash compensation expense
    
    
    293
    
    
    
    254
    
    
    
    916
    
    
    
    1,396Total general and administrative
    
    
    1,609
    
    
    
    2,042
    
    
    
    5,861
    
    
    
    6,713Restructuring costs and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,324Merger fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,300In-process research and development
    
    
    704
    
    
    
    
    
    
    
    1,565
    
    
    
    Amortization of intangible and other assets
    
    
    1
    
    
    
    15
    
    
    
    11
    
    
    
    63Total other operating expenses
    
    
    705
    
    
    
    15
    
    
    
    1,576
    
    
    
    8,687Total operating expenses
    
    
    5,258
    
    
    
    4,439
    
    
    
    15,409
    
    
    
    25,924Loss from operations
    
    
    (2,175
    )
    
    
    (3,467
    )
    
    
    (7,934
    )
    
    
    (25,986
    )Interest and other income, net
    
    
    795
    
    
    
    859
    
    
    
    1,936
    
    
    
    2,973(Loss) gain on sale of assets
    
    
    (20
    )
    
    
    
    
    
    
    105
    
    
    
    Loss from continuing operations
    
    
    (1,400
    )
    
    
    (2,608
    )
    
    
    (5,893
    )
    
    
    (23,013
    )(Loss) income from discontinued operation
    
    
    (53
    )
    
    
    (426
    )
    
    
    75
    
    
    
    (3,112
    )Net loss
    
    $
    (1,453
    )
    
    $
    (3,034
    )
    
    $
    (5,818
    )
    
    $
    (26,125
    )Basic and diluted net loss per share:Continuing operations
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.14
    )Discontinued operation
    
    
    (0.00
    )
    
    
    (0.00
    )
    
    
    0.00
    
    
    
    (0.02
    )Total
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )Basic and diluted weighted average shares outstanding
    
    
    146,529
    
    
    
    158,556
    
    
    
    144,887
    
    
    
    161,844
 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 31,2004
    
    2003Cash flows from operating activities:Loss from continuing operations
    
    $
    (5,893
    )
    
    $
    (23,013
    )Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:Non-cash restructuring and other charges
    
    
    
    
    
    
    3,962Depreciation and amortization of property, plant and equipment
    
    
    6,288
    
    
    
    8,438Amortization of intangible and other assets
    
    
    11
    
    
    
    63Non-cash compensation expense
    
    
    1,554
    
    
    
    671In-process research and development
    
    
    1,565
    
    
    
    Amortization of premium (discount) on investments
    
    
    147
    
    
    
    (99
    )Gain on sale of assets
    
    
    (105
    )
    
    
    Interest income related to stockholder notes
    
    
    (3
    )
    
    
    (540
    )Change in assets and liabilities:Accounts receivable
    
    
    (2,102
    )
    
    
    2,029Inventories
    
    
    (1,203
    )
    
    
    1,792Prepaid expenses and other assets
    
    
    (230
    )
    
    
    340Accounts payable
    
    
    224
    
    
    
    1,216Accrued liabilities and accrued restructuring costs
    
    
    (1,375
    )
    
    
    (5,443
    )Net cash used in operating activities from continuing operations
    
    
    (1,122
    )
    
    
    (10,584
    )Net cash provided by (used in) discontinued operation
    
    
    103
    
    
    
    (227
    )Net cash used in operating activities
    
    
    (1,019
    )
    
    
    (10,811
    )Cash flows from investing activities:Cash acquired in business combination, net of payments
    
    
    404
    
    
    
    Purchases of investments
    
    
    (151,963
    )
    
    
    (133,562
    )Maturities of investments
    
    
    131,279
    
    
    
    52,700Proceeds from sales of assets
    
    
    478
    
    
    
    593Purchase of property and equipment
    
    
    (225
    )
    
    
    (445
    )Net cash used in investing activities
    
    
    (20,027
    )
    
    
    (80,714
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,526
    
    
    
    198Repurchase of common stock
    
    
    
    
    
    
    (8,704
    )Repayment of capital lease obligations
    
    
    (1,353
    )
    
    
    (3,190
    )Net cash provided by (used in) financing activities
    
    
    2,173
    
    
    
    (11,696
    )Net decrease in cash and cash equivalents
    
    
    (18,873
    )
    
    
    (103,221
    )Cash and cash equivalents, beginning of period
    
    
    121,498
    
    
    
    219,033Cash and cash equivalents, end of period
    
    $
    102,625
    
    
    $
    115,812
 (CONTINUED ON NEXT PAGE) The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 5




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OPLINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) (CONTINUED FROM PREVIOUS PAGE) Nine Months EndedMarch 31,2004
    
    2003Supplemental disclosures of cash flow information:Cash paid during the period for interest expense
    
    $
    34
    
    
    $
    259Supplemental non-cash investing and financing activities:Forfeiture of common stock option grants
    
    $
    
    
    
    $
    (302
    )Recovery of property and equipment
    
    $
    
    
    
    $
    (412
    )Adjustment to accrued construction in progress
    
    $
    (807
    )
    
    $
    Common stock issued upon business combination
    
    $
    1,612
    
    
    $
    
 The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements. 6




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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, or DWDM and CWDM,
respectively, optical amplification, switching and routing, monitoring and
conditioning, dispersion management and line transmission applications. The
Company offers advanced and cost-effective optical-electrical components and
subsystem manufacturing through its facilities in Zhuhai, China. In addition,
the Company maintains optical-centric front-end design, application, and
customer service functions at its headquarters in San Jose, California. 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 specification. The Companys
broad line of products and services increases the performance of optical
networks and enables 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s customers include
telecommunications, data communications and cable TV equipment manufacturers
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 San Jose, 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 independent auditors who do 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, 2003 included in the Companys Annual Report on Form 10-K. The Company operates and reports using a fiscal year, which ends on the
Sunday closest to June 30. Interim fiscal quarters end on the Sunday 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. March 28,
2004 and March 30, 2003 represent the Sunday closest to the period ended March
31, 2004 and March 31, 2003, respectively. Fiscal year 2004 will consist of 52
weeks. In May 2003, the Company adopted a plan to sell its Shanghai operation.
The sale of the Shanghai operation represents a disposal of a component of an
entity as defined in Statement of Financial 7




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Accounting Standard (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets. For the periods presented, the Shanghai
operation is accounted as a discontinued operation in the financial statements
in accordance with SFAS No. 144. Amounts in the financial statements and
related notes for the periods presented, are reclassified to reflect the
discontinued operation. 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, 2004, the results of its operations for the three and
nine-month periods ended March 31, 2004 and 2003 and its cash flows for the
nine-month periods ended March 31, 2004 and 2003. The results of operations for
the periods presented are not necessarily indicative of those that may be
expected for the full year. 3. Acquisitions. On November 3, 2003, the Company acquired RedClover Networks,
Inc. (RedClover), an early-stage private company that designed and
manufactured broadband optical interface products for access, storage, metro
and long-haul networks. The purchase price was comprised of $250,000 in cash
and $70,000 in transaction costs. The Company paid $150,000 upon the closing of
the acquisition and the remaining $100,000 will be paid twelve months after the
date of the RedClover acquisition, subject to satisfaction of any
indemnification obligations owed by RedClover and its stockholders to the
Company. The RedClover acquisition was accounted for under the purchase method
of accounting. On February 4, 2004, the Company acquired Accumux Technologies, Inc.
(Accumux), an early-stage private company that developed a standard-tunable
dispersion compensation module (DCM) for dense wavelength division
multiplexing (DWDM) fiber optic communication systems. Pursuant to the terms
of the definitive merger agreement, a wholly owned subsidiary of the Company
was merged with and into Accumux and Accumux became a wholly owned subsidiary
of the Company. The purchase price was comprised of 600,000 shares of the
Companys common stock valued at $1,611,600 based on a five trading day average
per share price of $2.686 and transaction costs of approximately $50,000. The
Accumux acquisition was accounted for under the purchase method of accounting. On March 23, 2004, the Company acquired certain assets of Gigabit Optics
Corporation (Gigabit), an early-stage private company that developed and
marketed micro-optical subassemblies. The purchase price was comprised of
transaction costs of approximately $37,000 and $1,150,000 in cash, of which
$500,000 was paid upon closing, $350,000 will be paid upon satisfaction of
certain events and the remaining $300,000 is subject to an escrow to secure
certain indemnification obligations owned by Gigabit to the Company. The
Gigabit acquisition was accounted for under the purchase method of accounting. The purchase price of each acquisition is as follows (in thousands): RedClover
    
    Accumux
    
    GigabitCash
    
    $
    250
    
    
    $
    
    
    
    $
    1,150Value of securities issued
    
    
    
    
    
    
    1,612
    
    
    
    Transaction costs
    
    
    70
    
    
    
    50
    
    
    
    37Total purchase price
    
    $
    320
    
    
    $
    1,662
    
    
    $
    1,187
 Under the purchase method of accounting, the total purchase price as shown in
the table above is allocated to the net tangible and intangible assets based on
their estimated fair value as of the date of the completion of each
acquisition. The purchase price allocation of each acquisition is as follows
(in thousands): 8




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RedClover
    
    Accumux
    
    GigabitCash and cash equivalents
    
    $
    
    
    
    $
    1,054
    
    
    $
    Inventory
    
    
    11
    
    
    
    
    
    
    
    53Fixed assets
    
    
    583
    
    
    
    393
    
    
    
    172In-process research and development
    
    
    861
    
    
    
    251
    
    
    
    453Patent
    
    
    
    
    
    
    45
    
    
    
    Technology
    
    
    
    
    
    
    
    
    
    
    509Liabilities assumed
    
    
    (1,135
    )
    
    
    (81
    )
    
    
    Total purchase price
    
    $
    320
    
    
    $
    1,662
    
    
    $
    1,187
 The in-process research and development (IP R&D) in connection with the
acquisition of RedClover consisted of a single channel transponder which is
being designed to provide 10 gigabyte per second (Gb/s) ethernet physical
transceiver layer for local area network applications, and a narrowly tunable
transponder which is being designed to combine the functionality of a standard
SFI-4 compliant electrical interface, 10 Gb/s optical interface, tunable
laser, and adaptive receiver with embedded ultra-compact dispersion
compensation in a single intelligent sub-system module for optical networks. The IP R&D in connection with the acquisition of Accumux consisted of a
standard-tunable DCM for DWDM fiber-optic communication systems, which will be
installed into existing long haul networks to improve the performance of
existing fiber cables and provide low residual transmission errors at speeds
of up to 10 Gb/s. The IP R&D in connection with the acquisition of Gigabit consisted of a
next generation MicroMux which is a filter design coarse wavelength division
multiplexing (CWDM) device and is designed to accommodate large increases in
packet based data traffic, and a laser-equipped Micro-LX4 platform which has
four CWDM laser diodes in a smaller footprint. 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 $861,000, $251,000 and $453,000, respectively, and was
charged to expense at the time of each respective acquisition. The Company acquired developed technology from Gigabit, which was
comprised of products that are technologically feasible, primarily including
first generation micro-optical assemblies, MicroMux and PatchMux. The Company
amortizes the developed technology on a straight-line basis over an estimated
life of three years. The Company allocated the purchase price of acquired companies and assets
to the tangible and intangible assets acquired and liabilities assumed based on
their estimated fair values. The Company engaged independent third-party
appraisal firms to assist in determining the fair values of the assets acquired
and the liabilities assumed. Such valuations require management to make
significant estimations and assumptions, especially with respect to intangible
assets. Managements estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and
unpredictable. 9




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4. 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 31,2004
    
    2003
    
    2004
    
    2003Numerator:Loss from continuing operations
    
    $
    (1,400
    )
    
    $
    (2,608
    )
    
    $
    (5,893
    )
    
    $
    (23,013
    )(Loss) income from discontinued operation
    
    
    (53
    )
    
    
    (426
    )
    
    
    75
    
    
    
    (3,112
    )Total
    
    $
    (1,453
    )
    
    $
    (3,034
    )
    
    $
    (5,818
    )
    
    $
    (26,125
    )Denominator:Weighted average shares outstanding
    
    
    146,529
    
    
    
    158,556
    
    
    
    144,887
    
    
    
    161,844Net loss per share  basic and diluted:Continuing operations
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.14
    )Discontinued operation
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    (0.02
    )Total
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )Antidilutive stock options not included in net
loss per share calculation
    
    
    19,439
    
    
    
    25,446
    
    
    
    19,439
    
    
    
    25,446
 5. 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, 2004 and 2003 is as follows (in thousands): Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (1,453
    )
    
    $
    (3,034
    )
    
    $
    (5,818
    )
    
    $
    (26,125
    )Unrealized gain (loss) on investments
    
    
    119
    
    
    
    22
    
    
    
    165
    
    
    
    (27
    )Change in cumulative translation adjustments
    
    
    3
    
    
    
    (23
    )
    
    
    56
    
    
    
    (16
    )Total comprehensive loss
    
    $
    (1,331
    )
    
    $
    (3,035
    )
    
    $
    (5,597
    )
    
    $
    (26,168
    )
 10




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##### Table of Contents



6. Short-Term and Long-Term Investments. The Companys short-term investments
are primarily comprised of money market funds, government and non-government
debt securities and commercial paper. Short-term investments represent
securities with maturities of greater than three months when purchased and less
than one year from the balance sheet date. The Companys long-term investments
are primarily comprised of corporate bonds and government debt securities.
Long-term investments represent securities with maturities of greater than one
year from the balance sheet date. Investments are custodied with major
financial institutions. Realized gains and losses are recorded using the
specific identification method. As of March 31, 2004 and June 30, 2003, all of
the Companys short-term and long-term investments were classified as
available-for-sale and were carried at fair value. Unrealized gains and losses
on these investments are included as a separate component of accumulated other
comprehensive income (loss). The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity, both of
which are included in interest income. 7. Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist of (in thousands): March 31,
    
    June 30,2004
    
    2003Inventories:Raw materials
    
    $
    10,072
    
    
    $
    12,636Work-in-process
    
    
    5,241
    
    
    
    5,224Finished goods
    
    
    3,794
    
    
    
    4,018Sub-total
    
    
    19,107
    
    
    
    21,878Less: Reserves for excess and obsolete inventory
    
    
    (14,405
    )
    
    
    (18,442
    )Total
    
    $
    4,702
    
    
    $
    3,436
 8. Property, Plant and Equipment. Property, plant and equipment consist of (in
thousands): March 31,
    
    June 30,2004
    
    2003Property, plant and equipment:Computer equipment and software
    
    $
    38,142
    
    
    $
    34,903Building and leasehold improvements
    
    
    10,778
    
    
    
    12,685Construction in progress
    
    
    
    
    
    
    975Sub-total
    
    
    48,920
    
    
    
    48,563Less: Accumulated depreciation and
amortization
    
    
    (23,070
    )
    
    
    (16,825
    )Total
    
    $
    25,850
    
    
    $
    31,738
 9. Accrued Liabilities. Accrued liabilities consist of (in thousands): 11




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##### Table of Contents



March 31,
    
    June 30,2004
    
    2003Accrued liabilities:Payroll and related expenses
    
    $
    745
    
    
    $
    598Accrued sales commission
    
    
    1,004
    
    
    
    958Accrued warranty
    
    
    700
    
    
    
    700Accrued restructuring costs
    
    
    1,965
    
    
    
    3,018Liabilities resulting from acquisitions
    
    
    750
    
    
    
    Other
    
    
    3,092
    
    
    
    2,133Total
    
    $
    8,256
    
    
    $
    7,407
 10. 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): Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Balance at the beginning of the period
    
    $
    700
    
    
    $
    800
    
    
    $
    700
    
    
    $
    1,200Accruals for warranties issued during the period
    
    
    210
    
    
    
    155
    
    
    
    630
    
    
    
    474Accruals related to pre-existing warranties
(including changes in estimates)
    
    
    (125
    )
    
    
    (227
    )
    
    
    (354
    )
    
    
    (710
    )Settlements made (in cash or in kind) during the period
    
    
    (85
    )
    
    
    (28
    )
    
    
    (276
    )
    
    
    (264
    )Balance at the end of the period
    
    $
    700
    
    
    $
    700
    
    
    $
    700
    
    
    $
    700
 11. Restructuring Costs and Other Charges. For the nine months ended March 31,
2004 and 2003 and the years ended June 30, 2003, 2002 and 2001, $0 (zero), $7.3
million, $12.2 million, $28.1 million and $18.2 million, respectively, of
restructuring costs and other charges were recorded as operating expenses for
worldwide workforce reduction, consolidation of excess property and equipment
and facilities and other charges. A summary of the restructuring charges
accrued in fiscal 2001, 2002 and 2003 and the nine months ended March 31, 2004
is as follows (in thousands): 12




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ImpairmentConsolidation of
    
    of GoodwillWorkforce
    
    Excess Property
    
    Excess Facilities
    
    and PurchasedReduction
    
    and Equipment
    
    and Other Charges
    
    Intangible Assets
    
    TotalInitial restructuring charge in the
fourth quarter of fiscal 2001
    
    $
    250
    
    
    $
    
    
    
    $
    5,485
    
    
    $
    12,442
    
    
    $
    18,177Non-cash charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,442
    )
    
    
    (12,442
    )Cash payments
    
    
    
    
    
    
    
    
    
    
    (1,191
    )
    
    
    
    
    
    
    (1,191
    )Balance at June 30, 2001
    
    
    250
    
    
    
    
    
    
    
    4,294
    
    
    
    
    
    
    $
    4,544Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,820Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,724Additional restructuring charge in
the fourth quarter of fiscal 2002
    
    
    2,899
    
    
    
    16,055
    
    
    
    9,151
    
    
    
    
    
    
    
    28,105Non-cash charge
    
    
    
    
    
    
    (15,680
    )
    
    
    
    
    
    
    
    
    
    
    (15,680
    )Cash payments
    
    
    (2,269
    )
    
    
    (375
    )
    
    
    (4,646
    )
    
    
    
    
    
    
    (7,290
    )Balance at June 30, 2002
    
    
    880
    
    
    
    
    
    
    
    8,799
    
    
    
    
    
    
    $
    9,679Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,355Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,324Additional restructuring charge in
the second and fourth quarter
of fiscal 2003
    
    
    1,831
    
    
    
    8,850
    
    
    
    1,185
    
    
    
    301
    
    
    
    12,167Non-cash charge
    
    
    
    
    
    
    (8,850
    )
    
    
    310
    
    
    
    (301
    )
    
    
    (8,841
    )Cash payments
    
    
    (2,535
    )
    
    
    
    
    
    
    (5,980
    )
    
    
    
    
    
    
    (8,515
    )Balance at June 30, 2003
    
    
    176
    
    
    
    
    
    
    
    4,314
    
    
    
    
    
    
    $
    4,490Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,018Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,472Cash payments
    
    
    (142
    )
    
    
    
    
    
    
    (642
    )
    
    
    
    
    
    
    (784
    )Balance at September 30, 2003
    
    
    34
    
    
    
    
    
    
    
    3,672
    
    
    
    
    
    
    $
    3,706Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,561Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,145Adjustment
    
    
    101
    
    
    
    
    
    
    
    (101
    )
    
    
    
    
    
    
    Cash payments
    
    
    (133
    )
    
    
    
    
    
    
    (649
    )
    
    
    
    
    
    
    (782
    )Balance at December 31, 2003
    
    
    2
    
    
    
    
    
    
    
    2,922
    
    
    
    
    
    
    $
    2,924Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,066Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    858Cash payments
    
    
    
    
    
    
    
    
    
    
    (823
    )
    
    
    
    
    
    
    (823
    )Balance at March 31, 2004
    
    $
    2
    
    
    $
    
    
    
    $
    2,099
    
    
    $
    
    
    
    $
    2,101Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,965Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    136
 12. Stock-Based Compensation. On December 31, 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
148 requires more prominent and frequent disclosures about the effects of
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 13




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##### Table of Contents



No. 123 establishes accounting and disclosure requirement
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 applied to account for stock-based employee
compensation (in thousands, except per share data): Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net loss as reported
    
    $
    (1,453
    )
    
    $
    (3,034
    )
    
    $
    (5,818
    )
    
    $
    (26,125
    )Stock-based employee compensation expense
included in reported net loss
    
    
    379
    
    
    
    294
    
    
    
    1,554
    
    
    
    671Pro forma stock compensation expense computed
under the fair value method for all awards
    
    
    (1,522
    )
    
    
    (1,484
    )
    
    
    (4,894
    )
    
    
    (5,998
    )Pro forma net loss
    
    $
    (2,596
    )
    
    $
    (4,224
    )
    
    $
    (9,158
    )
    
    $
    (31,452
    )Basic and diluted net loss per share, as reported
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.16
    )Pro forma basic and diluted net loss per share
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.19
    )
 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 31,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.01
    %
    
    
    2.75
    %
    
    
    3.27
    %
    
    
    2.95
    %Expected life of option
    
    4 years
    
    4 years
    
    4 years
    
    4 yearsExpected dividends
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    70
    %
    
    
    70
    %
    
    
    70
    %
    
    
    70
    %
 13. 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, in negotiated transactions off the market or pursuant to a
10b5-1 plan adopted by the Company. The Company adopted a 10b5-1 plan in August
2002, which allows the Company to repurchase its shares during a period in
which the Company is in possession of material non-public information, provided the Company
communicated share repurchase instructions to the broker at a time when the
Company was not in possession of such material non-public information. As of
March 31, 2004, repurchases of an aggregate of $35.2 million have been made
under the Companys repurchase program. 14. Recent Accounting Pronouncements. In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have 14




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##### Table of Contents



sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim or annual period beginning after June
15, 2003. The Company has determined that the adoption of FIN 46 did not have a
material impact on the Companys financial position, results of operations or
cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 addresses certain financial instruments that, under previous
guidance, could be accounted for as equity, but now must be classified as
liabilities in statements of financial position. These financial instruments
include: 1) mandatorily redeemable financial instruments, 2) obligations to
repurchase the issuers equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The Company did not have any such financial instruments as
of March 31, 2004. The implementation of SFAS No. 150 did not have a material
effect on the Companys financial position, results of operations or cash
flows. 15. 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
(collectively, the IPO Lawsuits). 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 to dismiss
the IPO cases filed by all of the Issuers (among others). 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. The Section 10(b) claim was dismissed without leave to amend. In June 2003, Issuers and Plaintiffs reached a tentative settlement
agreement that would, among other things, result in the dismissal with
prejudice of all claims against the Issuers and their officers and directors in
the IPO Lawsuits. 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 15




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##### Table of Contents



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, those 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. Although the
Company has approved this settlement proposal in principle, it remains subject
to a number of procedural conditions, as well as formal approval by the Court.
Pending a definitive settlement, the Company continues to believe that the
action against the Company is without merit and intends to continue 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 alleges trade secret misappropriation and related
claims against the four individuals and the Company concerning OZs alleged
polarization mode dispersion technology. The plaintiffs seek 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. The
case is in the stage of discovery and no trial date has been set. The Company
believes that this litigation with respect to the Company is without merit and
intends to defend itself vigorously. The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. The ultimate disposition of these
various other claims and legal actions is not expected to have a material
effect on the Companys business, financial condition or results of operations. 16. Subsequent Event. In April 2004, the Company entered into an agreement to
purchase a building in Fremont, California that is expected to house the
Companys U.S. operation. The closing of the transaction is subject to certain
contingencies, including a customary diligence investigation of the property by
the Company. The purchase price is comprised of approximately $5.0 million in
cash. 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations 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 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, 2003
as filed with the Securities and Exchange Commission on September 26, 2003. Our consolidated financial statements for all periods presented account
for our Shanghai operation as a discontinued operation as required under
generally accepted accounting principles (GAAP) in the United States as a
result of our decision to sell the business, which we adopted in May 2003. Our
Condensed Consolidated Statements of Operations and of Cash Flows have been
retroactively adjusted for all periods to separately present the results of the
discontinued operation from the results of our continuing operations. This
presentation is required by GAAP and facilitates historical and future trend
analysis of our continuing operations. Unless otherwise indicated, the
following discussion relates to our continuing operations. 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, or DWDM and CWDM, respectively,
optical amplification, switching and routing, monitoring and conditioning,
dispersion management and line transmission applications. We offer advanced and
cost-effective optical-electrical components and subsystem manufacturing
through our facilities in Zhuhai, China. In addition, we maintain
optical-centric front-end design, application, and customer service functions
at our headquarters in San Jose, California. 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 specification. Our broad line of products and services
increases the performance of optical networks and enables 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.
Our customers include telecommunications, data communications and cable TV
equipment manufacturers around the globe. Our management team, on an internal basis, informally monitors the general
overall worldwide economic trends and in particular activity within the
telecommunication economic space. This would 17




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##### Table of Contents



include 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 space 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 our revenue growth. However, the fact 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
requirements of our customer. To the extent we may receive 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 150
standard products that are sold or integrated into customized solutions for our
customers. Our products are generally categorized into the following major
groups: our bandwidth creation products, which include wavelength expansion and
optical amplification products; and our bandwidth management products, which
include wavelength performance monitoring and protection, and optical switching
products. A majority of our revenues are derived from our bandwidth creation
products, which include our wavelength expansion products, in particular,
multiplexers. NON-CASH COMPENSATION EXPENSE. Prior to and after our initial public
offering, we granted stock options and issued warrants to employees and
consultants at prices below the fair value of the underlying stock on the
date of grant or issuance. During the period from July 1, 1998 through March
31, 2004, we recorded aggregate deferred stock compensation, net of
cancellations due to terminations of employment, of approximately $59.0
million, of which $1.6 million, $1.9 million, $4.7 million and $26.6 million
was expensed during the nine months ended March 31, 2004, and the fiscal
years ended June 30, 2003, 2002 and 2001, respectively. This expense has an
impact on our net loss, but not on our cash flows. With respect to employee
stock-based compensation, we are amortizing the deferred compensation
expense over the vesting period of the related stock options, as set forth
in FASB Interpretation (FIN) No. 28. Under the FIN No. 28 method, each
vested tranche of options is accounted for as a separate option grant
awarded for services. The compensation expense is recognized over the period
during which the services are provided. Accordingly, this method results in
higher compensation expenses being recognized in the earlier vesting periods
of an option. Stock options or warrants granted to non-employees are
accounted for in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation and Emerging
Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services and valued using the Black-Scholes model.
The deferred compensation expense related to non-employees stock option
grants is amortized over the vesting period as set forth in FIN No. 28. ACQUISITIONS. On November 3, 2003, we acquired RedClover Networks, Inc.
(RedClover), an early-stage private company that designed and manufactured
broadband optical interface products for access, storage, metro and long-haul
networks. The purchase price was comprised of $250,000 in cash and $70,000 in
transaction costs. We paid $150,000 upon the closing of the acquisition and the
remaining $100,000 will be paid twelve months after the date of the RedClover
acquisition, subject to satisfaction of any indemnification obligations owed by
RedClover and its stockholders to us. The RedClover acquisition was accounted
for under the purchase method of accounting. 18




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##### Table of Contents



On February 4, 2004, we acquired Accumux Technologies, Inc. (Accumux),
an early-stage private company that developed a standard-tunable dispersion
compensation module (DCM) for dense wavelength division multiplexing (DWDM)
fiber optic communication systems. Pursuant to the terms of the definitive
merger agreement, a wholly owned subsidiary of Oplink was merged with and into
Accumux and Accumux became a wholly owned subsidiary of Oplink. The purchase
price was comprised of 600,000 shares of our common stock valued at $1,611,600
based on a five trading day average per share price of $2.686 and transaction
costs of approximately $50,000. The Accumux acquisition was accounted for under
the purchase method of accounting. On March 23, 2004, we acquired certain assets of Gigabit Optics
Corporation (Gigabit), an early-stage private company that developed and
marketed micro-optical subassemblies. The purchase price was comprised of
transaction costs of approximately $37,000 and $1,150,000 in cash, of which
$500,000 was paid upon closing, $350,000 will be paid upon satisfaction of
certain events and the remaining $300,000 is subject to an escrow to secure
certain indemnification obligations owned by Gigabit to us. The Gigabit
acquisition was accounted for under the purchase method of accounting. Under the purchase method of accounting, the total purchase price is
allocated to the net tangible and intangible assets based on their estimated
fair value as of the date of the completion of each acquisition. The purchase
price allocation of each acquisition is as follows (in thousands): RedClover
    
    Accumux
    
    GigabitCash and cash equivalents
    
    $
    
    
    
    $
    1,054
    
    
    $
    Inventory
    
    
    11
    
    
    
    
    
    
    
    53Fixed assets
    
    
    583
    
    
    
    393
    
    
    
    172In-process research and development
    
    
    861
    
    
    
    251
    
    
    
    453Patent
    
    
    
    
    
    
    45
    
    
    
    Technology
    
    
    
    
    
    
    
    
    
    
    509Liabilities assumed
    
    
    (1,135
    )
    
    
    (81
    )
    
    
    Total purchase price
    
    $
    320
    
    
    $
    1,662
    
    
    $
    1,187
 We allocated the purchase price of acquired companies and assets to the
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. We engaged independent third-party appraisal firms to
assist us in determining the fair values of the assets acquired and the
liabilities assumed. Such valuations require management to make significant
estimations and assumptions, especially with respect to intangible assets.
Managements estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable. 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, 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 19




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##### Table of Contents



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; - property, plant and equipment; and - goodwill and other identifiable intangibles. 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, 2003. In light of the recent acquisitions, we have also
included our Business Combination policy as a critical accounting policy, as
set forth below. Business Combination We account for our purchases of acquired companies in accordance with SFAS
No. 141, Business Combinations, and account for the related acquired
intangible assets in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. In accordance with SFAS No. 141, we allocate the cost of
the acquired companies to the identifiable tangible and intangible assets
acquired and liabilities assumed, with the remaining amount being classified as
goodwill. Certain intangible assets are amortized to expense over time, while
in-process research and development (IP R&D) costs are immediately expensed
in the period the acquisition is completed. The recorded values of assets and
liabilities are based on third-party and internal estimates and valuations. The
values are based on our judgments and estimates, and accordingly, our financial
position or results of operations may be affected by changes in these estimates
and judgments. Results of Operations Revenues: 20




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##### Table of Contents



(In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeRevenues
    
    $
    9,152
    
    
    $
    5,621
    
    
    $
    3,531
    
    
    
    62.8
    %
    
    $
    24,457
    
    
    $
    16,661
    
    
    $
    7,796
    
    
    
    46.8
    %
 The increase in revenue for the three months ended March 31, 2004 compared
to the three months ended March 31, 2003 was primarily due to increased unit
shipments of our wavelength expansion products and optical switching and
routing products to exiting and new customers. The increase in revenue for the
nine months ended March 31, 2004 compared to the nine months ended March 31,
2003 was primarily due to increased unit shipments of our wavelength expansion
products, optical amplification products and optical switching and routing
products to existing and new customers. The increases in revenues associated
with increased unit shipments were partially offset by decreases in the average
selling prices of our products during the three and nine months ended March 31,
2004 as compared to the same periods in the prior fiscal year. Further declines
in average selling prices are anticipated in the fourth quarter of fiscal 2004.
Though visibility remains difficult, we anticipate a modest increase ranging
from 8% to 10% in revenue in the fourth quarter of fiscal 2004 from the third
quarter of fiscal 2004. Gross Profit (Loss): (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeGross profit (loss)
    
    $
    3,083
    
    
    $
    972
    
    
    $
    2,111
    
    
    
    217.2
    %
    
    $
    7,475
    
    
    $
    (62
    )
    
    $
    7,537
    
    
    
    12,156.5
    %Gross profit margin
    
    
    33.7
    %
    
    
    17.3
    %
    
    
    
    
    
    
    
    
    
    
    30.6
    %
    
    
    (0.4
    )%
 The increases in gross profit for the three and nine months ended March
31, 2004 compared to the three and nine months ended March 31, 2003,
respectively, were primarily due to the cost savings associated with the
worldwide workforce reduction and the consolidation of excess facilities, and
the cost benefits of operating in China as a result of transitioning our
manufacturing capacity to China. Our gross profit also increased as a result of
greater revenue. In addition, our gross profit for the three months ended March
31, 2004 was positively impacted by the unexpected sale of inventory that had
been previously fully reserved of $167,000, partially offset by $32,000 of
non-cash compensation expense. Our gross profit for the three months ended
March 31, 2003 was positively impacted by the unexpected sale of inventory that
had been previously fully reserved of $469,000 and $39,000 recovery of non-cash
compensation expense. Our gross profit for the nine months ended March 31, 2004
was positively impacted by the unexpected sale of inventory that had been
previously fully reserved of $922,000, partially offset by $160,000 of non-cash
compensation expense. Our gross profit for the nine months ended March 31,
2003 was positively impacted by the unexpected sale of inventory that had been
previously fully reserved of $1.0 million and $653,000 recovery of non-cash
compensation expense. Our gross profit was favorably impacted by the unexpected
utilization of fully reserved inventory of $167,000, $240,000, $515,000,
$619,000 in the third, the second and the first quarter of fiscal 2004 and the
fourth quarter of fiscal 2003, respectively. Though unexpected sales of fully
reserved inventory decreased over the past several quarters, we have no
visibility to the amount of such sales in the future. 21




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##### Table of Contents



Our gross profit margin increased for the three and nine months ended
March 31, 2004 compared to the three and nine months ended March 31, 2003 due
to the cost savings associated with the worldwide workforce reduction and the
consolidation of excess facilities and the cost benefits of operating in China
as a result of transitioning our manufacturing capacity to China, partially
offset by less benefit from the unexpected sales of fully reserved inventory.
Our gross profit margin also increased as a result of greater revenue. We
anticipate that we will see a slight improvement in gross profit margin in the
fourth quarter of fiscal 2004 from the third quarter of fiscal 2004. However,
this is primarily dependent on the anticipated increase in revenues and less
upon achieving improvements in our production yields or meeting our cost
management initiatives. Research and Development: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeResearch and development
    
    $
    1,984
    
    
    $
    1,710
    
    
    $
    274
    
    
    
    16.0
    %
    
    $
    5,396
    
    
    $
    6,944
    
    
    $
    (1,548
    )
    
    
    (22.3
    )%
 The increase in research and development expenses for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003 was
primarily due to higher personnel costs as a result of the acquisition of
RedClover, Accumux and Gigabit, partially offset by cost savings associated
with the transition of some research and development functions to China and
lower depreciation and facility costs due to restructurings. The decrease in
research and development expenses for the nine months ended March 31, 2004
compared to the nine months ended March 31, 2003 was primarily due to cost
savings associated with the transition of some research and development
functions to China, lower depreciation and facility costs due to restructurings
and lower project material costs, partially offset by higher personnel costs as
a result of the acquisition of RedClover, Accumux and Gigabit and increases in
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
expense to increase slightly in the fourth quarter of fiscal 2004 compared to
the third quarter of fiscal 2004. Sales and Marketing: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeSales and marketing
    
    $
    960
    
    
    $
    672
    
    
    $
    288
    
    
    
    42.9
    %
    
    $
    2,576
    
    
    $
    3,580
    
    
    $
    (1,004
    )
    
    
    (28.0
    )%
 The increase in sales and marketing expense for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003 was primarily
due to a one time benefit from a change in the estimate of commission due to
external sales representatives in the amount of $297,000 in the quarter ended
March 31, 22




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##### Table of Contents



2003. The decrease in sales and marketing expenses for the nine
months ended March 31, 2004 compared to the nine months ended March 31, 2003
was primarily due to the cost savings associated with the worldwide workforce
reduction, the consolidation of excess facilities and lower trade show,
advertising and other customer-related costs, partially offset by a one time
benefit from a change in the estimate of commission due to external sales
representatives in the amount of $297,000 in the third quarter of fiscal 2003.
We expect our quarterly sales and marketing expenses to remain approximately
flat in the fourth quarter of fiscal 2004 compared to the third quarter of
fiscal 2004. General and Administrative: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeGeneral and
administrative
    
    $
    1,609
    
    
    $
    2,042
    
    
    $
    (433
    )
    
    
    (21.2
    )%
    
    $
    5,861
    
    
    $
    6,713
    
    
    $
    (852
    )
    
    
    (12.7
    )%
 The decrease in general and administrative expenses for the three
months ended March 31, 2004 compared to the three months ended March 31,
2003 was primarily due to cost savings associated with the worldwide
workforce reduction and lower premiums for directors and officers
insurance. The decrease in general and administrative expenses for the
nine months ended March 31, 2004 compared to the nine months ended March
31, 2003 was primarily due to lower non-cash compensation expense, lower
premiums for directors and officers insurance and cost savings associated
with the worldwide workforce reduction, partially offset by $890,000 of
expenses associated with the exploration of strategic business
opportunities. We expect our general and administrative expenses in the
fourth quarter of fiscal 2004 to increase slightly compared to our general
and administrative expenses in the third quarter of fiscal 2004. Non-Cash Compensation Expense: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeNon-cash compensation
expense
    
    $
    379
    
    
    $
    294
    
    
    $
    85
    
    
    
    28.9
    %
    
    $
    1,554
    
    
    $
    671
    
    
    $
    883
    
    
    
    131.6
    %
 From July 1, 1998 through March 31, 2004, we recorded an aggregate of
$59.0 million in deferred non-cash compensation, net of recoveries resulting
from stock option cancellations. The increases in non-cash compensation
expenses were primarily due to a smaller benefit as a result of fewer stock
option cancellations for the three and nine months ended March 31, 2004 and
additional non-cash compensation expense relating to the modification of option
grants in the three and nine months ended March 31, 2004. We expect our
non-cash compensation expense to be less than $150,000 in the fourth quarter of
fiscal 2004. 23




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##### Table of Contents



Restructuring Costs and Other Charges.For the nine months ended March
31, 2004 and 2003 and the years ended June 30, 2003, 2002 and 2001, $0 (zero),
$7.3 million, $12.2 million, $28.1 million and $18.2 million, respectively, of
restructuring costs and other charges were recorded as operating expenses for
worldwide workforce reduction, consolidation of excess property and equipment
and facilities and other charges. A summary of the restructuring charges
accrued in fiscal 2001, 2002 and 2003 and the nine months ended March 31, 2004
is as follows (in thousands): ImpairmentConsolidation of
    
    of GoodwillWorkforce
    
    Excess Property
    
    Excess Facilities
    
    and PurchasedReduction
    
    and Equipment
    
    and Other Charges
    
    Intangible Assets
    
    TotalInitial restructuring charge in the
fourth quarter of fiscal 2001
    
    $
    250
    
    
    $
    
    
    
    $
    5,485
    
    
    $
    12,442
    
    
    $
    18,177Non-cash charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,442
    )
    
    
    (12,442
    )Cash payments
    
    
    
    
    
    
    
    
    
    
    (1,191
    )
    
    
    
    
    
    
    (1,191
    )Balance at June 30, 2001
    
    
    250
    
    
    
    
    
    
    
    4,294
    
    
    
    
    
    
    $
    4,544Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,820Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,724Additional restructuring charge in
the fourth quarter of fiscal 2002
    
    
    2,899
    
    
    
    16,055
    
    
    
    9,151
    
    
    
    
    
    
    
    28,105Non-cash charge
    
    
    
    
    
    
    (15,680
    )
    
    
    
    
    
    
    
    
    
    
    (15,680
    )Cash payments
    
    
    (2,269
    )
    
    
    (375
    )
    
    
    (4,646
    )
    
    
    
    
    
    
    (7,290
    )Balance at June 30, 2002
    
    
    880
    
    
    
    
    
    
    
    8,799
    
    
    
    
    
    
    $
    9,679Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,355Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,324Additional restructuring charge in
the second and fourth quarter
of fiscal 2003
    
    
    1,831
    
    
    
    8,850
    
    
    
    1,185
    
    
    
    301
    
    
    
    12,167Non-cash charge
    
    
    
    
    
    
    (8,850
    )
    
    
    310
    
    
    
    (301
    )
    
    
    (8,841
    )Cash payments
    
    
    (2,535
    )
    
    
    
    
    
    
    (5,980
    )
    
    
    
    
    
    
    (8,515
    )Balance at June 30, 2003
    
    
    176
    
    
    
    
    
    
    
    4,314
    
    
    
    
    
    
    $
    4,490Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,018Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,472Cash payments
    
    
    (142
    )
    
    
    
    
    
    
    (642
    )
    
    
    
    
    
    
    (784
    )Balance at September 30, 2003
    
    
    34
    
    
    
    
    
    
    
    3,672
    
    
    
    
    
    
    $
    3,706Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,561Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,145Adjustment
    
    
    101
    
    
    
    
    
    
    
    (101
    )
    
    
    
    
    
    
    Cash payments
    
    
    (133
    )
    
    
    
    
    
    
    (649
    )
    
    
    
    
    
    
    (782
    )Balance at December 31, 2003
    
    
    2
    
    
    
    
    
    
    
    2,922
    
    
    
    
    
    
    $
    2,924Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,066Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    858Cash payments
    
    
    
    
    
    
    
    
    
    
    (823
    )
    
    
    
    
    
    
    (823
    )Balance at March 31, 2004
    
    $
    2
    
    
    $
    
    
    
    $
    2,099
    
    
    $
    
    
    
    $
    2,101Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,965Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    136
 24




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##### Table of Contents



Merger Fees. In connection with the termination of the proposed merger
between us and Avanex Corporation, which was not approved at the special
meeting of our stockholders held on August 15, 2002, we incurred $1.3 million
in merger fees for the nine months ended March 31, 2003. In-Process Research and Development (IP R&D): (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    
    
    
    
    Percentage2004
    
    2003
    
    
    
    
    
    Change
    
    Change
    
    2004
    
    2003
    
    
    
    
    
    Change
    
    ChangeIn-process research
and development
    
    $
    704
    
    
    $
    
    
    
    
    
    
    
    $
    704
    
    
    
    N/A
    
    
    $
    1,565
    
    
    $
    
    
    
    
    
    
    
    $
    1,565
    
    
    
    N/A
 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 IP R&D of $861,000 in connection with the acquisition of RedClover
consisted of a single channel transponder which is being designed to provide
10 gigabyte per second (Gb/s) ethernet physical transceiver layer for local
area network applications, and a narrowly tunable transponder which is being
designed to combine the functionality of a standard SFI-4 compliant electrical
interface, 10 Gb/s optical interface, tunable laser, and adaptive receiver
with embedded ultra-compact dispersion compensation in a single intelligent
sub-system module for optical networks. The IP R&D of $251,000 in connection with the acquisition of Accumux
consisted of a standard-tunable DCM for DWDM fiber-optic communication
systems, which will be installed into existing long haul networks to improve
the performance of existing fiber cables and provide low residual transmission
errors at speeds of up to 10 Gb/s. The IP R&D of $453,000 in connection with the acquisition of Gigabit
consisted of a next generation MicroMux which is a filter design coarse
wavelength division multiplexing (CWDM) device and is designed to
accommodate large increases in packet based data traffic and a laser-equipped
Micro-LX4 platform which has four CWDM laser diodes in a smaller footprint. 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: 25




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(In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeInterest and other
income, net
    
    $
    795
    
    
    $
    859
    
    
    $
    (64
    )
    
    
    (7.5
    )%
    
    $
    1,936
    
    
    $
    2,973
    
    
    $
    (1,037
    )
    
    
    (34.9
    )%
 The decrease in interest income for the three month ended March 31, 2004
compared to the three months ended March 31, 2003 was primarily due to lower
interest income resulting from repayment of interest bearing notes receivable
from an officer during the fourth quarter of fiscal 2003, partially offset by
higher yields on our long-term investments. The decrease in interest income for
the nine months ended March 31, 2004 compared to the nine months ended March
31, 2003 was primarily due to overall decreased cash balances from the use of cash in the fiscal quarters loss from
operations and financing outlays relating repayment of capital lease
obligations and lower interest income resulting from repayment of interest
bearing notes receivable from an officer during the fourth quarter of fiscal
2003. Gain (Loss) on Sale of Assets. We recorded a loss of $20,000 and a gain
of $105,000 for the three and nine months ended March 31, 2004, respectively,
from the sale 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 $113.6 million as of March 31, 2004, 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. Discontinued Operation: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedMarch 31,
    
    
    
    
    
    Percentage
    
    March 31,
    
    
    
    
    
    Percentage2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    Change(Loss) income from
discontinued
operation
    
    $
    (53
    )
    
    $
    (426
    )
    
    $
    373
    
    
    
    87.6
    %
    
    $
    75
    
    
    $
    (3,112
    )
    
    $
    3,187
    
    
    
    102.4
    %
 In May 2003, we adopted a plan to sell our Shanghai operation and we are
continuing in our selling efforts. We will continue to operate it until it is
sold. For the periods presented, the Shanghai operation is accounted as a
discontinued operation in the consolidated financial statements. The decreases
in loss from discontinued operation for the three and nine months ended March
31, 2004 compared to the three and nine months ended March 31, 2003,
respectively, were primarily due to the write-down of the net assets of the
Shanghai operation to their estimated net realizable value, less estimated
costs to sell, in the fourth quarter of fiscal 2003. The write-down reduced the
depreciable asset base, resulting in a reduction of depreciation expense for
the three and nine months ended March 31, 2004. The amount of $2.7 million
attributed to net assets of the discontinued operation represents their
estimated net realizable value, less estimated costs to sell. If we sell our
Shanghai operation at less than its current carrying value, we would record a
loss. Furthermore, if we fail to sell our Shanghai operation, or should market
conditions worsen, the value attributed to the net assets of the discontinued
operation may be impaired, requiring further write-down in our consolidated
financial statements. 26




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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, offset by $24.5 million of common stock repurchases, net of
proceeds from exercise of stock options, employee stock purchase plan and
warrants through March 31, 2004. In August 2000, we received $50.0 million in
connection with the issuance to Cisco Systems of a convertible promissory
note, which along with the related accrued interest expense automatically
converted into 3,298,773 shares of common stock upon the closing of our
initial public offering in October 2000. Our initial public offering resulted
in net proceeds of approximately $263.7 million, before offering expenses of
approximately $2.7 million. As of March 31, 2004, we had cash, cash
equivalents and, short-term and long-term investments of $189.9 million and
working capital of $133.8 million. Our operating activities used cash of $1.0 million in the nine months
ended March 31, 2004. Cash used in operating activities was primarily
attributable to a loss from continuing operations incurred during the nine
months ended March 31, 2004 of $5.9 million, gain on sale of assets of
$105,000, increases in accounts receivable of $2.1 million, inventories of $1.2
million and prepaid expenses and other assets of $230,000 and decreases in
accrued liabilities and accrued restructuring costs of $1.4 million. These
amounts were partially offset by depreciation and amortization expense of $6.3
million, non-cash compensation expense of $1.6 million, in-process research and
development of $1.6 million, amortization of premium on investments of
$147,000, an increase in accounts payable of $224,000 and cash provided by
discontinued operation of $103,000. For the three months ended December 31,
2003, we spent approximately $1.1 million, which was included in accounts
payable, to settle liabilities assumed in connection with the acquisition of
RedClover. Our investing activities used cash of $20.0 million in the nine months
ended March 31, 2004 due to payment of $150,000 in connection with and upon the
closing of the acquisition of RedClover, payment of $500,000 in connection with
and upon the closing of the acquisition of Gigabit and purchases of investments
of $152.0 million and property and equipment of $225,000, partially offset by
maturities of investments of $131.3 million, $1.1 million in cash acquired
through the acquisition of Accumux and proceeds from sales of property and
equipment of $478,000. During the remaining three months of fiscal 2004, we
expect to use approximately $100,000 for the purchase of property and equipment
worldwide. In addition, we expect to use approximately $5.0 million in cash to
acquire a building in Fremont, California to house our US operations. We expect
to use cash generated from our initial public offering for these expenditures. Our financing activities provided cash of $2.2 million in the nine months
ended March 31, 2004 due to proceeds from issuance of common stock of $3.5
million in connection with the exercise of stock options, employee stock
purchase plan and warrants, partially offset by repayment of capital lease
obligations of $1.4 million. Our principal source of liquidity at March 31, 2004 consisted of $189.9
million in cash, cash equivalents and, short-term and long-term investments. We
believe that our current cash, cash equivalents, investments balance and any
cash generated from operations, will be sufficient to meet our operating and
capital requirements for at least the next 12 months. We may use cash, cash
equivalents and investments from time to time to fund our acquisition of
businesses and technologies. We may be required to raise funds through public
or private financings, strategic relationships or other arrangements. We cannot
assure you that such funding, if needed, will be available on terms attractive
to us, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive 27




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covenants. Our failure to raise capital when needed could harm our ability
to pursue our business strategy and achieve and maintain profitability. Contractual Obligations Our contractual obligations as of March 31, 2004 have been summarized
below (in thousands): Contractual Obligations Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsCapital lease obligations
    
    $
    208
    
    
    $
    208
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    3,109
    
    
    
    2,862
    
    
    
    247
    
    
    
    
    
    
    
    Purchase obligations
    
    
    1,550
    
    
    
    1,550
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,867
    
    
    $
    4,620
    
    
    $
    247
    
    
    $
    
    
    
    $
    
 Recent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. We have
determined that the adoption of this standard did not have a material impact on
our financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 addresses certain financial instruments that, under previous
guidance, could be accounted for as equity, but now must be classified as
liabilities in statements of financial position. These financial instruments
include: 1) mandatorily redeemable financial instruments, 2) obligations to
repurchase the issuers equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. We did not have any such financial instruments as of March
31, 2004. We believe that the implementation of SFAS No. 150 did not have a
material effect on our financial position, results of operations or cash flows. 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
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 $5.8 million, $36.8
million, $68.4 million and $80.4 million for the nine months ended March 31,
2004 and the fiscal years ended June 30, 2003, 2002 and 2001, respectively. We
have not achieved profitability on a quarterly or annual basis since inception.
As of March 31, 2004, we had an accumulated deficit of $223.8 million. We will
need to generate significantly greater revenues while containing 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 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 ten customers, although not the same ten customers for
each period, together accounted for 89%, 82%, 72% and 73% of our revenues in
the three and nine months ended March 31, 2004 and the fiscal years ended June
30, 2003 and 2002, respectively. Sanmina-SCI Corporation (Sanmina), Marubun
Corporation (Marubun) and Nortel Networks Corporation (Nortel) each
accounted for greater than 10% of our revenue for the three months ended March
31, 2004. Marubun, Nortel and Sanmina each accounted for greater than 10% of
our revenue for the nine months ended March 31, 2004. Marubun is our
third-party sales representative. For the three and nine months ended March 31,
2004, a substantial portion of our shipments to Marubun were to fulfill
purchase orders placed by Fujitsu Limited through Marubun. Through Marubun and
through direct sales, Fujitsu accounted for greater than 10% of our revenues
for the three and nine months ended March 31, 2004. Sanmina is a contract
manufacturer. For the three and nine months ended March 31, 2004, a substantial
portion of our shipments to Sanmina were to fulfill purchase orders placed by
Tellabs, Inc. Through Sanmina and through direct sales, Tellabs, Inc. accounted
for greater than 10% of our revenues for the three and nine months ended March
31, 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. 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 29




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choose to purchase products from other vendors. Furthermore, the businesses 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
could harm our business. Our dependence on a small number of customers may
increase if the fiber optic components and subsystems industry and our 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 INVESTORS EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DROP. It is difficult to forecast our revenues accurately. Moreover, our
revenues, 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 other risk
factors, 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;-
    
    cancellations of orders and shipment rescheduling;-
    
    our ability to successfully improve our manufacturing capability in our
facilities in China;-
    
    the availability of raw materials used in our products and increases in the
price of these raw materials;-
    
    the ability of our manufacturing operations in China to timely
produce and deliver products in the quantity and of the quality we
require;-
    
    our ability to achieve acceptable production yields in China;-
    
    the practice of communication equipment suppliers to sporadically
place large orders with short lead times;-
    
    the mix of products and the average selling prices of the products we
sell;-
    
    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 without defects;
and 30




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-
    
    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
and investors, which could cause our stock price to fall. WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE COMMUNICATIONS INDUSTRY,
WHICH RECENTLY EXPERIENCED A SIGNIFICANT ECONOMIC DOWNTURN, AS WELL AS RAPID
CONSOLIDATION AND REALIGNMENT INCLUDING OUTSOURCE MANUFACTURING AND MAY NOT
CONTINUE TO DEMAND FIBER OPTIC PRODUCTS AT HISTORICAL RATES, THEREBY REDUCING
DEMAND FOR OUR PRODUCTS AND HARMING OUR OPERATING RESULTS. We depend on the continued growth and success of the communications
industry, including the continued 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 relatively recent
unfavorable economic conditions and reduced capital spending in the
communications industry, our growth rate may be significantly lower than our
historical quarterly growth rate. 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. 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, our
quarterly operating 31




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results are likely to be harmed. For example, we did not experience
revenue growth during fiscal 2003 as compared to fiscal 2002. In addition, we
did not experience such growth during fiscal 2002 as compared to fiscal 2001. In fiscal 2003, 2002 and 2001, our net loss was $36.8
million, $68.4 million and $80.4 million, respectively. 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 OUR REVENUES COULD DECLINE FURTHER, 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. Our principal competitors in the fiber optic components and
subsystems market include Avanex Corporation (including the photonic
technologies business of Corning Incorporated), DiCon Fiberoptics, Inc.,
Furukawa Electrical Co., Ltd., FDK Corporation, NEL Hitachi Cable, Santec
Corporation, Tyco Electronics and JDS Uniphase Corporation. We believe that we
primarily compete with diversified suppliers, such as JDS Uniphase, Santec and
FDK, for the majority of our product line and to a lesser extent with niche
players that offer a more limited product line. Competitors in any portion of
our business may also rapidly become competitors in other portions of our
business. In addition, our industry has recently experienced significant
consolidation, and we anticipate that further consolidation will occur. This
consolidation has further increased competition. Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing, manufacturing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, to
devote greater resources to the development, promotion and sale of products, or
to deliver competitive products at lower prices. Several of our existing and potential customers are also current and
potential competitors of ours. These companies may develop or acquire
additional competitive products or technologies in the future and 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. Current and potential vendors
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. New technologies are emerging due to increased competition and customer
demand. The introduction of new products incorporating new technologies or the
emergence of new industry standards could make our 32




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existing products noncompetitive. 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, or AWG, and planar lightwave circuit, or
PLC. Additionally, a new technology being developed in the design of
equalization and switching is microelectro mechanical systems, or MEMs, that
compete with bulk micro-optics that we incorporate into our product. If our
competitors adopt new technologies before we do, we could lose market share and
our business would suffer. IF WE FAIL TO EFFECTIVELY MANAGE OUR MANUFACTURING CAPABILITY IN CHINA, WE MAY
NOT BE ABLE TO DELIVER SUFFICIENT QUANTITIES OF PRODUCTS TO OUR CUSTOMERS IN A
TIMELY MANNER, WHICH WOULD HARM OUR OPERATING RESULTS. As a result of the closure of other facilities in connection with our
recent restructuring efforts, we manufacture substantially all of our products
in our facilities in Zhuhai, China. These restructuring efforts also included
transferring expertise and resources relating to manufacturing, such as
production control, logistics, information technology, planning and management
and quality control, from our United States facilities to our facilities in
Zhuhai, 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 transferred from the United States to China. Additional
risks associated with improving our manufacturing processes and capability in
China include:  -
    
    a lack of availability of qualified management and manufacturing
personnel;-
    
    difficulties in achieving adequate yields from new manufacturing lines;-
    
    inability to quickly implement an adequate set of financial controls
to track and control levels of inventory;-
    
    our inability to procure the necessary raw materials and equipment; and-
    
    our inability to maintain quality. Communications equipment suppliers typically require that their vendors
commit to provide specified quantities of products over a given period of time.
We could be unable to pursue many large orders if we do not have sufficient
manufacturing capability to enable us to commit to provide customers with
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 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. IF WE SELL OUR SHANGHAI OPERATION AT LESS THAN ITS CURRENT CARRYING VALUE, WE
WOULD RECORD A LOSS, OR, IF WE FAIL TO SELL OUR SHANGHAI OPERATION, OR IF
MARKET CONDITIONS WORSEN, THE CARRYING VALUE OF OUR NET ASSETS OF DISCONTINUED
OPERATION MAY BE IMPAIRED, WHICH COULD HARM OUR OPERATING RESULTS. 33




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In May 2003, we adopted a plan to sell our Shanghai operation. This
operation is accounted for as a discontinued operation in our consolidated
financial statements. We are continuing to actively sell this operation. If we
sell our Shanghai operation at less than its current carrying value, we would
record a loss, which would harm our operating results. Furthermore, if we fail
to sell our Shanghai operation, or should market conditions worsen, the value
attributed to the net assets of the discontinued operation may be impaired, requiring further write-down in our consolidated financial
statements, which would harm our operation results. IF WE FAIL TO EFFECTIVELY CONTROL OUR INVENTORY LEVELS OR OUR INVENTORY MIX,
OUR OPERATING RESULTS COULD BE HARMED. Because we experience long lead times for raw materials and are often
required to purchase significant amounts of raw materials far in advance of
product shipments, we may not effectively control our inventory levels or our
inventory mix, which could harm our operating results. If we underestimate our
requirements, we may have inadequate inventory, which could result in delays in
shipments and loss of customers. On the other hand, if we purchase raw
materials in anticipation of orders that do not materialize, we will have to
carry or write off excess inventory and our gross margins will decline. For
example, for the fiscal years ended June 30, 2002 and 2001, our gross margin
was negatively impacted by a provision of $10.4 million and $30.6 million,
respectively, for excess and obsolete inventory due to the downturn in the
fiber optics industry. Conversely, our revenue was also favorably impacted by
the unexpected utilization of fully reserved inventory of $167,000, $240,000,
$515,000, $619,000, $469,000, $530,000 and $480,000 in the third, the second
and the first quarter of fiscal 2004, the fourth, the third and the second
quarter of fiscal 2003 and the fourth quarter of fiscal 2002, respectively.
Though unexpected utilization of fully reserved inventory decreased over the
past several quarters, we have no visibility to the amount of such sales in the
future. Any difficulty managing our inventory levels may cause us to poorly
utilize our manufacturing capacity and further harm our operating efficiency. We have implemented an automated manufacturing management system to
replace our previous system that tracked most of our data, including some
inventory levels, manually. The conversion from our previous systems used in
Zhuhai, China occurred in the fourth quarter of fiscal 2001, and the conversion
at our Zhuhai Free Trade Zone facility occurred in the second quarter of fiscal
2003. Failure to effectively and properly utilize the new management systems in
China could harm our results and increase the risk that we may fail to
effectively manage our inventory. SUBSTANTIALLY ALL OF OUR MANUFACTURING OPERATIONS ARE LOCATED IN CHINA, WHICH
EXPOSES US TO THE RISK THAT OUR FAILURE TO COMPLY WITH THE LAWS AND REGULATIONS
OF CHINA, OR EVENTS IN THAT COUNTRY, WILL DISRUPT OUR OPERATIONS. 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. Chinas economy differs
from the economies of many countries in terms of structure, government 34




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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 out of our control in China, 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. 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. 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, WHICH COULD LIMIT OUR ABILITY TO FILL CUSTOMER ORDERS
AND HARM OUR OPERATING RESULTS. Difficulties in obtaining raw materials in the future may limit our
product shipments. 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. Our failure to obtain these materials or other single or limited-source
raw materials could delay or reduce 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. Some of our raw
material suppliers are single sources, and finding alternative sources may
involve significant expense and delay, if these sources can be found at all.
For example, all of our GRIN lenses, which are incorporated into substantially
all of our products, were previously obtained only from Nippon Sheet Glass, the
dominant supplier worldwide of GRIN lenses. If a significant supplier became
unable or unwilling to continue to manufacture or ship materials in required
volumes, we would have to identify and qualify an acceptable replacement. A
material delay or reduction in shipments, any need to identify and qualify
replacement suppliers or any significant increase in our need for raw materials
that cannot be met on acceptable terms could harm our business. In addition,
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. Delays in the delivery of raw materials, increases
in the cost of the raw materials or the unavailability of the raw materials
could harm our operating results. We also depend on a limited number of manufacturers and vendors that make
and sell the complex equipment we use in our manufacturing process. In periods
of high market demand, the lead times from order to delivery of this equipment
could be as long as six months. Delays in the delivery of this equipment or
increases in the cost of this equipment could harm our operating results. 35




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DISRUPTION TO COMMERCIAL ACTIVITIES IN THE UNITED STATES OR IN OTHER COUNTRIES
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:  -
    
    fluctuations in currency exchange rates, particularly with respect to
the U.S. dollar and Chinese Renminbi exchange rate;-
    
    disruptions to commercial activities or damage to our facilities as a
result of 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; and-
    
    economic instability. To the extent that such disruptions interfere with our commercial
activities, our results of operations could be harmed. The relatively recent outbreak of severe acute respiratory syndrome, or
SARS, that began in China, Hong Kong, Singapore and Vietnam may have a negative
impact on our operations and financial results. In addition, there may be other
epidemics or illnesses that effect our international operations, such as the
Asian bird influenza. Risks related to the outbreak of SARS and other
illnesses, include, but are not limited to, temporary closure of one or more of
our facilities in China which, in turn, would reduce our manufacturing
capability; disruption to our research and development efforts located at our
China facilities; and loss of product orders from our customers and loss of raw
materials or equipment from our suppliers to the extent that the operations of
our customers or suppliers, respectively, are impacted by the outbreak of SARS.
The outbreak of SARS has also increased political and social tension which may
generally affect the China economy and the international economy and, as a
result, could lead to reduced sales in international retail channels and
increased supply chain costs for us. 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 36




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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. CURRENCY RESTRICTIONS IN CHINA MAY LIMIT THE ABILITY OF OUR SUBSIDIARIES IN
CHINA TO OBTAIN AND REMIT FOREIGN CURRENCY NECESSARY FOR THE PURCHASE OF
IMPORTED COMPONENTS AND MAY LIMIT OUR ABILITY TO OBTAIN AND REMIT FOREIGN
CURRENCY IN EXCHANGE FOR RENMINBI EARNINGS. 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 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. 37




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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. If our Chinese subsidiaries are unable to extend their
tax benefits, our financial condition and results of operations may be
adversely impacted. The tax holiday for one of our subsidiaries expired
December 31, 2001, and we are in the third year of a 50% reduction in the national
income tax rate. However, operations in such subsidiary have been substantially
moved to our Zhuhai Free Trade Zone facility. In addition, local enterprise
income tax is often waived or reduced during this tax holiday/incentive period.
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%. In addition,
we have substantially moved all of our manufacturing operations to our Zhuhai
Free Trade Zone facility. If China elects to repeal or reduce the tax benefits
available to us in the future, we fail to continue to qualify for the tax
benefits, or the consolidation of our manufacturing operations to our Zhuhai
Free Trade Zone facility causes adverse tax treatment, 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 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,
2004 and the fiscal years ended June 30, 2003 and 2002. These products include,
among others, dense wavelength division multiplexers, or DWDMs. These products
accounted for 60%, 67% and 66% of our revenues in the nine months ended March
31, 2004 and the fiscal years ended June 30, 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, or 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 FAIL TO EFFECTIVELY MANAGE OUR OPERATIONS, INCLUDING ANY REDUCTIONS OR
INCREASES IN THE NUMBER OF OUR EMPLOYEES, OUR OPERATING RESULTS COULD BE
HARMED. 38




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Primarily as a result of the relatively recent economic downturn and
slowdown in capital spending, particularly in the communications industry, we
have implemented, and may continue to implement in the future, a number of
cost-cutting measures, including reductions in our workforce. The impact of
these cost-cutting measures, combined with the challenges of managing our
geographically-dispersed operations, has placed, and may continue to place, a
significant strain on our management systems and resources. Reductions in our
workforce, including reductions in research and development and manufacturing personnel, may weaken our research and development efforts or cause us to
have difficulty responding to sudden increases in customer orders. Moreover, we
cannot assure you that our cost-cutting measures will achieve the benefits we
project. In addition, our ability to effectively manage our operations will be
challenged to the extent that we begin expanding our workforce. We expect that
we will need to continue to improve our financial and managerial controls,
reporting systems and procedures, and will need to continue to train and manage
our workforce worldwide. Any failure to effectively manage our operations could
harm our operating results. OUR FAILURE TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS IN A COST-EFFECTIVE
MANNER COULD DELAY PRODUCT SHIPMENTS TO OUR CUSTOMERS AND HARM OUR OPERATING
RESULTS. 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. Lower than expected
manufacturing yields could delay product shipments and harm our operating
results. Factors that affect our manufacturing yields include the quality of
raw materials used to make our products, 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 the
manufacturing process, 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 cost-effectively produce our
products 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 cost-effectively meet our
manufacturing yield goals so that we maintain acceptable gross margins while
meeting the cost targets of our customers. We will need to develop new
manufacturing processes and techniques that will involve higher levels of
automation 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. 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 networks for long 39




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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. 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;-
    
    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. 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 April 30, 2004, we hold 50 issued patents, have 11 allowed
applications awaiting issuance and 48 pending patent applications in the United
States. In addition, we have 7 issued patents and 29 pending patent
applications in the Peoples Republic of China, 21 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. 40




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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. 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 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. filed a lawsuit against us and our wholly-owned
subsidiary, Telelight Communication Inc., in the United States District Court
for the Northern District of Texas 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 in the United States
District Court for the District of Delaware, 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 October 2001, we reached an agreement with Chorum LP and its affiliates
to dismiss the patent infringement litigation between the companies without
prejudice. We cannot assure you that Chorum or Oplink will not in the future
elect to refile the prior patent infringement actions or file new patent
infringement actions against the other. We are also currently subject to a lawsuit filed by Oz Optics Limited et
al.alleging trade secret misappropriation and other related claims. The
plaintiffs seek actual damages against four individuals, including our former
Vice President of Product Line Management, Zeynep Hakimoglu, and three other
unrelated individuals, and us 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 us. We answered the complaint on January 22, 2002,
denying plaintiffs claims. The case is in the stage of discovery and no trial
date has been set. Although we believe that the claims against us are without
merit and intend to defend ourselves against such claims vigorously, we cannot
assure you that this litigation will be resolved in our favor or without
substantial cost or diversion of the attention of our management and key
technical personnel. Both prosecuting or 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; 41




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-
    
    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. 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. In November 2001, we and certain of our 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 we,
certain of our officers and directors and the underwriters of our initial
public offering, or IPO, violated section 11 of the Securities Act of 1933
based on allegations that our 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
(collectively, the IPO Lawsuits). 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, we joined in a global motion to dismiss the IPO
Lawsuits filed by all of the Issuers (among others). On October 9, 2002, the
Court entered an order dismissing our 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 us and almost all of the Issuers, and
granting the motion to dismiss the Section 10(b) claim against us. The Section
10(b) claim was dismissed without leave to amend. In June 2003, Issuers and Plaintiffs reached a tentative settlement
agreement that would, among other things, result in the dismissal with
prejudice of all claims against the Issuers and their officers and directors in
the IPO Lawsuits. 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, our obligation would be limited to reimbursement of our insurer up to
the amount remaining under the deductible of our insurance policy. In September
2003, in connection with the tentative settlement, those 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. Although we have approved this settlement proposal
in principle, it remains subject to a number of procedural conditions, as well
as formal approval by the Court. Pending a definitive settlement, we continue
to believe that the action against us is without merit and intend to continue
to defend against it vigorously. 42




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IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE
MARKET ACCEPTANCE, SALES OF OUR PRODUCTS COULD DECLINE, WHICH WOULD HARM OUR
OPERATING RESULTS. The communications industry is characterized by rapid technological
changes, frequent new product introductions, changes in customer requirements
and evolving industry standards. As a result, our products could quickly become
obsolete as new technologies are introduced and incorporated into new and
improved products. 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 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. BECAUSE NONE OF OUR CUSTOMERS ARE OBLIGATED TO PURCHASE OUR PRODUCTS, THEY MAY
AND DO CANCEL OR DEFER THEIR PURCHASES ON SHORT NOTICE AND AT ANY TIME, WHICH
COULD HARM OUR OPERATING RESULTS. 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 and do stop purchasing our products at any time without penalty;-
    
    are free to purchase products from our competitors;-
    
    are not required to make minimum purchases; and-
    
    may and do cancel orders that they place with us. 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 customer purchase orders have varied significantly from
quarter to quarter. This means that customers who account for a significant
portion of our 43




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revenues in one quarter may not and do not place any orders in the
succeeding quarter, which makes it difficult to forecast revenue 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. OUR REVENUES AND RESULTS OF OPERATIONS MAY BE HARMED IF WE FAIL TO INCREASE THE
VOLUME OF ORDERS, WHICH WE RECEIVE AND FILL ON A SHORT-TERM BASIS. Historically, a substantial portion of our net revenues in any fiscal
period has been derived from orders in backlog. Currently, due to the downturn
in the fiber optics industry, we are substantially dependent upon orders we
receive and fill on a short-term basis. Our customers can generally cancel,
reschedule or delay orders in backlog without obligation to us. As a result, we
cannot rely on orders in backlog as a reliable and consistent source of future
revenue. If any of our customers did in fact cancel or delay these orders, and
we were not able to replace them with new orders for product to be supplied on
a short-term basis, our results of operations could be harmed. In addition, a portion of our net revenues in the nine months ended March
31, 2004 has been derived from trial orders. If our products fail to meet
customers specification, we may not be able to convert the trial orders to
production orders and therefore our revenues and operating results may vary
significantly and unexpectedly from quarter to quarter, which could cause
volatility in our stock price. OUR LENGTHY AND VARIABLE QUALIFICATION AND SALES CYCLE MAKES IT DIFFICULT TO
PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE, WHICH MAY HARM OUR
OPERATING RESULTS. 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 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 44




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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, especially in the
San Francisco Bay area. 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. A majority of our revenues are derived from sales through our domestic and
international sales representatives and distributors. 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. BECAUSE SOME OF OUR OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE FAULT ZONES, WE
FACE THE RISK THAT A LARGE EARTHQUAKE COULD HARM OUR OPERATIONS. Some of our operations are located in San Jose, California, an active
earthquake fault zone. This region has experienced large earthquakes in the
past and may likely experience them in the future. A large earthquake in the
San Jose area could disrupt our operations for an extended period of time,
which would limit our ability to supply our products to our customers in
sufficient quantities on a timely basis, harming our customer relationships. 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 45




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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 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 has 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 the Company
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. 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. BECAUSE THE FIBER OPTIC COMPONENTS AND SUBSYSTEMS INDUSTRY IS CAPITAL
INTENSIVE, OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO RAISE ANY NEEDED
ADDITIONAL CAPITAL. The optical components and subsystems industry is capital intensive, and
the transition of our manufacturing facilities to China, the development and
marketing of new products and the hiring and 46




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retention of personnel have required and will continue to require a
significant commitment of resources. Furthermore, we may continue to incur
significant operating losses if the market for optical components and
subsystems develops at a slower pace than we anticipate, or if we fail to
establish significant market share and achieve a significantly increased level
of revenue. If cash from available sources is insufficient for these purposes,
or if additional cash is used for acquisitions or other unanticipated uses, we
may need to raise additional capital. Additional capital may not be available
on terms favorable to us, or at all. If we are unable to raise additional
capital when we require it, our business could be harmed. In addition, any
additional issuance of equity or equity-related securities to raise capital
will be dilutive to our stockholders. BECAUSE THE OPTICAL COMPONENTS AND SUBSYSTEMS INDUSTRY IS EVOLVING RAPIDLY AND
IS HIGHLY COMPETITIVE, OUR STRATEGY INVOLVES ACQUIRING OTHER BUSINESSES AND TECHNOLOGIES TO GROW OUR BUSINESS. 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, 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. 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 own, in the
aggregate, as of March 31, 2004, approximately 16.2% 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 47




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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, 2004. 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;-
    
    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 securities 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
or our securities, 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. 48




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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 NASDAQ NATIONAL MARKET LISTING, 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, on October 17, 2002, we received a determination letter
from Nasdaq advising us that our common stock no longer meets the requirements
for the continued listing on The Nasdaq National Market. The notification was
based on the failure by us to maintain a minimum bid price of $1.00 as required
by Nasdaq listing maintenance standards. In May 2003, Nasdaq confirmed that we
had evidenced compliance 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
Nasdaq will not again initiate delisting procedures if we cannot maintain
compliance with the listing requirements. In the event that we fail to meet the continued listing 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 as 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 49




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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s maintenance standards seek to maintain their listings by
effecting reverse stock splits. At our annual stockholders meeting in November
2002, 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 share price and, as
a result, our stock price may be adversely affected. 50




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Item 3. Quantitative and Qualitative Disclosure About Market Risk 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, corporate bonds and certificates of deposit. As
of March 31, 2004, all of our short-term investments were in money market
funds, certificates of deposits, municipal bonds or high quality commercial
paper with maturities of less than twelve months from March 31, 2004. As of
March 31, 2004, our long-term investments primarily consist of corporate bonds
and government debt securities with maturities of less than three years from
March 31, 2004. 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 30,2004
    
    2004
    
    2003
    
    2003(Annualized)
    
    
    
    
    
    (Annualized)Investment Securities:Cash equivalents - variable rate
    
    $
    41,882
    
    
    
    1.0
    %
    
    $
    54,292
    
    
    
    1.2
    %Cash equivalents - fixed rate
    
    
    55,663
    
    
    
    1.1
    %
    
    
    64,198
    
    
    
    1.2
    %Short-term investments - variable rate
    
    
    17,470
    
    
    
    1.1
    %
    
    
    38,927
    
    
    
    1.2
    %Short-term investments - fixed rate
    
    
    10,518
    
    
    
    1.3
    %
    
    
    27,678
    
    
    
    1.2
    %Long-term investments - fixed rate
    
    
    59,319
    
    
    
    2.3
    %
    
    
    -
    
    
    
    0.0
    %Total
    
    $
    184,852
    
    
    
    
    
    
    $
    185,095
 Foreign Currency Exchange Rate Exposure. We operate in the United States,
manufacture 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 which 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 which 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 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. 51




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(a)
    
    Evaluation of disclosure controls and procedures. Subject to the
limitations on the effectiveness of the controls as described below, our
management, with the participation of our principal executive officer,
Joseph Y. Liu, and our principal financial officer, Bruce D. Horn, has
concluded that our disclosure controls and procedures were effective as
of March 31, 2004.(b)
    
    Changes in internal controls. There was no change in our internal
control over financial reporting during the quarter ended March 31, 2004
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Limitations on the Effectiveness of Controls and Procedures. Our
management, including our chief executive officer and our chief financial
officer, does not expect that our disclosure controls, internal controls 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, our disclosure
controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of our disclosure control system are met and,
as set forth above, our principal executive officer and our principal

financial officer have concluded, based on their evaluation as of March 31,
2004, that our disclosure controls and procedures were effective to provide
reasonable assurance that the objectives of our disclosure controls and
procedures were met. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities On February 4, 2004, the Company acquired Accumux Technologies, Inc.
(Accumux). Pursuant to the terms of the definitive merger agreement, a wholly
owned subsidiary of the Company was merged with and into Accumux and Accumux
became a wholly owned subsidiary of the Company. In connection with the merger,
the Company issued an aggregate of 600,000 new shares of its common stock to
the former preferred stockholders of Accumux. A portion of the consideration is
subject to certain indemnification obligations of Accumux in favor of the
Company. The foregoing issuance was issued to accredited investors as defined
under Regulation D of the Securities Act of 1933, as amended (the Securities
Act) and was deemed to be exempt from registration under the Securities Act,
by virtue of Section 4(2) of the Securities Act or Regulation D promulgated
thereunder. 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders 52




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None 
 Item 5. Other Information In February 2004, Oplink acquired Accumux Technologies, Inc., a privately
held company that designed and manufactured high-precision innovative optical
components and sub-systems for fiber optic communication systems. Pursuant to
the terms of the definitive merger agreement, a wholly owned subsidiary of the
Company was merged with and into Accumux and Accumux became a wholly owned
subsidiary of the Company. The purchase price was comprised of 600,000 shares
of the Companys common stock valued at approximately $1.6 million based on a
five trading day average per share price of $2.686 and transaction costs of
approximately $50,000. In March 2004, the Company acquired certain assets of Gigabit Optics
Corporation (Gigabit), an early-stage private company that developed and
marketed micro-optical subassemblies. The purchase price was comprised of
$1,150,000 in cash, of which $500,000 was paid upon closing, $350,000 will be
paid upon satisfaction of certain events and the remaining $300,000 is subject
to an escrow to secure certain indemnification obligations owned by Gigabit to
the Company. The transaction costs associated with this acquisition were
approximately $37,000. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    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.10.28
    
    Consulting Agreement dated as of January 17, 2004, by and between the Registrant and Allen Hsu.
Certification of Chief Executive Officer Required under Rule 13a-14(a) or Rule 15d-14(a) of31.1
    
    the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer Required under Rule 13a-14(a) or Rule 15d-14(a) of31.2
    
    the Securities Exchange Act of 1934, as amended.
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 of32.1*
    
    the United States Code (18 U.S.C. Section 1350).
Certification of Chief Financial Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of32.2*
    
    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




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(b)
    
    Reports on Form 8-K On January 22, 2004, Oplink Communications, Inc. furnished a Current
Report on Form 8-K under Item 12. Results of Operations and Financial
Condition announcing that it had issued a press release on January 22, 2004
regarding its financial results for the quarter ended December 31, 2003. 54




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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 11, 2004
    
    By:
    
    /s/ Bruce D. HornBruce D. HornChief Financial Officer(Principal Financial and Accounting Officer)
 55




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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.10.28
    
    Consulting Agreement dated as of January 17, 2004, by and between the Registrant and Allen Hsu.
Certification of Chief Executive Officer Required under Rule 13a-14(a) or Rule 15d-14(a) of31.1
    
    the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer Required under Rule 13a-14(a) or Rule 15d-14(a) of31.2
    
    the Securities Exchange Act of 1934, as amended.
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 of32.1*
    
    the United States Code (18 U.S.C. Section 1350).
Certification of Chief Financial Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of32.2*
    
    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.