##### Table of Contents



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 September 30, 2004
 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 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
October 31, 2004 was 148,117,271.




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OPLINK COMMUNICATIONS, INC.  
 FORM 10-Q TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets 
September 30, 2004 and June 30, 2004
    
    
    3Condensed Consolidated Statements of Operations 
Three months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows 
Three months ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    48PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    49Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    49Item 3. Defaults Upon Senior Securities
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    49Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    50SIGNATURES
    
    
    51EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1- FINANCIAL STATEMENTS
 OPLINK COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 September 30,
    
    June 30,2004
    
    2004(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    99,758
    
    
    $
    110,390Short-term investments
    
    
    45,924
    
    
    
    24,849Accounts receivable, net
    
    
    8,153
    
    
    
    7,545Inventories
    
    
    5,381
    
    
    
    4,767Prepaid expenses and other current assets
    
    
    2,501
    
    
    
    2,814Total current assets
    
    
    161,717
    
    
    
    150,365Long-term investments
    
    
    39,848
    
    
    
    55,204Property, plant and equipment, net
    
    
    29,385
    
    
    
    26,426Intangible assets
    
    
    461
    
    
    
    507Other assets
    
    
    278
    
    
    
    401Total assets
    
    $
    231,689
    
    
    $
    232,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,682
    
    
    $
    4,926Accrued liabilities
    
    
    8,053
    
    
    
    8,090Current portion of capital lease obligations
    
    
    
    
    
    
    81Total current liabilities
    
    
    12,735
    
    
    
    13,097Accrued restructuring costs, non current
    
    
    21
    
    
    
    104Total liabilities
    
    
    12,756
    
    
    
    13,201Contingencies (Note 14)Stockholders equity:Common stock
    
    
    148
    
    
    
    147Additional paid-in capital
    
    
    444,231
    
    
    
    444,125Notes receivable from stockholders
    
    
    (26
    )
    
    
    (38
    )Deferred stock compensation
    
    
    (102
    )
    
    
    (158
    )Accumulated other comprehensive income (loss)
    
    
    (4
    )
    
    
    66Accumulated deficit
    
    
    (225,314
    )
    
    
    (224,440
    )Total stockholders equity
    
    
    218,933
    
    
    
    219,702Total liabilities and stockholders equity
    
    $
    231,689
    
    
    $
    232,903
 (1) The Condensed Consolidated Balance Sheet at June 30, 2004 has been derived
from the audited financial statements at that date. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3




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OPLINK COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
(Unaudited)
 Three Months EndedSeptember 30,2004
    
    2003Revenues
    
    $
    8,908
    
    
    $
    7,308Cost of revenues:Cost of revenues
    
    
    5,953
    
    
    
    5,090Non-cash compensation expense
    
    
    27
    
    
    
    76Total cost of revenues
    
    
    5,980
    
    
    
    5,166Gross profit
    
    
    2,928
    
    
    
    2,142Operating expenses:Research and development:Research and development
    
    
    1,905
    
    
    
    1,370Non-cash compensation expense
    
    
    2
    
    
    
    350Total research and development
    
    
    1,907
    
    
    
    1,720Sales and marketing:Sales and marketing
    
    
    833
    
    
    
    793Non-cash compensation expense (recovery)
    
    
    5
    
    
    
    (14
    )Total sales and marketing
    
    
    838
    
    
    
    779General and administrative:General and administrative
    
    
    1,751
    
    
    
    2,291Non-cash compensation expense
    
    
    45
    
    
    
    365Total general and administrative
    
    
    1,796
    
    
    
    2,656Amortization of intangible and other assets
    
    
    46
    
    
    
    10Total operating expenses
    
    
    4,587
    
    
    
    5,165Loss from operations
    
    
    (1,659
    )
    
    
    (3,023
    )Interest and other income, net
    
    
    801
    
    
    
    550(Loss) gain on sale of assets
    
    
    (16
    )
    
    
    215Net loss
    
    $
    (874
    )
    
    $
    (2,258
    )Basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )Basic and diluted weighted average shares outstanding
    
    
    147,512
    
    
    
    142,589
 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)
 Three Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (874
    )
    
    $
    (2,258
    )Adjustments to reconcile net loss to
net cash provided by operating activities:Depreciation and amortization of property and equipment
    
    
    1,934
    
    
    
    2,114Amortization of intangible and other assets
    
    
    46
    
    
    
    15Amortization of deferred stock compensation
    
    
    79
    
    
    
    777Amortization of premium (discount) on investments
    
    
    326
    
    
    
    37Loss (gain) on sale or disposal of assets
    
    
    16
    
    
    
    (215
    )Other
    
    
    (27
    )
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    (608
    )
    
    
    (1,266
    )Inventories
    
    
    (614
    )
    
    
    (218
    )Prepaid expenses and other current assets
    
    
    254
    
    
    
    254Other assets
    
    
    123
    
    
    
    Accounts payable
    
    
    (244
    )
    
    
    1,017Accrued liabilities and accrued restructuring costs
    
    
    (120
    )
    
    
    252Net cash provided by operating activities
    
    
    291
    
    
    
    509Cash flows from investing activities:Purchases of investments
    
    
    (18,588
    )
    
    
    (49,726
    )Maturities of investments
    
    
    12,500
    
    
    
    51,500Proceeds from sales of property and equipment
    
    
    116
    
    
    
    418Purchases of property and equipment
    
    
    (4,966
    )
    
    
    (51
    )Net cash (used in) provided by investing activities
    
    
    (10,938
    )
    
    
    2,141Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    84
    
    
    
    851Repayment of notes receivable from stockholders
    
    
    12
    
    
    
    Repayment of capital lease obligations
    
    
    (81
    )
    
    
    (695
    )Net cash provided by financing activities
    
    
    15
    
    
    
    156Net (decrease) increase in cash and cash equivalents
    
    
    (10,632
    )
    
    
    2,806Cash and cash equivalents, beginning of period
    
    
    110,390
    
    
    
    121,498Cash and cash equivalents, end of period
    
    $
    99,758
    
    
    $
    124,304Supplemental disclosures of cash flow information:Cash paid during the period for interest expense
    
    $
    3
    
    
    $
    20
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5




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OPLINK COMMUNICATIONS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Description of Business. Oplink Communications, Inc. (Oplink or the
Company) provides design, integration and Optical Manufacturing Solutions, or
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 and Shanghai, 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, 2004 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 Sundays closest
to each calendar quarter end. For presentation purposes, the Company presents
each fiscal year as if it ended on June 30. The Company presents each of the
fiscal quarters as if it ended on the last day of each calendar quarter.
October 3, 2004 and September 28, 2003 represent the Sunday closest to the
period ended September 30, 2004 and September 30, 2003, respectively.
The first quarter of fiscal 2005 is a 14-week quarter, one week more than
a typical quarter. Fiscal year 2005 will consist of 53 weeks, one week more
than a typical year. 6




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The Companys consolidated financial statements for all periods presented
account for the Shanghai operation as part of continuing operations rather than
as a discontinued operation. In May 2003, the Company adopted a plan to sell
its Shanghai operation. As the sale of the Shanghai operation represented a
disposal of a component of an entity as defined in SFAS No. 144, Accounting
for the Impairment or Disposal of Long Lived Assets, (SFAS No. 144), the
Shanghai operation was accounted for as a discontinued operation. In May 2004,
one year following the planned sale of its Shanghai operation and after
considering growth in the telecommunications market, the Company determined
that this facility is more strategic to its operations than in prior periods
due to the need to ensure a supply of the parts manufactured at the Shanghai
facility as a result of an increase in demand for these types of parts in the
market and the acquisition of one of the Companys suppliers by one of the
Companys competitors. Therefore, the Company has decided not to dispose of
this facility and has returned it to continuing operations. Amounts in the
financial statements and related notes for all periods presented are
reclassified to reflect the Shanghai operation as part of continuing operations
in accordance with SFAS No. 144. 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 September 30, 2004, the results of its operations for the
three-month periods ended September 30, 2004 and 2003 and its cash flows for
the three-month periods ended September 30, 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. 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 EndedSeptember 30,2004
    
    2003Numerator:Net loss
    
    $
    (874
    )
    
    $
    (2,258
    )Denominator:Weighted average shares outstanding
    
    
    147,512
    
    
    
    142,589Net loss per
share - basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )Antidilutive stock options not included in net
loss per share calculation
    
    
    18,775
    
    
    
    18,874
 7




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4. Comprehensive Loss. Comprehensive loss is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources, including foreign currency translation
adjustments and unrealized gains and losses on investments. The reconciliation of net loss to comprehensive loss for the three months
ended September 30, 2004 and 2003 is as follows (in thousands): Three Months EndedSeptember 30,2004
    
    2003Net loss
    
    $
    (874
    )
    
    $
    (2,258
    )Unrealized loss on investments
    
    
    (43
    )
    
    
    (17
    )Change in cumulative translation adjustments
    
    
    (27
    )
    
    
    53Total comprehensive loss
    
    $
    (944
    )
    
    $
    (2,222
    )
 5. Short-Term and Long-Term Investments. The Company generally invests its
excess cash in debt instruments of the U.S. Treasury, government agencies and
corporations with strong credit ratings. Such investments are made in
accordance with the Companys investment policy, which establishes guidelines
relative to diversification and maturities designed to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. To date, the Company has not
experienced any significant losses on its investments. Short-term and long-term investments consist of the following (in
thousands): September 30, 2004Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueAvailable-for-sale securitiesShort-term investmentsCommercial paper
    
    $
    3,494
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    3,492Corporate bonds
    
    
    17,325
    
    
    
    
    
    
    
    (109
    )
    
    
    17,216United States government agencies
    
    
    5,000
    
    
    
    
    
    
    
    (19
    )
    
    
    4,981Total available-for-sale securities
    
    
    25,819
    
    
    
    
    
    
    
    (130
    )
    
    
    25,689Held-to-maturity securitiesShort-term investmentsCorporate bonds
    
    
    10,235
    
    
    
    
    
    
    
    (20
    )
    
    
    10,215United States government agencies
    
    
    10,000
    
    
    
    
    
    
    
    (25
    )
    
    
    9,975Total short-term investments
    
    
    20,235
    
    
    
    
    
    
    
    (45
    )
    
    
    20,190Long-term
investments - due betweenone year and three yearsCorporate bonds
    
    
    5,831
    
    
    
    
    
    
    
    (34
    )
    
    
    5,797United States Government agencies
    
    
    34,017
    
    
    
    15
    
    
    
    (84
    )
    
    
    33,948Total long-term investments
    
    
    39,848
    
    
    
    15
    
    
    
    (118
    )
    
    
    39,745Total held-to-maturity securities
    
    $
    60,083
    
    
    $
    15
    
    
    $
    (163
    )
    
    $
    59,935
 8




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June 30, 2004Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueAvailable-for-sale securitiesShort-term investmentsCommercial paper
    
    $
    7,499
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    7,497Corporate bonds
    
    
    12,457
    
    
    
    
    
    
    
    (82
    )
    
    
    12,375United States government agencies
    
    
    5,000
    
    
    
    
    
    
    
    (23
    )
    
    
    4,977Total short-term investments
    
    
    24,956
    
    
    
    
    
    
    
    (107
    )
    
    
    24,849Held-to-maturity securitiesLong-term
investments - due between one year and three yearsCorporate bonds
    
    
    16,182
    
    
    
    
    
    
    
    (197
    )
    
    
    15,985United States Government agencies
    
    
    39,022
    
    
    
    
    
    
    
    (322
    )
    
    
    38,700Total long-term investments
    
    $
    55,204
    
    
    $
    
    
    
    $
    (519
    )
    
    $
    54,685
 One security which was categorized as held-to-maturity was called by the
issuer in September 2004. No gain or loss was recognized as the security was
called at the purchase price. 6. Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist of (in thousands): September 30,
    
    June 30,2004
    
    2004Inventories:Raw materials
    
    $
    10,290
    
    
    $
    9,751Work-in-process
    
    
    4,003
    
    
    
    4,282Finished goods
    
    
    3,036
    
    
    
    4,592Sub-total
    
    
    17,329
    
    
    
    18,625Less: Reserves for excess and obsolete inventory
    
    
    (11,948
    )
    
    
    (13,858
    )Total
    
    $
    5,381
    
    
    $
    4,767
 7. Property, Plant and Equipment. Property, plant and equipment consist of (in
thousands): September 30,
    
    June 30,2004
    
    2004Property, plant and equipment:Production and engineering equipment
    
    $
    33,812
    
    
    $
    33,356Computer equipment and software
    
    
    5,976
    
    
    
    5,970Building and leasehold improvements
    
    
    15,832
    
    
    
    11,064Sub-total
    
    
    55,620
    
    
    
    50,390Less: Accumulated depreciation and
amortization
    
    
    (26,235
    )
    
    
    (23,964
    )Total
    
    $
    29,385
    
    
    $
    26,426
 9




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In July 2004, the Company completed the purchase of a building in Fremont,
California for a total cost of $4.8 million in cash. It is currently intended
that the site will be the future location of the Companys U.S. headquarters.
The facility consists of approximately 52,000 square feet. 8. Accrued Liabilities. Accrued liabilities consist of (in thousands): September 30,
    
    June 30,2004
    
    2004Accrued liabilities:Payroll and related expenses
    
    $
    718
    
    
    $
    684Accrued sales commission
    
    
    943
    
    
    
    971Accrued warranty
    
    
    700
    
    
    
    700Accrued restructuring costs
    
    
    1,343
    
    
    
    1,795Remaining amounts payable for acquisitions
    
    
    750
    
    
    
    750Other
    
    
    3,599
    
    
    
    3,190Total
    
    $
    8,053
    
    
    $
    8,090
 9. Product Warranties. The Company provides reserves for the estimated
cost of product warranties at the time revenue is recognized based on its
historical experience of known product failure rates and expected material
and labor costs to provide warranty services. The Company generally
provides a one-year warranty on its products. Additionally, from time to
time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are
determined to be greater than the actual amounts necessary, the Company
may reverse a portion of such provisions in future periods. Changes in the warranty liability, which is included as a component of
Accrued liabilities on the Condensed Consolidated Balance Sheet, is as
follows (in thousands): Three Months EndedSeptember 30,2004
    
    2003Balance at the beginning of the period
    
    $
    700
    
    
    $
    700Accruals for warranties issued during the period
    
    
    173
    
    
    
    211Accruals related to pre-existing warranties
(including changes in estimates)
    
    
    (80
    )
    
    
    (143
    )Settlements made (in cash or in kind) during the period
    
    
    (93
    )
    
    
    (68
    )Balance at the end of the period
    
    $
    700
    
    
    $
    700
 10. Restructuring Costs and Other Charges. A summary of the restructuring
charges accrued in fiscal 2004 and the three months ended September 30, 2004 is
as follows (in thousands): 10




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ImpairmentConsolidation of
    
    of GoodwillWorkforce
    
    Excess Property
    
    Excess Facilities
    
    and PurchasedReduction
    
    and Equipment
    
    and Other Charges
    
    Intangible Assets
    
    TotalBalance at June 30, 2003
    
    $
    176
    
    
    $
    
    
    
    $
    4,314
    
    
    $
    
    
    
    $
    4,490Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,018Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,472Additional restructuring charge in
the fourth quarter
of fiscal 2004
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    452Adjustment
    
    
    99
    
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    Cash payments
    
    
    (275
    )
    
    
    
    
    
    
    (2,768
    )
    
    
    
    
    
    
    (3,043
    )Balance at June 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    1,899
    
    
    $
    
    
    
    $
    1,899Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,795Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    104Cash payments
    
    
    
    
    
    
    
    
    
    
    (535
    )
    
    
    
    
    
    
    (535
    )Balance at September 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    1,364
    
    
    $
    
    
    
    $
    1,364Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,343Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21
 11. Stock-Based Compensation. The Company accounts for its stock-based
compensation issued to employees using the intrinsic value method prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
issued to Employees. SFAS No. 123 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 EndedSeptember 30,2004
    
    2003Net loss as reported
    
    $
    (874
    )
    
    $
    (2,258
    )Stock-based employee compensation expense
included in reported net loss
    
    
    79
    
    
    
    777Pro forma stock compensation expense computed
under the fair value method for all awards
    
    
    (1,003
    )
    
    
    (1,541
    )Pro forma net loss
    
    $
    (1,798
    )
    
    $
    (3,022
    )Basic and diluted net loss per share, as reported
    
    $
    (0.01
    )
    
    $
    (0.02
    )Pro forma basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
 11




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##### Table of Contents



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 EndedSeptember 30,2004
    
    2003Risk-free interest rate
    
    
    3.47
    %
    
    
    3.54
    %Expected life of option
    
    4 years
    
    4 yearsExpected dividends
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    63
    %
    
    
    70
    %
 12. Repurchase of Common Stock. On September 26, 2001, the Companys Board of
Directors authorized a program to repurchase up to an aggregate of $21.2
million of the Companys common stock. On September 19, 2002, the Companys
Board of Directors approved an increase in the Companys buyback plan to
repurchase up to an aggregate of $40.0 million of the Companys common stock.
Such repurchases may be made from time to time on the open market at prevailing
market prices, in negotiated transactions 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 shares of its common stock 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 September 30, 2004, repurchases of an aggregate of $35.2
million have been made under the Companys repurchase program. 13. Recent Accounting Pronouncements. On March 31, 2004, the FASB issued a
proposed Statement, Share-Based Payment, an amendment of FASB Statements No.
123 and 95, that addresses the accounting for share-based payment transactions
in which an enterprise receives employee services in exchange for either equity
instruments of the enterprise or liabilities that are based on the fair value
of the enterprises equity instruments or that may be settled by the issuance
of such equity instruments. The proposed statement would eliminate the ability
to account for share-based compensation transactions using the intrinsic value
method as prescribed by Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, and generally would require that
such transactions be accounted for using a fair-value-based method and
recognized as expenses in our consolidated statement of operations. The
proposed standard would require that the modified prospective method be used,
which requires that the fair value of new awards granted from the beginning of
the year of adoption (plus unvested awards at the date of adoption) be expensed
over the vesting period. In addition, the proposed statement encourages the use
of the binomial approach to value stock options, which differs from the
Black-Scholes option pricing model that the Company currently uses in the
footnotes to its condensed consolidated financial statements. The recommended
effective date of the proposed standard for public companies is currently for
fiscal years beginning after June 15, 2005. Should this proposed statement be finalized in its current form, it will
have a significant impact on the Companys operating results as the Company
will be required to expense the fair value of its stock option grants and stock
purchases under the Companys employee stock purchase plan rather than disclose
the impact on its consolidated net loss within its footnotes, as is the
Companys current practice. In addition, there are a number of implementation
questions that are not fully resolved by the proposed statement. As a result,
there may be additional changes reflected in the Companys financial statements
upon issuance of the final standard. 12




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##### Table of Contents



At its November 2003 meeting, the Emerging Issues Task Force (EITF)
reached a consensus on disclosure guidance previously discussed under EITF
03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The consensus provided for certain disclosure
requirements that were effective for fiscal years ending after December 15,
2003. The Company adopted the disclosure requirements during the fiscal year
ended June 30, 2004. At its March 2004 meeting, the EITF reached a consensus on recognition and
measurement guidance previously discussed under EITF 03-01. The consensus
clarifies the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and investments accounted for under the cost method or the equity
method. The recognition and measurement guidance for which the consensus was
reached in the March 2004 meeting is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. The
Companys adoption of this consensus on the recognition and measurement
guidance did not have a material impact on its financial position, results of
operations or cash flows. In various areas, including revenue recognition and stock option
accounting, accounting standards and practices continue to evolve.
Additionally, the SEC and the FASBs Emerging Issues Task Force continue to
address revenue and stock option related accounting issues. The management of
the Company believes it is in compliance with all of the rules and related guidance as they currently
exist. However, any changes to generally accepted accounting principles in
these areas could impact the Companys future accounting for its operations. 14. Contingencies. In November 2001, the Company and certain of its officers
and directors were named as defendants in a class action shareholder complaint
filed in the United States District Court for the Southern District of New
York, now captioned In re Oplink Communications, Inc. Initial Public Offering
Securities Litigation, Case No. 01-CV-9904. In the amended complaint, the
plaintiffs allege that the Company, certain of the Companys officers and
directors and the underwriters of the Companys initial public offering, or
IPO, violated section 11 of the Securities Act of 1933 based on allegations
that the Companys registration statement and prospectus failed to disclose
material facts regarding the compensation to be received by, and the stock
allocation practices of, the IPO underwriters. The complaint also contains a
claim for violation of section 10(b) of the Securities Exchange Act of 1934
based on allegations that this omission constituted a deceit on investors. The
plaintiffs seek unspecified monetary damages and other relief. Similar
complaints were filed by plaintiffs (the Plaintiffs) against hundreds of
other public companies (the Issuers) that went public in the late 1990s
(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 Lawsuits 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. 13




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##### Table of Contents



In June 2003, Issuers and Plaintiffs reached a tentative settlement
agreement and entered a memorandumof understanding, providing for, among other
things, a dismissal with prejudice and full release of the Issuers and their
officers and directors from all further liability resulting from Plaintiffs
claims, and the assignment to Plaintiffs of certain potential claims that the
Issuers may have against the underwriters. In addition, the tentative
settlement guarantees that, in the event that the Plaintiffs recover less than
$1 billion in settlement or judgment against the underwriter defendants in the
IPO Lawsuits, the Plaintiffs would be entitled to payment by each participating
Issuers insurer of a pro rata share of any shortfall in the Plaintiffs
guaranteed recovery. In such event, the Companys obligation would be limited
to reimbursement of the Companys insurer up to the amount remaining under the
deductible of the Companys insurance policy. In September 2003, in connection
with the tentative settlement, the Companys officers and directors who had
entered tolling agreements with the Plaintiffs (described above) agreed to
extend those agreements so that they would not expire prior to any settlement
being finalized. In June 2004, the Company executed a settlement agreement with
the Plaintiffs pursuant to the terms of a memorandum of understanding. The
settlement is subject to a number of conditions, including action by the Court
certifying a class action for settlement purposes and formally approving the
settlement. The underwriters have opposed both the certification of the class
and the judicial approval of the settlement. Pending a definitive settlement,
the Company continues to believe that the action against the Company is without
merit and intends to defend against it vigorously. On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc.
(collectively, OZ) sued four individuals and the Company in California
Superior Court for the County of Alameda. One of the four individual defendants is Zeynep Hakimoglu, who joined the Company on
November 1, 2001 as Vice President of Product Line Management. The other three
are unrelated to the Company. Zeynep Hakimoglus employment with the Company
terminated on December 17, 2002. The complaint 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 currently in discovery with a trial date set
for April 8, 2005. In August 2004, the Company settled the lawsuit with respect
to the claims against the Company and OZ agreed to dismiss the case against the
Company with prejudice. To the Companys knowledge OZ is continuing to pursue
its lawsuit against all the defendants other than the Company, and the Company
may be obligated to indemnify Ms. Hakimoglu for certain amounts in connection
with her prior employment with the Company. In the event that the Company
incurs such an obligation, the Company believes it has obtained sufficient
director and officer liability insurance to cover this contingency. The Company is subject to legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Companys consolidated financial position,
results of operations or cash flows. 15. Subsequent Events. On October 28, 2004, the Company and Cayman Oplink
Communications, Inc., a newly formed, wholly owned Cayman Islands subsidiary of
the Company (Buyer), entered into a stock purchase agreement with all the
shareholders of EZconn Corporation (EZconn), a privately-held Taiwanese
company that manufactures cable and photonics components for broadband access
equipment manufacturers. Pursuant to the stock purchase agreement and related
ancillary agreements, Buyer will pay $30 million for all of the shares of
EZconn and certain assets related to the business of EZconn, of which $9 14




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##### Table of Contents



million will be paid in cash and $21 million will be paid in shares of common
stock of the Company to be issued pursuant to a subscription agreement entered
into by the Company and eight of the shareholders of EZconn. Buyer will also
assume approximately $12 million in net debt of EZconn, which will be repaid at
or promptly following the closing of the acquisition. The closing of the
acquisition is subject to the Companys satisfactory completion of its due
diligence investigation of EZconn, approval by the Investment Commission of the
Ministry of Economic Affairs of the Republic of China and certain other
customary closing conditions. The acquisition is expected to close in January
2005. Pursuant to the subscription agreement between the Company and eight of
the shareholders of EZconn, the Company will issue $21 million in shares of its
common stock to such persons upon the closing of the acquisition of EZconn
contemplated by the stock purchase agreement. The shares of common stock will
be issued at a price per share based on the 20-day average closing price of the
Companys common stock for the period ending one day prior to the closing of
the acquisition of EZconn, provided that (i) if the 20-day average closing
price exceeds $1.83, the price per share shall be $1.83, and (ii) if the 20-day
average closing price is less than $1.66, the price per share shall be $1.66.
The shares of common stock will not be issued unless the acquisition of EZconn
contemplated by the stock purchase agreement is consummated and will not be
registered under the Securities Act of 1933, as amended, or any state
securities laws. The Company has agreed to grant certain registration rights to
the eight purchasers. 
 ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Forward-looking statements This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions, or future strategies that are signified by
the words expects, anticipates, intends, believes, or similar language.
All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. In
evaluating our business, prospective investors should carefully consider the
information set forth below under the caption Risk Factors in addition to the
other information set forth herein. We caution investors that our business and
financial performance are subject to substantial risks and uncertainties. The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and related notes in this report, and
Managements Discussion and Analysis of Financial Condition and Results of
Operations, related financial information and audited consolidated financial
statements contained in our Form 10-K for the fiscal year ended June 30, 2004
as filed with the Securities and Exchange Commission on September 10, 2004. In May 2003, we adopted a plan to sell our Shanghai operation. As the sale
of the Shanghai operation represented a disposal of a component of an entity
as defined in SFAS No. 144, Accounting for the Impairment or Disposal of Long
Lived Assets, (SFAS No. 144), the Shanghai operation was accounted for as a
discontinued operation. In May 2004, one year following the planned sale of our
Shanghai operation and after considering growth in the telecommunications
market, we determined that this facility is more strategic to our operations
than in prior periods due to the need to ensure a supply of the parts
manufactured 15




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##### Table of Contents



at the Shanghai facility as a result of an increase in demand for
these types of parts in the market and the acquisition of one of our suppliers
by one of our competitors. Therefore, we have decided not to dispose of this
facility and have returned it to continuing operations. Operating results of
the Shanghai operation have been reclassified from discontinued to continuing
operations for all periods presented. Overview We provide design, integration and Optical Manufacturing Solutions, or
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 and Shanghai, 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 worldwide
economic trends and in particular activity within the telecommunication
economic space. This would 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 receive new orders,
these orders may be only for trial units and future full deployment orders may
not necessarily follow. REVENUES. We generate substantially all of our revenues from the sale of fiber
optic components and subsystems. To date, we have developed over 160 standard
products that are sold or integrated into customized solutions for our
customers. Our products are generally categorized into two major groups: (i)
our bandwidth creation products, which include wavelength expansion and optical
amplification products; and (ii) 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. 16




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##### Table of Contents



ACQUISITION. On October 28, 2004, we and our newly formed, wholly owned Cayman
Islands subsidiary, Cayman Oplink Communications, Inc., entered into a stock
purchase agreement with all the shareholders of EZconn Corporation, a
privately-held Taiwanese company that manufactures cable and photonics
components for broadband access equipment manufacturers. Pursuant to the stock
purchase agreement and related ancillary agreements, our Cayman Island
subsidiary will pay $30 million for all of the shares of EZconn and certain
assets related to the business of EZconn, of which $9 million will be paid in
cash and $21 million will be paid in shares of our common stock to be issued
pursuant to a subscription agreement entered into by us and eight of the
shareholders of EZconn. Our Cayman Islands subsidiary will also assume
approximately $12 million in net debt of EZconn, which will be repaid at or
promptly following the closing of the acquisition. The closing of the
acquisition is subject to the satisfactory completion of our due diligence
investigation of EZconn, approval by the Investment Commission of the Ministry
of Economic Affairs of the Republic of China and certain other customary
closing conditions. The acquisition is expected to close in January 2005. Pursuant to the subscription agreement entered into by us and eight of the
shareholders of EZconn, we will issue $21 million in shares of our common stock
to such persons upon the closing of the acquisition of EZconn contemplated by
the stock purchase agreement. The shares of common stock will be issued at a
price per share based on the 20-day average closing price of our common stock
for the period ending one day prior to the closing of the acquisition of
EZconn, provided that (i) if the 20-day average closing price exceeds $1.83,
the price per share shall be $1.83, and (ii) if the 20-day average closing
price is less than $1.66, the price per share shall be $1.66. The shares of
common stock will not be issued unless the acquisition of EZconn contemplated
by the stock purchase agreement is consummated and will not be registered under
the Securities Act of 1933, as amended, or any state securities laws. We have
agreed to grant certain registration rights to the eight purchasers. 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 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, 17




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##### Table of Contents



may have a material impact on our
financial condition or results of operations. Our critical accounting policies
cover the following areas:  -
    
    revenue recognition and product returns;-
    
    warranty obligations;-
    
    risk evaluation;-
    
    allowance for doubtful accounts;-
    
    excess and obsolete inventory;-
    
    long-lived asset valuation; and-
    
    business combination. Additional information about these critical accounting policies may be
found in the Managements Discussion & Analysis of Financial Condition and
Results of Operations section included in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2004. Results of Operations Revenues: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003Revenues
    
    $
    8,908
    
    
    $
    7,308
    
    
    $
    1,600
    
    
    
    21.9
    %
 The increase in revenue for the three months ended September 30, 2004
compared to the three months ended September 30, 2003 was primarily due to
increased unit shipments of our wavelength expansion products and optical
switching and routing products to existing and new customers. The increase in
shipments was primarily due to a general increase in spending activity in the
telecommunications industry. The increase in revenue associated with increased
unit shipments was partially offset by decreases in the average selling prices
of our products during the three months ended September 30, 2004 as compared to
the three months ended September 30, 2003. We anticipate that there will be further declines in average selling
prices through the fiscal year ending June 30, 2005. We also expect our revenue
in the second quarter of fiscal 2005 to be approximately $9.0 million. 18




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##### Table of Contents



Gross Profit: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003Gross Profit
    
    $
    2,928
    
    
    $
    2,142
    
    
    $
    786
    
    
    
    36.7
    %Gross Profit margin
    
    
    32.9
    %
    
    
    29.3
    %
 The increase in gross profit for the three months ended September 30, 2004
compared to the three months ended September 30, 2003 was primarily due to
greater revenue. The increase in gross profit was partially offset by higher
depreciation expense resulting from the return of our Shanghai operation to
continuing operations from discontinued operations. In addition, our gross
profit for the three months ended September 30, 2004 was positively impacted by
the unexpected sale of inventory of $54,000 that had been previously fully
reserved, partially offset by $27,000 of non-cash compensation expense. Our
gross profit for the three months ended September 30, 2003 was positively
impacted by the unexpected sale of inventory that had been previously fully
reserved of $515,000, partially offset by $76,000 of non-cash compensation
expense. Unexpected sales of fully reserved inventory decreased over the past
several quarters. However, we have no visibility to the amount of such sales in
the future, if any. Our gross profit margin increased for the three months ended September 30,
2004 compared to the three months ended September 30, 2003 due to greater
revenue resulting in lower manufacturing costs relative to our production volume. The increase in gross profit margin was partially
offset by a smaller benefit from the unexpected sales of fully reserved
inventory and higher depreciation expense. We expect our gross profit margin in the second quarter of fiscal 2005 to
be approximately the same as the first quarter of fiscal 2005. Research and Development: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003Research and development
    
    $
    1,907
    
    
    $
    1,720
    
    
    $
    187
    
    
    
    10.9
    %
 The increase in research and development expenses for the three months
ended September 30, 2004 compared to the three months ended September 30, 2003
was primarily due to higher personnel costs as a result of the acquisition of
RedClover, Accumux and Gigabit, partially offset by a decrease 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 be approximately the same in the second quarter of fiscal 2005 compared to
the first quarter of fiscal 2005. 19




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##### Table of Contents



Sales and Marketing: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003Sales and marketing
    
    $
    838
    
    
    $
    779
    
    
    $
    59
    
    
    
    7.6
    %
 The increase in sales and marketing expense for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003 was
primarily due to higher personnel-related costs. We expect our quarterly sales
and marketing expenses to remain relatively flat in the second quarter of
fiscal 2005 compared to the first quarter of fiscal 2005. General and Administrative: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003General and administrative
    
    $
    1,796
    
    
    $
    2,656
    
    
    $
    (860
    )
    
    
    (32.4
    )%
 The decrease in general and administrative expenses for the three
months ended September 30, 2004 compared to the three months ended
September 30, 2003 was primarily due to $890,000 of expenses associated
with the exploration of strategic business opportunities in the three
months ended September 30, 2003 and lower non-cash compensation expense,
partially offset by increased legal costs resulting from the settlement of
the lawsuit with OZ Optics Limited, Inc., additional professional services
fees related to Sarbanes-Oxley compliance and higher personnel-related
costs. We expect our general and administrative expenses to remain
relatively flat in the second quarter of fiscal 2005 compared to our
expenses in the first quarter of fiscal 2005. Non-Cash Compensation Expense: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003Non-cash compensation expense
    
    $
    79
    
    
    $
    777
    
    
    $
    (698
    )
    
    
    (89.8
    )%
 From July 1, 1998 through September 30, 2004, we recorded an aggregate of
$59.0 million in deferred non-cash compensation, net of recoveries resulting
from stock option cancellations. The decrease in non-cash compensation expenses
for the three months ended September 30, 2004 compared to the three months
ended September 30, 2003 was primarily due to the method under which the
deferred non-cash compensation was amortized, as set out in FASB Interpretation
No. 28, which results in higher compensation expense in the earlier vesting
periods of the related options. 20




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Restructuring Costs and Other Charges.A summary of the restructuring
charges accrued in fiscal 2004 and the three months ended September 30, 2004 is
as follows (in thousands): ImpairmentConsolidation of
    
    of GoodwillWorkforce
    
    Excess Property
    
    Excess Facilities
    
    and PurchasedReduction
    
    and Equipment
    
    and Other Charges
    
    Intangible Assets
    
    TotalBalance at June 30, 2003
    
    $
    176
    
    
    $
    
    
    
    $
    4,314
    
    
    $
    
    
    
    $
    4,490Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,018Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,472Additional restructuring charge in
the fourth quarter
of fiscal 2004
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    452Adjustment
    
    
    99
    
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    Cash payments
    
    
    (275
    )
    
    
    
    
    
    
    (2,768
    )
    
    
    
    
    
    
    (3,043
    )Balance at June 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    1,899
    
    
    $
    
    
    
    $
    1,899Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,795Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    104Cash payments
    
    
    
    
    
    
    
    
    
    
    (535
    )
    
    
    
    
    
    
    (535
    )Balance at September 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    1,364
    
    
    $
    
    
    
    $
    1,364Less: accrued restructuring costs, current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,343Accrued restructuring costs, non current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21
 Interest and Other Income, Net: (In thousands, except percentages) Three Months Ended
    
    
    
    
    
    PercentageSeptember 30,
    
    Change
    
    Change2004
    
    2003Interest and other
income, net
    
    $
    801
    
    
    $
    550
    
    
    $
    251
    
    
    
    45.6
    %
 The increase in interest income for the three month ended September 30,
2004 compared to the three months ended September 30, 2003 was primarily due to
higher yields on our investments. The average rate of return for the three
months ended September 30, 2004 was 1.9% as compared to the average rate of
return of 1.2% for the three months ended September 30, 2003. Gain (Loss) on Sale of Assets. We recorded a loss of $16,000 and a gain
of $215,000 for the three months ended September 30, 2004 and 2003,
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 $56.4 million as of September 30, 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. 21




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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 $24.8 million in common stock repurchases, net of
proceeds from exercise of stock options, employee stock purchase plan and
warrants through September 30, 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 interest expense automatically converted
into 3,298,773 shares of common stock upon the closing of our initial public
offering in October 2000. As of September 30, 2004, we had cash, cash
equivalents and short-term and long-term investments of $185.5 million and
working capital of $149.0 million. We estimate that the sum of our cash, cash
equivalents and short-term and long-term investments at the end of the second
quarter of fiscal 2005 will be lower than the sum of our cash, cash equivalents
and short-term and long-term investments at the end of the first quarter of
fiscal year 2005 due to our acquisition of EZconn Corporation. Three Months Ended September 30, 2004 Our operating activities provided cash of $291,000 in the first quarter of
fiscal 2005 as a result of our net loss for the first quarter of fiscal 2005 of
$874,000 adjusted by $2.4 million primarily for the non-cash charges of
depreciation and amortization, amortization of deferred stock compensation as
well as a net changes in assets and liabilities of $1.2 million. In the three months ended September 30, 2004, the changes in assets and
liabilities were primarily the result of changes in accounts receivable and
inventories. Accounts receivable used $608,000 of cash primarily due to one of
our large customers scheduled payment date falling immediately after our
fiscal quarter end. As a result, days sales outstanding in accounts receivable
ended first quarter of fiscal 2005 at 84 days, as compared to 71 days at the
end of the fourth quarter of fiscal 2004. Inventories used $614,000 of cash during the first quarter of fiscal 2005
primarily due to purchases of inventory to address longer lead time for
materials. We typically bill customers on an open account basis with net thirty to
ninety day payment terms. We would generally expect the level of accounts
receivable at the end of any quarter to reflect the level of sales in that
quarter and to change from one period to another in a direct relationship to
the change in the level of sales. Our level of accounts receivable would also
increase if customers delayed their payments or if we offered extended payment
terms to our customers. Additionally, in order to maintain an adequate supply of product for our
customers, we must carry a certain level of inventory. Our inventory level may
vary based primarily upon orders received from our customers, our forecast of
demand for these products and lead time for materials. These considerations are
balanced against risk of obsolescence or potentially excess inventory levels.
We generally expect the level of inventory to vary from one period to another
as a result of changes in the level of sales. Our investing activities used cash of $10.9 million in the first quarter
of fiscal 2005. The net cash used in investing activities in the three months
ended September 30, 2004 was primarily due to purchases of short-term and
long-term investments of $18.6 million partially offset by maturities of
short-term and long-term investments of $12.5 million resulting in use of cash
of $6.1 million. We invested a significant amount of our excess cash to
purchase short-term and long-term investments in the first quarter of fiscal
2005 in an 22




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effort to take advantage of higher yields and increase returns on our investments.
We used approximately $4.8 million to purchase a building in Fremont,
California in the first quarter of fiscal 2005 to house our US operations.
During the remaining nine months of fiscal 2005, we expect to use approximately
$1.4 million for capital expenditures worldwide, excluding property and
equipment acquired through acquisitions. On October 28, 2004, we and our newly formed, wholly owned Cayman Islands
subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase
agreement with all the shareholders of EZconn Corporation, a privately-held
Taiwanese company that manufactures cable and photonics components for
broadband access equipment manufacturers. Pursuant to the stock purchase
agreement and related ancillary agreements, our Cayman Island subsidiary will
pay $30 million for all of the shares of EZconn and certain assets related to
the business of EZconn, of which $9 million will be paid in cash and $21
million will be paid in shares of our common stock to be issued pursuant to a
subscription agreement entered into by us and eight of the shareholders of
EZconn. Our Cayman Islands subsidiary will also assume approximately $12
million in net debt of EZconn, which will be repaid at or promptly following
the closing of the acquisition. The closing of the acquisition is subject to
the satisfactory completion of our due diligence investigation of EZconn,
approval by the Investment Commission of the Ministry of Economic Affairs of
the Republic of China and certain other customary closing conditions. The
acquisition is expected to close in January 2005. Our financing activities provided cash of $15,000 in the first quarter of
fiscal 2005 primarily due to proceeds from issuance of common stock of $84,000
in connection with the exercise of stock options and partial repayment of a
note receivable from a stockholder of $12,000, partially offset by repayment of
capital lease obligations of $81,000. Pursuant to the subscription agreement
entered into by us and eight of the shareholders of EZconn, we will issue $21
million in shares of our common stock to such persons upon the closing of the
acquisition of EZconn contemplated by the stock purchase agreement. The shares
of common stock will be issued at a price per share based on the 20-day average
closing price of our common stock for the period ending one day prior to the
closing of the acquisition of EZconn, provided that (i) if the 20-day average
closing price exceeds $1.83, the price per share shall be $1.83, and (ii) if
the 20-day average closing price is less than $1.66, the price per share shall
be $1.66. The shares of common stock will not be issued unless the acquisition
of EZconn contemplated by the stock purchase agreement is consummated and will
not be registered under the Securities Act of 1933, as amended, or any state
securities laws. We have agreed to grant certain registration rights to the
eight purchasers. Three Months Ended September 30, 2003 Our operating activities provided cash of $509,000 in the first quarter of
fiscal 2004 as a result of our net loss for the quarter of $2.3 million
adjusted by $2.7 million primarily for the non-cash charges of depreciation and
amortization, amortization of deferred stock compensation offset by a net
change in assets and liabilities of $39,000. In the first quarter of fiscal 2004, the changes in assets and liabilities
were primarily the result of changes in accounts receivable and accounts
payable. Accounts receivable used $1.3 million of cash primarily due to
increased shipments during the first quarter of fiscal 2004. Days sales
outstanding in accounts receivable ended the first quarter of fiscal 2004 at 75
days, as compared to 72 days at the end of the fourth quarter of fiscal 2003. 23




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Accounts payable provided cash of $1.0 million due to a lower accounts
payable balance at the end of the fourth quarter of fiscal year 2003 compared
to the end of first quarter of fiscal 2004 primarily due to higher inventory
purchases as a result of increased demand for our products by our customers. Our investing activities provided cash of $2.1 million in first quarter of
fiscal 2004. The net cash provided by investing activities in the first quarter
of fiscal 2004 was primarily due to maturities of short-term investments of
$51.5 million and proceeds from sales of property and equipment of $418,000,
partially offset by purchases of short-term investments of $49.7 million. Our financing activities provided cash of $156,000 in the first quarter of
fiscal 2004 primarily due to proceeds from the issuance of common stock of
$851,000 in connection with the exercise of stock options partially offset by
repayment of capital lease obligations of $695,000. Contractual Obligations Our contractual obligations as of September 30, 2004 have been summarized
below (in thousands): Contractual Obligations Due by PeriodTotal
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsContractual ObligationsOperating leases
    
    $
    1,537
    
    
    $
    1,511
    
    
    $
    26
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    3,585
    
    
    
    3,585
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,122
    
    
    $
    5,096
    
    
    $
    26
    
    
    $
    
    
    
    $
    
 On October 28, 2004, we entered into an agreement to acquire privately
held EZconn, or EZconn. Under the terms of the proposed acquisition agreement,
we will pay $30 million for all of the shares of EZconn and certain assets
related to the business of EZconn, of which $9 million will be paid in cash and
$21 million will be paid in shares of Oplinks common stock. We will also
assume approximately $12 million in net debt of EZconn, which will be paid at
or promptly following the closing. The acquisition is expected to close in
January 2005. Recent Accounting Pronouncements On March 31, 2004, the FASB issued a proposed Statement, Share-Based
Payment, an amendment of FASB Statements No. 123 and 95, that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise
or liabilities that are based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using the intrinsic value method as prescribed by
Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock
Issued to Employees, and generally would require that such transactions be
accounted for using a fair-value-based method and recognized as expenses in our
consolidated statements of operations. The proposed standard would require that
the modified prospective method be used, which requires that the fair value of
new awards granted from the beginning of the year of adoption (plus unvested
awards at the date of adoption) be expensed over the vesting period. In
addition, the proposed statement encourages the use of the binomial approach
to value stock options, which differs from the Black-Scholes option pricing
model that we currently use in the footnotes to our condensed consolidated
financial statements. The recommended effective date of the proposed
standard for public companies is currently for fiscal years beginning after
June 15, 2005. 24




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Should this proposed statement be finalized in its current form, it will
have a significant impact on our operating results as we will be required to
expense the fair value of our stock option grants and stock purchases under our
employee stock purchase plan rather than disclose the impact on our
consolidated net loss within our footnotes, as is our current practice. In
addition, there are a number of implementation questions that are not fully
resolved by the proposed statement. As a result, there may be additional
changes reflected in our consolidated financial statements upon issuance of the
final standard. At its November 2003 meeting, the Emerging Issues Task Force (EITF)
reached a consensus on disclosure guidance previously discussed under EITF
03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The consensus provided for certain disclosure
requirements that were effective for fiscal years ending after December 15,
2003. We adopted the disclosure requirements during the fiscal year ended June
30, 2004. At its March 2004 meeting, the EITF reached a consensus on recognition and
measurement guidance previously discussed under EITF 03-01. The consensus
clarifies the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and investments accounted for under the cost method or the equity
method. The recognition and measurement guidance for which the consensus was
reached in the March 2004 meeting is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. The
adoption of this consensus on the recognition and measurement guidance did not
have a material impact on our financial position, results of operations, or
cash flows. In various areas, including revenue recognition and stock option
accounting, accounting standards and practices continue to evolve.
Additionally, the SEC and the FASBs Emerging Issues Task Force continue to
address revenue and stock option related accounting issues. The management of
Oplink believes it is in compliance with all of the rules and related guidance
as they currently exist. However, any changes to generally accepted accounting
principles in these areas could impact Oplinks future accounting for its
operations. 25




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##### Table of Contents



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 $874,000, $6.4
million, $36.8 million and $68.4 million for the three months ended September
30, 2004 and the fiscal years ended June 30, 2004, 2003 and 2002, respectively.
We have not achieved profitability on a quarterly or annual basis since
inception. As of September 30, 2004, we had an accumulated deficit of $225.3
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 five customers, although not the same five customers for
each period, together accounted for 68%, 69%, 56% and 49% of our revenues in
the three months ended September 30, 2004 and the fiscal years ended June 30,
2004, 2003 and 2002, respectively. Nortel Networks Corporation (Nortel), Hua
Wei Technologies Co. Ltd. and Marubun Corporation (Marubun) each accounted
for greater than 10% of our revenue for the three months ended September 30,
2004. For the three months ended September 30, 2004, a substantial portion of
our shipments to Marubun, our third-party sales representative, were to fulfill
purchase orders placed by Fujitsu Limited (Fujitsu) through Marubun. Through
Marubun and through direct sales, Fujitsu accounted for greater than 10% of our
revenues for the three months ended September 30, 2004. Nortel, Sanmina-SCI
Corporation (Sanmina) and Marubun each accounted for greater than 10% of our
revenue for the fiscal year ended June 30, 2004. For the fiscal year ended June
30, 2004, a substantial portion of our shipments to Sanmina, a contract
manufacturer, were to fulfill purchase orders placed by Tellabs, Inc.
(Tellabs). Through Sanmina and through direct sales, Tellabs accounted for
greater than 10% of our revenues for the fiscal year ended June 30, 2004. For
the fiscal year ended June 30, 2004, a substantial portion of our shipments to
Marubun were to fulfill purchase orders placed by Fujitsu through Marubun.
Through Marubun and through direct sales, Fujitsu accounted for greater than
10% of our revenues for the fiscal year ended June 30, 2004. Nortel, Adva AG
Optical Networking and Marubun each accounted for greater than 10% of our
revenues for the fiscal year ended June 30, 2003. A substantial portion of our
shipments to Marubun during fiscal 2003 were to fulfill purchase orders placed
by Fujitsu and NEC Corporation (NEC). Neither Fujitsu nor NEC accounted for
greater than 10% percent of our revenues for fiscal 2003. We expect that we
will continue to depend upon a small number of customers, although potentially
not the same customers, for a substantial portion of our revenues. For
instance, Tellabs accounted for greater than 10% of our revenue for the quarter
ended June 30, 2004, March 31, 2004 and December 31, 26




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2003 and the fiscal year ended June 30, 2004, respectively. However, it
did not account for greater 10% of our revenue for the quarter ended September
30, 2004. Our revenues generated from these customers, individually or in the
aggregate, may not reach or exceed historic levels in any future period. We may
not be the sole source of supply to our customers, and they may choose to
purchase products from other vendors. Furthermore, the businesses of 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, gross margins, expenses and operating results have varied
significantly from quarter to quarter in the past and may continue to fluctuate
significantly in the future. The factors, many of which are more fully
discussed in the other risk factors below, that are likely to cause these
variations include, among others:  -
    
    economic downturn and uncertainty of the fiber optic industry;-
    
    economic conditions specific to the communications and related
industries and the development and size of the markets for our products;-
    
    fluctuations in demand for, and sales of, our products;-
    
    changes in customer, geographic or product mix and the average
selling prices of the products we sell;-
    
    cancellations of orders and shipment rescheduling;-
    
    the ability of our manufacturing operations in China to timely
produce and deliver products in the quantity and of the quality our
customers require;-
    
    the availability of raw materials used in our products and increases in the
price of these raw materials;-
    
    our ability to successfully improve our manufacturing capability and
achieve acceptable production yields in our facilities in China;-
    
    the practice of communication equipment suppliers to sporadically
place large orders with short lead times;-
    
    competitive factors, including introductions of new products, new
technologies and product enhancements by competitors, consolidation of
competitors in the fiber optic components and subsystems market and
pricing pressures; 27




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-
    
    our ability to develop, introduce, manufacture and ship new and
enhanced optical networking products in a timely manner without defects;
and-
    
    costs associated with and the outcomes of any intellectual property
or other litigation to which we
are, or may become, a party. Due to the factors noted above and other risks discussed in this section,
we believe that quarter-to-quarter comparisons of our operating results will
not be meaningful. Moreover, if we experience difficulties in any of these
areas, our operating results could be significantly and adversely affected and
our stock price could decline. Also, it is possible that in some future quarter
our operating results may be below the expectations of public market analysts
and investors, which could cause our stock price to fall. The pending acquisition of EZconn may not be consummated or may be difficult to
integrate, which would disrupt our business and could harm our operating
results. On October 28, 2004, we entered into a Stock Purchase Agreement with all
the shareholders of EZconn Corporation (EZconn), a privately-held Taiwanese
company that manufactures cable and photonics components for broadband access
equipment manufacturers. The transaction is expected to close by January 2005.
However, the consummation of the transaction is subject to regulatory
approvals, the satisfactory completion of our due diligence investigation of
EZconn, and other customary closing conditions. Therefore, we cannot assure you
that the transaction will be consummated. Even if the transaction with EZconn is consummated, our management and
financial controls, personnel, computer systems and other corporate support
systems may not be adequate to manage the increase in the size and scope of our
operations as a result of the completed acquisition. In addition, we may not be
able to generate revenue from the EZconn operations consistent with historical
results. We may not be able to realize positive earnings that we expect will
result from the addition of the EZconn operations to our business. Additionally
we may need to expend additional cash for working capital and capital
expenditures.
Moreover, we expect the transaction to result in intangible assets with
definite useful lives to be amortized over several years and may also incur a
one-time charge associated with the write-off of in-process research and
development in the quarter in which the transaction closes. There are risks associated with doing business in Taiwan. If we successfully complete our proposed acquisition of EZconn, we will
have substantial manufacturing operations in Taiwan. There are several risks
associated with doing business in Taiwan, including:  -
    
    risks related to Taiwans tense political and economic relationship with
China;-
    
    fluctuations in the exchange rate between New Taiwan Dollars and U.S.
Dollars;-
    
    the risk of an outbreaks of Severe Acute Respiratory Syndrome (or SARS)
or other disease;-
    
    the risk of earthquakes, typhoons and other natural disasters;-
    
    risks related to potential changes in Taiwanese laws or regulatory
requirements, such as foreign exchange control regulations, import
and export regulations, quotas, tariffs or other trade policies; and 28




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-
    
    other risks normally associated with undertaking business operations in
foreign countries. Any or a combination of these risks could adversely impact our operating
results. 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. If we fail to effectively manage our manufacturing capability, produce products
meeting our customers quality requirements and achieve acceptable production
yields in China, we may not be able to deliver sufficient quantities of
products that meet all of the order requirements to our customers in a timely
manner, which would harm our operating results. We manufacture substantially all of our products in our facilities in
Zhuhai and Shanghai, China. The quality of our products and our ability to ship
products on a timely basis may suffer if we cannot effectively maintain the
necessary expertise and resources to effectively manage our manufacturing
activities in China. Because manufacturing our products involves complex and precise processes
and the majority of our manufacturing costs are relatively fixed, manufacturing
yields are critical to our results of operations. Factors that affect our
manufacturing yields include the quality of raw materials used to make our
products, 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 29




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to hire and train a sufficient number of qualified personnel to produce
our products cost-effectively with the quality and in the quantities required
by our customers. Changes in our manufacturing processes or those of our suppliers could
also impact our yields. In some cases, existing manufacturing techniques, which
involve substantial manual labor, may not allow us to meet our manufacturing
yield goals cost-effectively so that we maintain acceptable gross margins while
meeting the cost targets of our customers. We will need to develop new
manufacturing processes and techniques that will involve higher levels of
automation in order to increase our gross margins and help achieve the targeted
cost levels of our customers. We may not achieve manufacturing cost levels that
will allow us to achieve acceptable gross margins or fully satisfy customer
demands. Additionally, our competitors are automating their manufacturing
processes. If we are unable to achieve higher levels of automation and our
competitors are successful, it will harm our gross margins. Additional risks associated with managing our manufacturing processes and
capability in China include:  -
    
    a potential lack of availability of qualified management and
manufacturing personnel;-
    
    our ability to maintain quality;-
    
    our ability to procure the necessary raw materials and equipment on a
timely basis; and-
    
    our ability to quickly and effectively implement an adequate set of
financial controls to track and control levels of inventory. 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. We depend on the growth and success of the communications industry, which has
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, and if it does not
recover then we will not be able to grow our business. 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 30




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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 none of our customers are obligated to purchase our products, they may
cancel or defer their purchases at any time and on short notice, which could
harm our operating results. We do not have contracts with our customers that provide any assurance of
future sales, and sales are typically made pursuant to individual purchase
orders, often with extremely short lead times. Accordingly, our customers:  -
    
    may stop purchasing our products or defer their purchases at any time
without penalty;-
    
    are free to purchase products from our competitors;-
    
    are not required to make minimum purchases; and-
    
    may cancel orders that they place with us. 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 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. Because we depend on third parties to supply some of our raw materials and
equipment, we may not be able to obtain sufficient quantities of these
materials and equipment, or these materials may become unavailable due to
technological changes, which could limit our ability to fill customer orders
and harm our operating results. Difficulties in obtaining raw materials in the future may delay or limit
our product shipments, which could result in lost orders, increase our costs,
reduce our control over quality and delivery schedules and require us to
redesign our products. We depend on third parties to supply the raw materials
and equipment we use to manufacture our products. To be competitive, we must
obtain from our suppliers, on a timely 31




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basis, sufficient quantities of raw materials at acceptable prices. We
obtain most of our critical raw materials from a single or limited number of
suppliers and generally do not have long-term supply contracts with them. As a
result, our suppliers could terminate the supply of a particular material at
any time without penalty. Due to the severe downturn in the optical and
communications industries, manufacturers and vendors that we rely upon for raw
materials may scale back their operations or cease to do business entirely as a
result of financial hardship or other reasons. In addition, our suppliers could
terminate the supply of a particular material due to technological changes,
which would require us to redesign our products, identify and qualify
acceptable replacement suppliers. However, we cannot be certain that we could
obtain qualifications for such replacements from our customers. In addition,
some of the equipment we use is relatively complex and, in periods of high
market demand, the lead times from order to delivery of this equipment could be
as long as six months. 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 fiscal year ended June
30, 2004 has been derived from trial orders. If our products fail to meet our
customers specifications, 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. If our customers insist on outsourcing to contract manufacturers to provide
final assembly of their products, we will only be able to sell components,
which would harm 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 results are likely to be harmed. 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 32




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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, which would harm our operating
results. The market for fiber optic components and subsystems is intensely
competitive. We believe that our principal competitors are the major
manufacturers of optical components and subsystems, including vendors selling
to third parties and business divisions within communications equipment
suppliers. Many of our current and potential competitors have significantly
greater financial, technical, marketing, purchasing, manufacturing and other
resources than we do. As a result, these competitors may be able to respond
more quickly to new or emerging technologies and to changes in customer
requirements, to devote greater resources to the development, promotion and
sale of products, or to deliver competitive products at lower prices.
Competitors in any portion of our business may also rapidly become competitors
in other portions of our business. In addition, our industry has recently
experienced significant consolidation, and we anticipate that further
consolidation will occur. This consolidation has further increased competition. Several of our existing and potential customers are also current and
potential competitors of ours. These companies may develop or acquire
additional competitive products or technologies in the future and thereby
reduce or cease their purchases from us. In light of the consolidation in the
optical networking industry, we also believe that the size of the optical
component and subsystem suppliers will become increasingly important to our
current and potential customers in the future. 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 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 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. 33




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Our failure to predict market needs accurately or to develop new products
or product enhancements in a timely manner will harm market acceptance and
sales of our products. In this regard, we are currently developing bandwidth
creation products as well as bandwidth management products. If the development
of these products or any other future products takes longer than we anticipate,
or if we are unable to develop and introduce these products to market, our
revenues could suffer and we may not gain market share. Even if we are able to
develop and commercially introduce these new products, the new products may not
achieve widespread market acceptance. Furthermore, we have implemented, and may
continue to implement in the future, significant cost-cutting measures such as
reductions in our workforce, including reductions in research and development
and manufacturing personnel, that may weaken our research and development
efforts or cause us to have difficulty responding to sudden increases in
customer orders. In addition, we recently expanded our operations to include optical
contract manufacturing services. We cannot, however, assure you that we will be
able to successfully manage our manufacturing capabilities to produce quality
products in a cost-effective manner or gain market acceptance with respect to
any optical contract manufacturing service offerings. In addition, because
profit margins with respect to optical contract manufacturing services may be
smaller than the margins applicable to our current and past product offerings,
our gross margins may decline and our business may be harmed. If we fail to control our inventory levels or our inventory mix effectively,
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 are required to estimate our needs, which estimates may
not be accurate and may result in suboptimal inventory levels or 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 gross margins were positively impacted by the unexpected
utilization of fully reserved inventory of $54,000, $1.0 million and $1.6
million in the three months ended September 30, 2004 and fiscal 2004 and 2003,
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, if any. Any difficulty managing our inventory
levels, including failure to effectively and properly utilize the automated
management systems in China, may cause us to poorly utilize our manufacturing
capacity and further harm our operating efficiency. Disruption to commercial activities in the United States or in other countries,
particularly in China, may adversely impact our results of operations, our
ability to raise capital or our future growth. We derive a substantial portion of our revenues from customers located
outside the United States and a substantial portion of our operations are
located in China. Our international operations expose us to a number of
additional risks associated with international operations, including, without
limitation:  -
    
    disruptions to commercial activities or damage to our facilities as a
result of political unrest, war, terrorism, labor strikes, and work
stoppages; 34




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-
    
    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. Substantially all of our manufacturing operations are located in China and
are subject to the laws and regulations of China. Our operations in China may
be adversely affected by changes in the laws and regulations of China, such as
those relating to taxation, import and export tariffs, environmental
regulations, land use rights, property and other matters. Chinas central or
local governments may impose new, stricter regulations or interpretations of
existing regulations, which would require additional expenditures. In April
2004, Chinese leaders noted concerns regarding Chinas recent economic growth
and indicated, without providing specific details, that they may take very
forceful measures to bring the economy under control. On October 28, 2004, the
Peoples Bank of China, Chinas central bank, announced that it will raise both
lending and deposit interest rates 0.27 percentage effective October 29, 2004.
Chinas economy differs from the economies of many countries in terms of
structure, government involvement, specificity and enforcement of governmental
regulations, level of development, growth rate, capital reinvestment,
allocation of resources, self-sufficiency and rate of inflation, among others.
Our results of operations and financial condition may be harmed by changes in
the political, economic or social conditions in China. In addition, events in China over which we have no control, such as
political unrest, terrorism, war, labor strikes and work stoppages, could
disrupt our operations. There is currently political tension between the United
States and North Korea and the United States and China, which could, in either
case, result in hostilities or a deterioration in relations that would impact
our trade relations with China. There is also significant tension between China
and Taiwan, which could result in hostilities or lead to a breakdown in trade
relations between China and the United States. Additionally, China continues
its condemnation of the United States pledge of military support to Taiwan,
which could lead to hostilities. 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. The outbreak of any widespread illnesses, such as SARS, could disrupt our
operations and harm our financial results. 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 cause a reduction of our
manufacturing capability and a disruption to our research and development
efforts located at our China 35




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facilities. We could also experience a 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. Because a large portion of our business is located outside the United States,
fluctuations in currency exchange rates, particularly with respect to the U.S.
dollar and Chinese Renminbi exchange rate, could adversely impact our operating
results. A significant portion of our operations are conducted in currencies other
than the United States dollar, particularly, in Chinese Renminbi. Our operating
results are therefore subject to fluctuations in foreign currency exchange
rates. To the extent that the United States dollar weakens relative to other
currencies, our sales made in foreign currencies would be positively impacted,
although intercompany payments from our China subsidiaries to our parent
corporation that are made in United States dollars would be negatively
impacted. Conversely, to the extent that the United States dollar strengthens
relative to other currencies, our sales made in foreign currencies would be
negatively impacted, although intercompany payments from our China subsidiaries
to our parent corporation that are made in United States dollars would be
positively impacted. A number of commentators have recently suggested that a
strengthening of the Chinese Renminbi relative to the United States dollar is
anticipated at some point in the future; however, governmental authorities in
China have been noncommittal to date. To reduce our gains and losses associated
with converting foreign currencies into United States dollars, we may elect in
the future to enter into foreign exchange forward contracts to hedge our
foreign currency exposure. However, we cannot be certain that any such hedging
activities will be effective, or available to us at commercially reasonable
rates. As a result, we will continue to experience foreign currency gains and
losses. Power shortages at our manufacturing facilities in China may cause disruptions
and harm our operations. China has also recently experienced acute power shortages, and the
government has begun imposing regular power cuts in some areas. If any of our
facilities or the facilities of our suppliers are impacted by these power
shortages, we may be forced to shut down our production activities in China
frequently due to power shortages or incur additional costs to supply
electricity internally, which may cause production delays or increase
manufacturing costs and harm our operating results. 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 36




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us, but as demands on Chinas foreign currency reserves increase over time
to meet its commitments, sufficient foreign currency may not be available to
satisfy Chinas currency needs. Our business could be negatively impacted if we are unable to convert and
remit our sales received in Renminbi into U.S. dollars. Under existing foreign
exchange laws, Renminbi held by our Chinese subsidiaries can be converted into
foreign currencies and remitted out of China to pay current account items such
as payments to suppliers for imports, labor services, payment of interest on
foreign exchange loans and distributions of dividends so long as our
subsidiaries have adequate amounts of Renminbi to purchase the foreign
currency. Expenses of a capital nature such as the repayment of bank loans
denominated in foreign currencies, however, require approval from appropriate
governmental authorities before Renminbi can be used to purchase foreign
currency for remittance out of China. This system could be changed at any time
by executive decision of the State Council to impose limits on current account
convertibility of the Renminbi or other similar restrictions. Moreover, even though the Renminbi is intended to be freely convertible on
current accounts, the State Administration of Foreign Exchange, which is
responsible for administering Chinas foreign currency market, has a
significant degree of administrative discretion in interpreting and
implementing foreign exchange control regulations. From time to time, the State
Administration of Foreign Exchange has used this discretion in ways that
effectively limit the convertibility of current account payments and restrict
remittances out of China. Furthermore, in many circumstances the State
Administration of Foreign Exchange must approve foreign currency conversions
and remittances. Under the current foreign exchange control system, sufficient
foreign currency may not always be available in the future at a given exchange
rate to satisfy our currency demands. If tax benefits available to our subsidiaries located in China are reduced or
repealed, our business could suffer. Our subsidiaries located in China enjoy tax benefits in China that are
generally available to foreign investment enterprises, including full exemption
from national enterprise income tax for two years starting from the first
profit-making year and a 50% reduction in national income tax rate for the
following three years. In addition, local enterprise income tax is often waived
or reduced during this tax holiday/incentive period. Furthermore, under current
regulations in China, foreign investment enterprises that have been accredited
as technologically advanced enterprises are entitled to an additional
three-year reduction in national income tax by 50%, with a provision that the
income tax rate as so reduced may not be lower than 10%. However, the Chinese
government recently announced that preferential tax treatment for foreign
enterprises may be repealed beginning in 2006. If China elects to repeal or
reduce the tax benefits available to us in the future or we fail to continue to
qualify for the tax benefits, our financial condition and results of operations
may be adversely impacted. Our wavelength expansion products have accounted for a majority of our
revenues, and our revenues could be harmed if the price of, or demand for,
these products further declines or if these products fail to achieve broader
market acceptance. We believe that our future growth and a significant portion of our future
revenues will depend on the commercial success of our wavelength expansion
products. Customers that have purchased wavelength 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 37




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revenues in the three months ended September 30, 2004 and the fiscal years
ended June 30, 2004, 2003 and 2002. These products include, among others, dense
wavelength division multiplexers, or DWDMs. These products accounted for 60%,
65%, 67% and 66% of our revenues in the three months ended September 30, 2004
and the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Any
decline in the price of, or demand for, our wavelength expansion products, or
their failure to achieve broader market acceptance, could harm our revenues. The optical networking component industry is experiencing declining average
selling prices, which could cause our gross margins to decline and harm our
operating results. The optical networking component industry is experiencing declining
average selling prices, 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. 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. 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 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 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; 38




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-
    
    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 September 30, 2004, we hold 62 issued patents, have 8 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. 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., alleging, among other things,
infringement of two U.S. patents allegedly owned by Chorum relating to fiber
optical interleaving, based on our manufacture 39




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of and offer to sell various fiber optic interleaver products. On May 7,
2001, we filed a lawsuit alleging, among other matters, that Chorum infringes
one of our patents relating to fiber optic couplers based on Chorums
manufacture of and offer to sell various DWDM products. In December 2001, Oz Optics Limited et al.filed a lawsuit against us and
four individuals, including our former Vice President of Product Line
Management, Zeynep Hakimoglu (and three other unrelated individuals), alleging
trade secret misappropriation and other related claims. Under the complaint,
the plaintiffs sought damages against the four individuals in the amounts of
approximately $17,550,000, and against us in the amount of approximately
$1,500,000, as well as enhanced damages, injunctive relief, costs and attorney
fees, and other relief. We settled the lawsuit against us in August 2004 and Oz
Optics agreed to dismiss the case against us with prejudice. However, we cannot
assure you that Oz Optics will not choose to pursue further litigation against
us in the future. In addition, to our knowledge Oz Optics is continuing to
pursue its lawsuit against all of the defendants other than us, and we may be
obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her
prior employment with us. Both prosecuting and defending lawsuits involving our intellectual
property may be costly and time consuming and may also divert the efforts and
attention of our management and technical personnel. Intellectual property
litigation is often highly complex and can extend for a protracted period of
time, which can substantially increase the cost of litigation. Accordingly, the
expenses and diversion of resources associated with intellectual property
litigation to which we may become a party could seriously harm our business and
financial condition. Any intellectual property litigation also could invalidate
our proprietary rights and force us to do one or more of the following:  -
    
    obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all;-
    
    stop selling, incorporating or using our products that use the
challenged intellectual property;-
    
    pay substantial money damages; or-
    
    redesign the products that use the technology. Any of these actions could result in a substantial reduction in our
revenue and could result in losses over an extended period of time. We are the target of a securities class action complaint and are at risk of
securities class action litigation, which will likely result in substantial
costs and divert management attention and resources. We are one of hundreds of defendants in a consolidated set of class action
lawsuits, filed by plaintiffs (the Plaintiffs) against hundreds of public
companies (the Issuers) that went public in the late 1990s and early 2000s
(collectively, the IPO Lawsuits). In June 2003, Issuers and Plaintiffs
reached a tentative settlement agreement and entered a memorandum of
understanding, providing for, among other things, a dismissal with prejudice
and full release of the Issuers and their officers and directors from all
further liability resulting from Plaintiffs claims, and the assignment to
Plaintiffs of certain potential claims that the Issuers may have against the
underwriters. In addition, the tentative settlement guarantees that, in the
event that the Plaintiffs recover less than $1 billion in settlement or
judgment against the underwriter defendants in the IPO Lawsuits, the Plaintiffs
would be entitled to payment by each participating Issuers insurer of a pro 40




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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 June
2004, Oplink executed a settlement agreement with the Plaintiffs pursuant to
the terms of a memorandum of understanding. The settlement is subject to a
number of conditions, including action by the Court certifying a class action
for settlement purposes and formally approving the settlement. The underwriters
have opposed both the certification of the class and the judicial approval of
the settlement. Pending a definitive settlement, we continue to believe that
the action against us is without merit and intend to defend against it
vigorously. Our lengthy and variable qualification and sales cycle requires us to incur
substantial costs to make a sale, and if the sale does not occur then we will
have incurred these expenses without obtaining increased sales. Our customers typically expend significant efforts in evaluating and
qualifying our products and manufacturing process prior to placing an order.
This evaluation and qualification process frequently results in a lengthy sales
cycle, typically ranging from nine to twelve months and sometimes longer. While
our customers are evaluating our products and before they place an order with
us, we may incur substantial sales, marketing, research and development
expenses, expend significant management efforts, increase manufacturing
capacity and order long lead-time supplies. Even after this evaluation process,
it is possible that a potential customer will not purchase our products. In addition, product purchases are frequently subject to unplanned
processing and other delays, particularly with respect to larger customers for
which our products represent a very small percentage of their overall purchase
activity. Long sales cycles may cause our revenues and operating results to
vary significantly and unexpectedly from quarter to quarter, which could cause
volatility in our stock price. We depend on key personnel to manage our business effectively in a rapidly
changing market, and if we are unable to retain our key employees and hire
additional personnel, our ability to sell our products could be harmed. Our future success depends upon the continued services of our executive
officers and other key engineering, finance, sales, marketing, manufacturing
and support personnel. In addition, we depend substantially upon the continued
services of key management personnel at our Chinese subsidiaries. None of our
officers or key employees are bound by an employment agreement for any specific
term, and these personnel may terminate their employment at any time. In
addition, we do not have key person life insurance policies covering any of
our employees. Our ability to continue to attract and retain highly-skilled personnel
will be a critical factor in determining whether we will be successful in the
future. Competition for highly-skilled personnel is intense. We may not be
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs. In addition, our management team has
experienced significant personnel changes over the past two years and may
continue to experience changes in the future. If our management team
experiences further changes and does not work effectively together, it could
substantially harm our business. Because some of our third-party sales representatives and distributors carry
products of one or more of our competitors, they may not recommend our products
over competitors products. 41




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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 area, which is
in the vicinity of 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 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 have been inventory and other materials shipped to and
from our facilities in China for which, upon arrival of the goods, there was
not sufficient documentation to demonstrate the items comply with all local
customs regulations. The U.S. Customs Service may also require us to revise
product classifications from time to time with respect to various items
imported into the United States. In such cases we may be required to pay any
increase in customs duty to account for the difference in duty actually paid by
Oplink and the duty owed under the amended product classification, and may also
be subject to penalties under applicable laws. In addition, from time to time we enter into transfer pricing arrangements
with our subsidiaries to establish sales prices for internal distributions of
goods that have the effect of allocating taxes between the 42




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parent corporation and our subsidiaries. In general, these transfer prices
have not been approved by any governmental entity and, therefore, may be
challenged by the applicable tax authorities. China tax authorities have
recently announced that they plan to increase transfer pricing audits and
specifically identified telecommunications companies, among others, as priority
targets. We employ a number of foreign nationals in our U.S. operations and as a
result we are subject to various laws related to the status of those employees
with the Bureau of Citizenship and Immigration Services. We also send our U.S.
employees to China from time to time and for varying durations of time to
assist with our Chinese operations. Depending on the durations of such
arrangements, we may be required to withhold and pay personal income taxes in
respect of the affected U.S. employees directly to the Chinese tax authorities,
and the affected U.S. employees may be required to register with various
Chinese governmental authorities. Our failure to comply with the foregoing laws
and regulations or any other applicable laws and regulations could subject us
to liability. In addition, we are subject to laws relating to the storage, use,
discharge and disposal of toxic or otherwise hazardous or regulated chemicals
or materials used in our manufacturing processes. While we believe that we are
currently in compliance in all material respects with these laws and
regulations, if we fail to store, use, discharge or dispose of hazardous
materials appropriately, we could be subject to substantial liability or could
be required to suspend or adversely modify our manufacturing operations. In
addition, we could be required to pay for the cleanup of our properties if they
are found to be contaminated, even if we are not responsible for the
contamination. Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are
uncertain, and if we fail to comply in a timely manner, our business could be
harmed and our stock price could decline. We must comply with the rules promulgated under Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404) by June 30, 2005. Rules describing
the requirements for our auditors to be able to attest to our compliance under
Section 404 were adopted in June 2004, and we, along with our external service
providers, are currently interpreting what qualifies as compliance with Section
404. Because the matter of Section 404 compliance is new, there is no precedent
or proven method for such compliance, and our management must exercise
significant judgment in our effort to comply with Section 404. As a result of
this uncertainty, although we currently anticipate that we will timely complete
all such actions, we cannot at this time be certain that all such actions will
timely be completed. Possible consequences of failure include sanction or
investigation by regulatory authorities, such as the Securities Exchange
Commission or the Nasdaq National Market, and inability to timely file our
Annual Report on Form 10-K for fiscal 2005. If we fail to comply in a timely
manner and any of these consequences were to result, public perception of our
internal controls could be damaged, causing our financial results to suffer and
our stock price to decline. Recently enacted and proposed changes in securities laws and regulations are
likely to increase our costs. The Sarbanes-Oxley Act of 2002 has required and will continue to require
changes in some of our corporate governance and securities disclosure or
compliance practices. That Act also requires the SEC to promulgate new rules on
a variety of subjects, in addition to rule proposals already made, and The
Nasdaq National Market has revised its requirements for companies that are
Nasdaq-listed. We expect these developments will (i) require us to devote
additional resources to our operational, financial and management information
systems procedures and controls to ensure our continued compliance with current
and future 43




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laws and regulations, (ii) will make it more difficult and more expensive
for us to obtain director and officer liability insurance, and we may be
required to accept reduced coverage, increase our level of self-insurance, or
incur substantially higher costs to obtain coverage, and (iii) could make it
more difficult for us to attract and retain qualified members of our board of
directors, or qualified executive officers. We are presently evaluating and
monitoring regulatory developments and cannot estimate the timing or magnitude
of additional costs we may incur as a result. Changes in existing financial accounting standards or practices or taxation
rules or practices may adversely affect our results of operations. Changes in existing accounting or taxation rules or practices, new
accounting pronouncements or taxation rules, or varying interpretations of
current accounting pronouncements or taxation practice could have a significant
adverse effect on our results of operations or the manner in which we conduct
our business. Further, such changes could potentially affect our reporting of
transactions completed before such changes are effective. For example, we
currently are not required to expense stock-based compensation charges in
connection with stock option grants to our employees and stock purchases under
our employee stock purchase plan. However, the Financial Accounting Standards
Board (FASB) has announced a proposal to change generally accepted accounting
principles in the United States that, if implemented, would require us to
expense stock-based compensation charges for employee stock option grants and
stock purchases. Such charges would negatively impact our operating results. 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 development and marketing of new products and the acquisition from time to
time of strategic businesses and technologies, may 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 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. 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 September 30, 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 the effect of delaying a change
in control, which may be favored by our other stockholders, or entrenching
current management. 44




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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 September 30, 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. 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; 45




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-
    
    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 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; 46




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-
    
    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. 
 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 and corporate bonds. As of September 30, 2004,
all of our short-term investments were in high quality commercial paper,
corporate bonds and government debt securities with maturities of less than
twelve months from September 30, 2004. As of September 30, 2004, our long-term
investments primarily consist of corporate bonds and government debt securities
with maturities of less than three years from September 30, 2004. We invested
our excess cash in long-term investments to take advantage of higher yields
generated by these investments. We intend to hold these long-term investments
to maturity and we believe we have the ability to hold them to maturity.
However, liquidating our long-term investments before maturity could have a
material impact on our interest earnings. We do not hold any instruments for
trading purposes. Declines in interest rates could have a material impact on
interest earnings for our investment portfolio. The following table summarizes
our current investment securities (in thousands, except percentages): 47




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Carrying
    
    Average Rate
    
    Carrying
    
    Average RateValue at
    
    of Return at
    
    Value at
    
    of Return atSeptember 30,
    
    September 30,
    
    June 30,
    
    June 30,2004
    
    2004
    
    2004
    
    2004(Annualized)
    
    
    
    
    
    (Annualized)Investment Securities:Cash
equivalents - variable rate
    
    $
    21,252
    
    
    
    1.8
    %
    
    $
    46,034
    
    
    
    1.1
    %Cash
equivalents - fixed rate
    
    
    74,397
    
    
    
    1.8
    %
    
    
    58,919
    
    
    
    1.4
    %Short-term
investments - variable rate
    
    
    5,002
    
    
    
    1.7
    %
    
    
    7,497
    
    
    
    1.0
    %Short-term
investments - fixed rate
    
    
    40,922
    
    
    
    1.6
    %
    
    
    17,352
    
    
    
    1.3
    %Long-term
investments - variable rate
    
    
    
    
    
    
    
    
    
    
    5,002
    
    
    
    1.2
    %Long-term
investments - fixed rate
    
    
    39,848
    
    
    
    2.6
    %
    
    
    50,202
    
    
    
    2.3
    %Total
    
    $
    181,421
    
    
    
    
    
    
    $
    185,006
 Expected Fiscal Year Maturity Date2005
    
    2006
    
    2007
    
    Total
    
    Fair ValueLong-term
investments - fixed rate
    
    $
    
    
    
    $
    22,845
    
    
    $
    17,003
    
    
    $
    39,848
    
    
    $
    39,745Average interest rate
    
    
    0.0
    %
    
    
    2.3
    %
    
    
    3.0
    %
    
    
    2.7
    %
 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.  (a)
    
    Evaluation of disclosure controls and procedures. Subject to the
limitations on the effectiveness of the controls as described below,
based on an evaluation of our disclosure controls and procedures
conducted by our management, including our principal executive officer
and principal financial officer, our principal executive officer, Joseph
Y. Liu, and our principal financial officer, Bruce D. Horn, have
concluded that our disclosure controls and procedures were effective as
of September 30, 2004.(b)
    
    Changes in internal controls. There was no change in our internal
control over financial reporting during the quarter ended September 30,
2004 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 48




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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 September
30, 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 On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc.
(collectively, OZ) sued four individuals and us in California Superior Court
for the County of Alameda. One of the four individual defendants is Zeynep
Hakimoglu, who joined Oplink on November 1, 2001 as Vice President of Product
Line Management. The other three are unrelated to us. Zeynep Hakimoglus
employment with us terminated on December 17, 2002. The complaint alleges trade
secret misappropriation and related claims against the four individuals and us
concerning OZs alleged polarization modedispersion technology. The plaintiffs
seek actual damages against the four 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
currently in discovery with a trial date set for April 8, 2005. In August 2004,
we settled the lawsuit against us and OZ agreed to dismiss the case against us
with prejudice. To our knowledge OZ is continuing to pursue its lawsuit against
all of the defendants other than us, and we may be obligated to indemnify Ms.
Hakimoglu for certain amounts in connection with her prior employment with us.
In the event that we incur such an obligation, we believe we have obtained
sufficient director and officer liability insurance to cover this contingency. 
 ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES None. 
 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 49




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ITEM 5 - OTHER INFORMATION On October 28, 2004, we and our newly formed, wholly owned Cayman Islands
subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase
agreement with all the shareholders of EZconn Corporation, a privately-held
Taiwanese company that manufactures cable and photonics components for
broadband access equipment manufacturers. Pursuant to the stock purchase
agreement and related ancillary agreements, our Cayman Island subsidiary will
pay $30 million for all of the shares of EZconn and certain assets related to
the business of EZconn, of which $9 million will be paid in cash and $21
million will be paid in shares of our common stock to be issued pursuant to a
subscription agreement entered into by us and eight of the shareholders of
EZconn. Our Cayman Islands subsidiary will also assume approximately $12
million in net debt of EZconn, which will be repaid at or promptly following
the closing of the acquisition. The closing of the acquisition is subject to
the satisfactory completion of our due diligence investigation of EZconn,
approval by the Investment Commission of the Ministry of Economic Affairs of
the Republic of China and certain other customary closing conditions. The
acquisition is expected to close in January 2005. Pursuant to the subscription agreement entered into by us and eight of the
shareholders of EZconn, we will issue $21 million in shares of our common stock
to such persons upon the closing of the acquisition of EZconn contemplated by
the stock purchase agreement. The shares of common stock will be issued at a
price per share based on the 20-day average closing price of our common stock
for the period ending one day prior to the closing of the acquisition of
EZconn, provided that (i) if the 20-day average closing price exceeds $1.83,
the price per share shall be $1.83, and (ii) if the 20-day average closing
price is less than $1.66, the price per share shall be $1.66. The shares of
common stock will not be issued unless the acquisition of EZconn contemplated
by the stock purchase agreement is consummated and will not be registered under
the Securities Act of 1933, as amended, or any state securities laws. We have
agreed to grant certain registration rights to the eight purchasers. 
 ITEM 6 - EXHIBITS Exhibit No.
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(1)
    
    Bylaws of the Registrant.3.3(2)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock.31.1
    
    Certification of Chief Executive Officer Required under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Required under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of
the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. Section 1350).32.2*
    
    Certification of Chief Financial Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of
the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
  (1)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1/A, No. 333-41506, as filed on
October 3, 2000.(2)
    
    Previously filed as an Exhibit to the Registrants Report on Form 8-K filed on March 22, 2002 and incorporated
herein by reference. * The certifications attached as Exhibits 32.1 and 32.2 accompanies
this Quarterly Report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of
1934, as amended. 50




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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: November 12, 2004
    
    By:
    
    /s/ Bruce D. HornBruce D. HornChief Financial Officer(Principal Financial and Accounting Officer)
 51




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Exhibit Index Exhibit No.
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(1)
    
    Bylaws of the Registrant.3.3(2)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock.31.1
    
    Certification of Chief Executive Officer Required under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Required under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of
the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. Section 1350).32.2*
    
    Certification of Chief Financial Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of
the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
 * 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. 52