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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2003



or



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 000-31581



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OPLINK COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)



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|Delaware                                                      |  | No. 77-0411346                     
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification 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, 2003 was 145,236,594.



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##### Table of Contents

OPLINK COMMUNICATIONS, INC.



FORM 10-Q



INDEX



|                              |  |                                                                                                  |  | Page
|----------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ----
|PART I. FINANCIAL INFORMATION |  |                                                                                                 
|                              |  |                                                                                                 
|Item 1.                       |  | Financial Statements (unaudited):                                                                |  |     
|                              |  |                                                                                                 
|                              |  | Condensed Consolidated Balance Sheets  September 30, 2003 and June 30, 2003                     |  | 3   
|                              |  |                                                                                                 
|                              |  | Condensed Consolidated Statements of Operations  Three months ended September 30, 2003 and 2002 |  | 4   
|                              |  |                                                                                                 
|                              |  | Condensed Consolidated Statements of Cash Flows  Three months ended September 30, 2003 and 2002 |  | 5   
|                              |  |                                                                                                 
|                              |  | Notes to Condensed Consolidated Financial Statements                                             |  | 7   
|                              |  |                                                                                                 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 15  
|                              |  |                                                                                                 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                       |  | 45  
|                              |  |                                                                                                 
|Item 4.                       |  | Controls and Procedures                                                                          |  | 45  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                 
|                              |  |                                                                                                 
|Item 1.                       |  | Legal Proceedings                                                                                |  | 46  
|                              |  |                                                                                                 
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                        |  | 47  
|                              |  |                                                                                                 
|Item 3.                       |  | Defaults Upon Senior Securities                                                                  |  | 48  
|                              |  |                                                                                                 
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                              |  | 48  
|                              |  |                                                                                                 
|Item 5.                       |  | Other Information                                                                                |  | 48  
|                              |  |                                                                                                 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                 |  | 48  
|                              | 
|SIGNATURES                    |  | 50                                                                                              



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                              |  | September 30, |          |   | June 30, |  
|--------------------------------------------- |  | ------------- | -------- | - | -------- | -
|                                              |  | 2003          |          |   | 2003     |  
|                                              |  | (Unaudited)   |          |   | (1)      |  
|ASSETS                                        |  |               |          |   |          |  
|Current assets:                               |  |               |          |   |          |  
|Cash and cash equivalents                     |  | $             | 124,304  |   |          | $
|Short-term investments                        |  |               | 64,777   |   |          |  
|Accounts receivable, net                      |  |               | 5,982    |   |          |  
|Inventories                                   |  |               | 3,654    |   |          |  
|Prepaid expenses and other current assets     |  |               | 2,008    |   |          |  
|Net assets of discontinued operation          |  |               | 2,667    |   |          |  
|                                              |  |               |          |   |          |  
|Total current assets                          |  |               | 203,392  |   |          |  
|Property, plant and equipment, net            |  |               | 29,670   |   |          |  
|Intangible assets                             |  |               |         |   |          |  
|Other assets                                  |  |               | 608      |   |          |  
|                                              |  |               |          |   |          |  
|Total assets                                  |  | $             | 233,670  |   |          | $
|                                              |  |               |          |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY          |  |               |          |   |          |  
|Current liabilities:                          |  |               |          |   |          |  
|Accounts payable                              |  | $             | 5,604    |   |          | $
|Accrued liabilities                           |  |               | 7,933    |   |          |  
|Current portion of capital lease obligations  |  |               | 866      |   |          |  
|                                              |  |               |          |   |          |  
|Total current liabilities                     |  |               | 14,403   |   |          |  
|Capital lease obligations, non current        |  |               |         |   |          |  
|Accrued restructuring costs, non current      |  |               | 1,145    |   |          |  
|                                              |  |               |          |   |          |  
|Total liabilities                             |  |               | 15,548   |   |          |  
|                                              |  |               |          |   |          |  
|Commitments and contingencies (Note 14)       |  |               |          |   |          |  
|                                              |  |              
|Stockholders equity:                         |  |               |          |   |          |  
|Common stock                                  |  |               | 144      |   |          |  
|Additional paid-in capital                    |  |               | 464,498  |   |          |  
|Treasury stock                                |  |               | (25,276  | ) |          |  
|Notes receivable from stockholders            |  |               | (51      | ) |          |  
|Deferred stock compensation                   |  |               | (943     | ) |          |  
|Accumulated other comprehensive income (loss) |  |               | 7        |   |          |  
|Accumulated deficit                           |  |               | (220,257 | ) |          |  
|                                              |  |               |          |   |          |  
|Total stockholders equity                    |  |               | 218,122  |   |          |  
|                                              |  |               |          |   |          |  
|Total liabilities and stockholders equity    |  | $             | 233,670  |   |          | $
|                                              |  |               |          |   |          |  

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|(1) |  | The Condensed Consolidated Balance Sheet at June 30, 2003 has been derived from the audited financial statements at that date.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part of these condensed consolidated financial
statements.



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OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                      |  | Three Months Ended September 30, |        
|----------------------------------------------------- |  | -------------------------------- | -------
|                                                      |  | 2003                             |        
|Revenues                                              |  | $                                | 7,234  
|Cost of revenues:                                     |  |                                  |        
|Cost of revenues                                      |  |                                  | 5,173  
|Non-cash compensation expense                         |  |                                  | 76     
|                                                      |  |                                  |        
|Total cost of revenues                                |  |                                  | 5,249  
|                                                      |  |                                  |        
|Gross profit (loss)                                   |  |                                  | 1,985  
|                                                      |  |                                  |        
|Operating expenses:                                   |  |                                  |        
|Research and development:                             |  |                                  |        
|Research and development                              |  |                                  | 1,362  
|Non-cash compensation expense (recovery)              |  |                                  | 350    
|                                                      |  |                                  |        
|Total research and development                        |  |                                  | 1,712  
|                                                      |  |                                  |        
|Sales and marketing:                                  |  |                                  |        
|Sales and marketing                                   |  |                                  | 784    
|Non-cash compensation (recovery) expense              |  |                                  | (14    
|                                                      |  |                                  |        
|Total sales and marketing                             |  |                                  | 770    
|                                                      |  |                                  |        
|General and administrative:                           |  |                                  |        
|General and administrative                            |  |                                  | 2,256  
|Non-cash compensation expense                         |  |                                  | 365    
|                                                      |  |                                  |        
|Total general and administrative                      |  |                                  | 2,621  
|                                                      |  |                                  |        
|Merger fees                                           |  |                                  |       
|Amortization of goodwill, intangible and other assets |  |                                  | 10     
|                                                      |  |                                  |        
|Total other operating expenses                        |  |                                  | 10     
|                                                      |  |                                  |        
|Total operating expenses                              |  |                                  | 5,113  
|                                                      |  |                                  |        
|Loss from operations                                  |  |                                  | (3,128 
|Interest and other income, net                        |  |                                  | 552    
|Gain (loss) on sale of assets                         |  |                                  | 215    
|                                                      |  |                                  |        
|Loss from continuing operations                       |  |                                  | (2,361 
|Income (loss) from discontinued operation             |  |                                  | 103    
|                                                      |  |                                  |        
|Net loss                                              |  | $                                | (2,258 
|                                                      |  |                                  |        
|Basic and diluted net loss per share:                 |  |                                  |        
|Continuing operations                                 |  | $                                | (0.02  
|Discontinued operation                                |  |                                  | 0.00   
|                                                      |  |                                  |        
|Total                                                 |  | $                                | (0.02  
|                                                      |  |                                  |        
|Basic and diluted weighted average shares outstanding |  |                                  | 142,589
|                                                      |  |                                  |        



The accompanying notes are an
integral part of these condensed consolidated financial statements.



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OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                                                          |  | Three Months Ended September 30, |        
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------
|                                                                                                                                          |  | 2003                             |        
|Cash flows from operating activities:                                                                                                     |  |                                  |        
|Loss from continuing operations                                                                                                           |  | $                                | (2,361 
|Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities of continuing
operations: |  |                                  |        
|Depreciation and amortization of property and equipment                                                                                   |  |                                  | 2,117  
|Amortization of goodwill and intangible assets                                                                                            |  |                                  | 10     
|Amortization of deferred stock compensation                                                                                               |  |                                  | 777    
|Amortization of discount (premium) on short-term investments                                                                              |  |                                  | 37     
|(Gain) loss on sale or disposal of assets                                                                                                 |  |                                  | (215   
|Interest income related to stockholder notes                                                                                              |  |                                  |       
|Other                                                                                                                                     |  |                                  | 53     
|Change in assets and liabilities:                                                                                                         |  |                                  |        
|Accounts receivable                                                                                                                       |  |                                  | (1,266 
|Inventories                                                                                                                               |  |                                  | (218   
|Prepaid expenses and other assets                                                                                                         |  |                                  | 254    
|Accounts payable                                                                                                                          |  |                                  | 1,017  
|Accrued liabilities and accrued restructuring costs                                                                                       |  |                                  | 199    
|                                                                                                                                          |  |                                  |        
|Net cash provided by (used in) continuing operations                                                                                      |  |                                  | 404    
|                                                                                                                                          |  |                                  |        
|Cash flows from investing activities:                                                                                                     |  |                                  |        
|Purchases of short-term investments                                                                                                       |  |                                  | (49,726
|Maturities of short-term investments                                                                                                      |  |                                  | 51,500 
|Proceeds from sales of assets                                                                                                             |  |                                  | 393    
|Purchase of property and equipment                                                                                                        |  |                                  | (51    
|                                                                                                                                          |  |                                  |        
|Net cash provided by (used in) investing activities of continuing operations                                                              |  |                                  | 2,116  
|                                                                                                                                          |  |                                  |        
|Cash flows from financing activities:                                                                                                     |  |                                  |        
|Proceeds from issuance of common stock                                                                                                    |  |                                  | 851    
|Repurchase of common stock                                                                                                                |  |                                  |       
|Repayment of capital lease obligations                                                                                                    |  |                                  | (695   
|                                                                                                                                          |  |                                  |        
|Net cash provided by (used in) financing activities of continuing operations                                                              |  |                                  | 156    
|                                                                                                                                          |  |                                  |        
|Net cash provided by (used in) continuing operations                                                                                      |  |                                  | 2,676  
|Net cash provided by (used in) discontinued operation                                                                                     |  |                                  | 130    
|                                                                                                                                          |  |                                  |        
|Net increase (decrease) in cash and cash equivalents                                                                                      |  |                                  | 2,806  
|Cash and cash equivalents, beginning of period                                                                                            |  |                                  | 121,498
|                                                                                                                                          |  |                                  |        
|Cash and cash equivalents, end of period                                                                                                  |  | $                                | 124,304
|                                                                                                                                          |  |                                  |        



(CONTINUED ON NEXT
PAGE)



The accompanying notes are an integral part of these condensed
consolidated financial statements.



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OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



(CONTINUED FROM PREVIOUS PAGE)



|                                                          |  | Three Months EndedSeptember 30, |   
|--------------------------------------------------------- |  | ------------------------------- | --
|                                                          |  | 2003                            |   
|Supplemental disclosures of cash flow information:        |  |                                 |   
|Cash paid during the period for interest expense          |  | $                               | 20
|                                                          |  |                                 |   
|Supplemental non-cash investing and financing activities: |  |                                 |   
|Forfeiture of common stock option grants                  |  | $                               | (3
|                                                          |  |                                 |   
|Recovery/return of property and equipment                 |  | $                               |  
|                                                          |  |                                 |   



The accompanying notes are an
integral part of these condensed consolidated financial statements.



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OPLINK COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. Description of Business. Oplink Communications, Inc. (Oplink or the Company) provides design, integration and Optical Manufacturing Solutions (OMS) for optical networking components
and subsystems that expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals and provide signal transmission and reception within an optical network. The Companys product portfolio
includes solutions for next-generation, all-optical Dense Wavelength Division Multiplexing, or DWDM, optical amplification, switching and routing, monitoring and conditioning and line transmission applications. The Company offers advanced and
cost-effective optical-electrical components and subsystem manufacturing through its facilities in Zhuhai, China. In addition, the Company maintains optical-centric front-end design, application, and customer service functions at its headquarters in
San Jose, California. 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 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 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 accountants who do not express an opinion thereon, and should be read in conjunction with the audited consolidated financial statements and notes thereto for
the fiscal year ended June 30, 2003 included in the Companys Annual Report on Form 10-K.



The Company operates and reports using a fiscal year, which ends on the Sunday closest to June 30. Interim fiscal quarters end on the Sunday closest to each calendar quarter end. For presentation purposes, the Company
presents each fiscal year as if it ended on June 30. The Company presents each of the fiscal quarters as if it ended on the last day of each calendar quarter. Fiscal year 2004 will consist of 52 weeks.



In June 2003, the Company adopted a plan to sell its Shanghai operation. The
sale of the Shanghai operation represents a disposal of a component of an entity as defined in Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets,. For the periods presented, the Shanghai operation is accounted as a discontinued operation in the financial statements in accordance with SFAS No. 144. Amounts in the financial statements and related notes for the periods presented,
are reclassified to reflect the discontinued operation.



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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, 2003 and the results of its operations and its cash flows for the three-month periods ended September
30, 2003 and 2002. 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, |        
|------------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                          |  | 2003                            |        
|Numerator:                                                                |  |                                 |        
|Loss from continuing operations                                           |  | $                               | (2,361 
|Income (loss) from discontinued operation                                 |  |                                 | 103    
|                                                                          |  |                                 |        
|Total                                                                     |  | $                               | (2,258 
|                                                                          |  |                                 |        
|Denominator:                                                              |  |                                 |        
|Weighted average shares outstanding                                       |  |                                 | 142,589
|                                                                          |  |                                 |        
|Net loss per share - basic and diluted:                                   |  |                                 |        
|Continuing operations                                                     |  | $                               | (0.02  
|Discontinued operation                                                    |  |                                 | 0.00   
|                                                                          |  |                                 |        
|Total                                                                     |  | $                               | (0.02  
|                                                                          |  |                                 |        
|Antidilutive stock options not included in net loss per share calculation |  |                                 | 18,874 
|                                                                          |  |                                 |        



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.



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The reconciliation of net loss to comprehensive loss for the three months ended September 30, 2003 and
2002 is as follows (in thousands):



|                                             |  | Three MonthsEndedSeptember 30, |       
|-------------------------------------------- |  | ------------------------------ | ------
|                                             |  | 2003                           |       
|Net loss                                     |  | $                              | (2,258
|Unrealized loss on investments               |  |                                | (17   
|Change in cumulative translation adjustments |  |                                | 53    
|                                             |  |                                |       
|Total comprehensive loss                     |  | $                              | (2,222
|                                             |  |                                |       



5. Short-Term
Investments.The Companys short-term investments are primarily comprised of money market funds, government and non-government debt securities and commercial paper. Short-term investments represent securities with original
maturity of greater than three months and less than one year. Investments are custodied with major financial institutions. Realized gains and losses are recorded using the specific identification method. As of September 30, 2003 and June 30, 2003,
all of the Companys short-term investments were classified as available-for-sale and were recorded on the Condensed Consolidated Balance Sheets at fair value. Unrealized gains and losses on these short-term investments are included as a
separate component of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income.



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, |  
|------------------------------------------------ |  | ------------- | ------- | - | -------- | -
|                                                 |  | 2003          |         |   | 2003     |  
|Inventories:                                     |  |               |         |   |          |  
|Raw materials                                    |  | $             | 11,019  |   |          | $
|Work-in-process                                  |  |               | 5,049   |   |          |  
|Finished goods                                   |  |               | 3,808   |   |          |  
|                                                 |  |               |         |   |          |  
|                                                 |  |               | 19,876  |   |          |  
|Less: Reserves for excess and obsolete inventory |  |               | (16,222 | ) |          |  
|                                                 |  |               |         |   |          |  
|                                                 |  | $             | 3,654   |   |          | $
|                                                 |  |               |         |   |          |  



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7. Property, Plant and Equipment. Property, plant and equipment consist of (in thousands):



|                                                |  | September 30, |         |   | June 30, |  
|----------------------------------------------- |  | ------------- | ------- | - | -------- | -
|                                                |  | 2003          |         |   | 2003     |  
|Property, plant and equipment:                  |  |               |         |   |          |  
|Computer equipment and software                 |  | $             | 34,771  |   |          | $
|Building and leasehold improvements             |  |               | 12,685  |   |          |  
|Construction in progress                        |  |               | 968     |   |          |  
|                                                |  |               |         |   |          |  
|                                                |  |               | 48,424  |   |          |  
|Less: Accumulated depreciation and amortization |  |               | (18,754 | ) |          |  
|                                                |  |               |         |   |          |  
|                                                |  | $             | 29,670  |   |          | $
|                                                |  |               |         |   |          |  



8. Accrued Liabilities. Accrued
liabilities consist of (in thousands):



|                             |  | September 30, |       | June 30,
|---------------------------- |  | ------------- | ----- | --------
|                             |  | 2003          |       | 2003    
|Accrued liabilities:         |  |               |       |         
|Payroll and related expenses |  | $             | 726   |         
|Accrued sales commission     |  |               | 973   |         
|Accrued warranty             |  |               | 700   |         
|Accrued restructuring costs  |  |               | 2,561 |         
|Other                        |  |               | 2,973 |         
|                             |  |               |       |         
|                             |  | $             | 7,933 |         
|                             |  |               |       |         



9. Product Warranties. We
provide reserves for the estimated cost of product warranties at the time revenue is recognized based on our historical experience of known product failure rates and expected material and labor costs to provide warranty services. We generally
provide a one-year warranty on our products. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if our estimates are determined to be greater than the actual amounts
necessary, we 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 MonthsEnded September 30, |     
|---------------------------------------------------------------------------- |  | ------------------------------- | ----
|                                                                             |  | 2003                            |     
|Balance at the beginning of the period                                       |  | $                               | 700 
|Accruals for warranties issued during the period                             |  |                                 | 211 
|Accruals related to pre-existing warranties (including changes in estimates) |  |                                 | (179
|Settlements made (in cash or in kind) during the period                      |  |                                 | (32 
|                                                                             |  |                                 |     
|Balance at the end of the period                                             |  | $                               | 700 
|                                                                             |  |                                 |     



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10. Restructuring Costs and Other Charges. For the years ended June 30, 2003, 2002 and 2001, $12.2 million, $28.1
million and $18.2 million, respectively, of restructuring costs and other charges were recorded as operating expenses for worldwide workforce reduction, consolidation of excess property and equipment and facilities and other charges. A summary of
the restructuring charges accrued in fiscal 2001, 2002 and 2003 and the quarter ended September 30, 2003 is as follows (in thousands):



|                                                                                |  | WorkforceReduction |        |   | Excess Propertyand Equipment |   |         | Consolidation ofExcess Facilitiesand Other Charges |  |   | Impairmentof Goodwilland PurchasedIntangible Assets |   |  | Total |        
|------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------------------- | - | ------- | -------------------------------------------------- |  | - | --------------------------------------------------- | - |  | ----- | -------
|Initial restructuring charge in the fourth quarter of fiscal 2001               |  | $                  | 250    |   |                              | $ |        |                                                    |  | $ | 5,485                                               |   |  | $     | 12,442 
|Non-cash charge                                                                 |  |                    |       |   |                              |   |        |                                                    |  |   |                                                    |   |  |       | (12,442
|Cash payments                                                                   |  |                    |       |   |                              |   |        |                                                    |  |   | (1,191                                              | ) |  |       |       
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at June 30, 2001                                                        |  |                    | 250    |   |                              |   |        |                                                    |  |   | 4,294                                               |   |  |       |       
|Less: accrued restructuring costs, current                                      |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Additional restructuring charge in the fourth quarter of fiscal 2002            |  |                    | 2,899  |   |                              |   | 16,055  |                                                    |  |   | 9,151                                               |   |  |       |       
|Non-cash charge                                                                 |  |                    |       |   |                              |   | (15,680 | )                                                  |  |   |                                                    |   |  |       |       
|Cash payments                                                                   |  |                    | (2,269 | ) |                              |   | (375    | )                                                  |  |   | (4,646                                              | ) |  |       |       
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at June 30, 2002                                                        |  |                    | 880    |   |                              |   |        |                                                    |  |   | 8,799                                               |   |  |       |       
|Less: accrued restructuring costs, current                                      |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Additional restructuring charge in the second and fourth quarter of fiscal 2003 |  |                    | 1,831  |   |                              |   | 8,850   |                                                    |  |   | 1,185                                               |   |  |       | 301    
|Non-cash charge                                                                 |  |                    |       |   |                              |   | (8,850  | )                                                  |  |   | 310                                                 |   |  |       | (301   
|Cash payments                                                                   |  |                    | (2,535 | ) |                              |   |        |                                                    |  |   | (5,980                                              | ) |  |       |       
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at June 30, 2003                                                        |  |                    | 176    |   |                              |   |        |                                                    |  |   | 4,314                                               |   |  |       |       
|Less: accrued restructuring costs, current                                      |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Cash payments                                                                   |  |                    | (142   | ) |                              |   |        |                                                    |  |   | (642                                                | ) |  |       |       
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at September 30, 2003                                                   |  | $                  | 34     |   |                              | $ |        |                                                    |  | $ | 3,672                                               |   |  | $     |       
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Less: accrued restructuring costs, current                                      |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                    |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        



11. Stock-based
compensation.On December 31, 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company accounts for its stock-based compensation issued to employees using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock issued to Employees. SFAS No. 123 establishes accounting and disclosure requirement using a fair value method of
accounting for stock-based employee compensation plan 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.



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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 MonthsEndedSeptember 30, |       
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------
|                                                                                         |  | 2003                           |       
|Net loss as reported                                                                     |  | $                              | (2,258
|Stock-based employee compensation expense included in reported net loss                  |  |                                | 777   
|Pro forma stock compensation expense computed under the fair value method for all awards |  |                                | (1,541
|                                                                                         |  |                                |       
|Pro forma net loss                                                                       |  | $                              | (3,022
|                                                                                         |  |                                |       
|Basic and diluted net loss per share, as reported                                        |  | $                              | (0.01 
|                                                                                         |  |                                |       
|Pro forma basic and diluted net loss per share                                           |  | $                              | (0.02 
|                                                                                         |  |                                |       



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 MonthsEnded September 30,
|----------------------- |  | -------------------------------
|                        |  | 2003                           
|Risk-free interest rate |  | 3.54%                          
|Expected life of option |  | 4 years                        
|Expected dividends      |  | 0%                             
|Volatility              |  | 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 off
the market or pursuant to a 10b5-1 plan adopted by the Company. The Company adopted a 10b5-1 plan in August 2002, which allows the Company to repurchase its shares during a period in which the Company is in possession of material non-public
information, provided the Company communicated share repurchase instructions to the broker at a time when the Company was not in possession of such material non-public information. As of September 30, 2003, repurchases of an aggregate of $35.2
million have been made under the Companys repurchase program.



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13. Recent Accounting Pronouncements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company has adopted SFAS No. 146 and believes that the adoption did not have a material impact on its financial position, results of operations or cash flows.



In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has adopted EITF Issue No. 00-21 and believes that the adoption did not have a material impact on its
financial position, results of operations or cash flows.



In
January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of FIN 46 will not have a material impact on the Companys financial position, results of
operations or cash flows.



In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 addresses certain financial instruments that, under previous guidance, could be accounted for as equity, but now must
be classified as liabilities in statements of financial position. These financial instruments include: 1) mandatorily redeemable financial instruments, 2) obligations to repurchase the issuers equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15,
2003. The Company did not have any such financial instruments as of September 30, 2003. The implementation of SFAS No. 150 is not expected to have a material effect on the Companys financial position, results of operations or cash flows.



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



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section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek
unspecified monetary damages and other relief. Similar complaints were filed by plaintiffs (the Plaintiffs) against hundreds of other public companies (the Issuers) that went public in the late 1990s (collectively, the
IPO Lawsuits).



On August 8, 2001, the IPO Lawsuits
were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, the Company joined in a global motion to dismiss the IPO cases filed by all of the Issuers (among others). On
October 9, 2002, the Court entered an order dismissing the Companys named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to these officers and directors
until September 30, 2003. On February 19, 2003, the Court issued a decision denying the motion to dismiss the Section 11 claims against the Company and almost all of the Issuers, and granting the motion to dismiss the Section 10(b) claim against the
Company. The Section 10(b) claim was dismissed without leave to amend.



In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO Lawsuits. In
addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the
difference between the actual recovery and $1 billion from the insurers for the Issuers. In September 2003, in connection with the tentative settlement, those officers and directors who had entered tolling agreements with the Plaintiffs (described
above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized. Although the Company has approved this settlement proposal in principle, it remains subject to a number of procedural conditions, as well
as formal approval by the Court.



On December 17, 2001, OZ
Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively, OZ) sued four individuals and the Company in California Superior Court for the County of Alameda. One of the four individual defendants is Zeynep Hakimoglu, who joined the
Company on November 1, 2001 as Vice President of Product Line Management. The other three are unrelated to the Company. Zeynep Hakimoglus employment with the Company terminated on December 17, 2002. The complaint alleges trade secret
misappropriation and related claims against the four individuals and the Company concerning OZs alleged polarization mode dispersion technology. The plaintiffs seek actual damages against the four individuals and the Company in the amounts of
approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. The plaintiffs sought a temporary restraining order in December 2001, which the court denied, and withdrew
their preliminary injunction motion against the Company. The Company answered the complaint on January 22, 2002, denying plaintiffs claims. The case is in the early stages of discovery and no trial date has been set. The Company believes that
this litigation with respect to the Company is without merit and intends to defend itself vigorously.



The Company is also subject to various other claims and legal actions arising in the ordinary course of business. The ultimate disposition of these
various other claims and legal actions is not expected to have a material effect on the Companys business, financial condition or results of operations.



15. Subsequent Event. In October 2003, the Company entered into a definitive agreement to acquire substantially all of the assets, including intellectual
property, of privately held RedClover Networks, Inc. The acquisition was consummated in early November 2003. The Company paid $250,000 in cash, assumed certain liabilities of approximately $1.2 million and incurred other costs of approximately
$100,000.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words expects, anticipates, intends, believes, or
similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. In evaluating our business, prospective investors should carefully consider the information set forth below under the caption Risk Factors in addition to the other information set
forth herein. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated
financial statements and related notes in this report, and Managements Discussion and Analysis of Financial Condition and Results of Operations, related financial information and audited consolidated financial statements contained in our Form
10-K for the fiscal year ended June 30, 2003 as filed with the Securities and Exchange Commission on September 26, 2003.



Our consolidated financial statements for all periods presented account for our Shanghai operation as a discontinued operation as required under generally
accepted accounting principles (GAAP) as a result of our decision to sell the business, which we announced in July 2003. Our Condensed Consolidated Statements of Operations and of Cash Flows have been retroactively adjusted for all
periods to separately present the results of the discontinued operation from the results of our continuing operations. This presentation is required by GAAP and facilitates historical and future trend analysis of our continuing operations. Unless
otherwise indicated, the following discussion relates to our continuing operations.



Overview



We provide design, integration and
Optical Manufacturing Solutions (OMS) for optical networking components and subsystems that expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals and provide signal transmission and
reception within an optical network. Our product portfolio includes solutions for next-generation, all-optical Dense Wavelength Division Multiplexing, or DWDM, optical amplification, switching and routing, monitoring and conditioning and line
transmission applications. We offer advanced and cost-effective optical-electrical components and subsystem manufacturing through our facilities in Zhuhai, China. In addition, we maintain optical-centric front-end design, application, and customer
service functions at our headquarters in San Jose, California. 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.



REVENUES. We generate substantially all of our revenues from the sale of fiber optic components and subsystems. To date, we have developed over 120
standard products that are sold or integrated into customized solutions for our customers. Our products are generally categorized into the following major



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groups: our bandwidth creation products, which include wavelength expansion and optical amplification products; and our bandwidth management products, which
include wavelength performance monitoring and protection, and optical switching products. A majority of our revenues are derived from our bandwidth creation products, which include our wavelength expansion products, in particular, multiplexers.



COST OF REVENUES. Our cost of revenues consists of raw
material, salaries and related personnel expense, manufacturing overhead, and provisions for excess and obsolete inventories and warranties. We expect cost of revenues, as a percentage of revenues, to fluctuate from period to period. Our gross
margins will primarily be affected by manufacturing volume, our pricing policies, production yield, costs incurred in improving manufacturing processes, mix of products sold, provisions for excess and obsolete inventories.



RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
consist primarily of salaries and related personnel costs, depreciation, non-recurring engineering charges and prototype costs, patent filing costs and fees paid to consultants and outside service providers, all of which relate to the design,
development, testing, pre-manufacturing and significant improvement of our products. We expense our research and development costs as they are incurred.



SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist primarily of salaries and related expenses for marketing, sales, customer service
and application engineering support personnel, commissions paid to internal and external sales representatives, as well as costs associated with trade shows and other marketing expenses.



GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses consist primarily of salaries and related
expenses for executive, finance, accounting, and human resources personnel, professional fees and other corporate expenses.



NON-CASH COMPENSATION EXPENSE. Prior to and after our initial public offering, we granted stock options and issued warrants to employees and consultants
at prices below the fair value of the underlying stock on the date of grant or issuance. During the period from July 1, 1998 through September 30, 2003, we recorded aggregate deferred stock compensation, net of cancellations due to terminations of
employment, of approximately $59.0 million, of which $777,000, $1.9 million, $4.7 million and $26.6 million was expensed during the three months ended September 30, 2003, and the fiscal years ended June 30, 2003, 2002 and 2001, respectively. This
expense has an impact on our net loss, but not on our cash flows. With respect to employee stock-based compensation, we are amortizing the deferred compensation expense over the vesting period of the related stock options, as set forth in FASB
Interpretation (FIN) No. 28. Under the FIN No. 28 method, each vested tranche of options is accounted for as a separate option grant awarded for services. The compensation expenses are recognized over the period during which the services
are provided. Accordingly, this method results in higher compensation expenses being recognized in the earlier vesting periods of an option. Non-employee grants are accounted for in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation and Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and valued using the Black-Scholes model. The deferred compensation expense related to non-employees stock option grants is amortized over the vesting period as set forth in FIN No. 28.



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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 our Audit Committee at the end of each quarter prior to the public release of our
financial results. We believe the following critical accounting policies, and our procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



We have identified the policies below as critical to our
business operations and understanding of our financial condition and results of operations. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or
complex judgments that could have a material effect on our financial condition and results of operations. These policies may require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates
that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Our critical accounting policies cover the following areas:



| | - |  | revenue recognition and product returns;
| | - |  | ----------------------------------------



| | - |  | warranty obligations;
| | - |  | ---------------------



| | - |  | risk evaluation;
| | - |  | ----------------



| | - |  | allowance for doubtful accounts;
| | - |  | --------------------------------



| | - |  | excess and obsolete inventory;
| | - |  | ------------------------------



| | - |  | property, plant and equipment; and
| | - |  | ----------------------------------



| | - |  | goodwill and other identifiable intangibles.
| | - |  | --------------------------------------------



Additional information about these critical accounting policies may be found in the Managements Discussion & Analysis of Financial
Condition and Results of Operations section included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2003. There have been no changes to these critical accounting policies subsequent to June 30, 2003.



Results of Operations



Revenues. Revenues increased by $1.2 million, or 20%, from $6.0 million for the three months ended September 30, 2002
to $7.2 million for the three months ended September 30, 2003. The increase was primarily due to increased unit shipments of our wavelength expansion products and optical amplification products to customers. The increase in revenues associated with
increased unit shipments was partially offset by decreases in the average selling prices of our products. Though further declines in average selling



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prices are anticipated in the second quarter of fiscal 2004, shipment volume in the second quarter of fiscal 2004 is expected to increase in excess of the
negative impact on our revenues from the decreases in average selling prices. Though visibility remains difficult we anticipate a slightly better than modest increase in revenue in the second quarter of fiscal 2004 from the first quarter of fiscal
2004.



Gross Profit (Loss). Gross profit increased by
$3.4 million, or 236%, from a gross loss of $1.5 million for the three months ended September 30, 2002 to a gross profit of $2.0 million for the three months ended September 30, 2003. The increase in gross profit was primarily due to the cost
savings associated with the worldwide workforce reduction and the consolidation of excess facilities, and the cost benefits of operating in China as a result of transitioning our manufacturing capacity to China. Our gross profit also increased as a
result of greater revenue. In addition, our gross profit for the three months ended 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 in
non-cash compensation expense. Our gross profit for the three months ended September 30, 2002 was negatively impacted by $102,000 of non-cash compensation expense.



Gross profit margins were 27.4% and (24.3%) for the three months ended September 30, 2003 and 2002, respectively. Our gross
margin increased for the three months ended September 30, 2003 compared to the three months ended September 30, 2002, due to the cost savings associated with the worldwide workforce reduction and the consolidation of excess facilities, the cost
benefits of operating in China as a result of transitioning our manufacturing capacity to China, improvement in manufacturing efficiencies and higher yields in our manufacturing facilities in China. We are continuing to implement programs to further
improve production yields of our products. We cannot assure you, however, that these programs will be successful in increasing our gross margin. We anticipate that we will see a slight sequential improvement in gross margin in the second quarter of
fiscal 2004 from the first quarter of fiscal 2004. However, this is primarily dependent on the anticipated increase in revenues and less upon achieving improvements in our production yields or meeting our cost management initiatives.



Research and Development. Research and development
expenses, including non-cash compensation expense (recovery), decreased $1.1 million, or 39%, from $2.8 million for the three months ended September 30, 2002 to $1.7 million for the three months ended September 30, 2003. The decrease in research and
development expenses was primarily due to the cost savings associated with the worldwide workforce reductions, lower costs as a result of transitioning the research and development function to China, lower depreciation and facility costs due to
restructurings and lower project material costs, partially offset by an increase 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.



Subsequent to September 30, 2003, we acquired substantially all of the assets, including intellectual property, of privately
held RedClover Networks, Inc. As a result of the acquisition, we expect our quarterly research and development expenses to increase in the second quarter of fiscal 2004. In addition, we expect that a portion of the total purchase price will be
allocated to in-process research and development and will be expensed in the second quarter of fiscal 2004.



Sales and Marketing. Sales and marketing expenses, including non-cash compensation expense (recovery), decreased $968,000, or 56%, from $1.7
million for the three months ended September 30, 2002 to $770,000 for the three months ended September 30, 2003. The decrease in sales and marketing expenses



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was primarily due to the cost savings associated with the worldwide workforce reduction, the consolidation of excess facilities and a decrease in non-cash
compensation expense, partially offset by higher commissions paid to our internal and external sales representatives associated with increased revenue. We expect our quarterly sales and marketing expenses to increase slightly in the second quarter
of fiscal 2004 compared to the first quarter of fiscal 2004 primarily as a result of anticipated increased revenues.



General and Administrative. General and administrative expenses, including non-cash compensation expense, increased $314,000, or 14%, from $2.3
million for the three months ended September 30, 2002 to $2.6 million for the three months ended September 30, 2003. The increase in general and administrative expenses was primarily due to $890,000 of expenses associated with the exploration of
strategic business opportunities in the three months ended September 30, 2003, partially offset by lower non-cash compensation expense and cost savings associated with the worldwide workforce reduction. We expect our general and administrative
expenses in the second quarter of fiscal 2004 to be slightly lower than our general and administrative expenses in the fourth quarter of fiscal 2003.



Non-Cash Compensation Expense. From July 1, 1998 through September 30, 2003, we recorded an aggregate of $59.0 million in deferred non-cash
compensation, net of stock option cancellations. Non-cash compensation expense increased $45,000, or 6%, from $732,000 for the three months ended September 30, 2002 to $777,000 for the three months ended September 30, 2003. The increase in non-cash
compensation expenses was primarily due to additional non-cash compensation expense relating to the modification of option grants to employees in the three months ended September 30, 2003.



Employees. As of September 30, 2003, we have 709 full-time employees
worldwide, as compared to 966 full-time employees worldwide as of September 30, 2002. During the twelve months ended September 30, 2003, we reduced our headcount by 257 people, or 27% of our work force, moved substantially all of our manufacturing
operations to China and further reduced our cost structure to respond to significantly lower revenues than we previously anticipated. Additionally, during the fiscal year ended June 30, 2003, we completed our move of a majority of our research and
development activities in the United States to China. There is no certainty that these programs will be successful to offset any reductions in shipments to customers or any decline in average selling prices. Our visibility continues to be limited
with respect to the demand for products and services from telecommunications equipment providers. We expect to continue to evaluate our business on an ongoing basis in light of current and future revenue trends and adjust our cost structure
accordingly.



Restructuring Costs and Other Charges. For
the years ended June 30, 2003, 2002 and 2001, $12.2 million, $28.1 million and $18.2 million, respectively, of restructuring costs and other charges were recorded as operating expenses for worldwide workforce reduction, consolidation of excess
property and



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equipment and facilities and other charges. A summary of the restructuring charges accrued in fiscal 2001, 2002 and 2003
and the quarter ended September 30, 2003 is as follows (in thousands):



|                                                                                |  | Workforce Reduction |        |   | Excess Propertyand Equipment |   |         | Consolidation ofExcess Facilitiesand Other Charges |  |   | Impairment ofGoodwilland PurchasedIntangible Assets |   |  | Total |        
|------------------------------------------------------------------------------- |  | ------------------- | ------ | - | ---------------------------- | - | ------- | -------------------------------------------------- |  | - | --------------------------------------------------- | - |  | ----- | -------
|Initial restructuring charge in the fourth quarter of fiscal 2001               |  | $                   | 250    |   |                              | $ |        |                                                    |  | $ | 5,485                                               |   |  | $     | 12,442 
|Non-cash charge                                                                 |  |                     |       |   |                              |   |        |                                                    |  |   |                                                    |   |  |       | (12,442
|Cash payments                                                                   |  |                     |       |   |                              |   |        |                                                    |  |   | (1,191                                              | ) |  |       |       
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at June 30, 2001                                                        |  |                     | 250    |   |                              |   |        |                                                    |  |   | 4,294                                               |   |  |       |       
|Less: accrued restructuring costs, current                                      |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Additional restructuring charge in the fourth quarter of fiscal 2002            |  |                     | 2,899  |   |                              |   | 16,055  |                                                    |  |   | 9,151                                               |   |  |       |       
|Non-cash charge                                                                 |  |                     |       |   |                              |   | (15,680 | )                                                  |  |   |                                                    |   |  |       |       
|Cash payments                                                                   |  |                     | (2,269 | ) |                              |   | (375    | )                                                  |  |   | (4,646                                              | ) |  |       |       
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at June 30, 2002                                                        |  |                     | 880    |   |                              |   |        |                                                    |  |   | 8,799                                               |   |  |       |       
|Less: accrued restructuring costs, current                                      |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Additional restructuring charge in the second and fourth quarter of fiscal 2003 |  |                     | 1,831  |   |                              |   | 8,850   |                                                    |  |   | 1,185                                               |   |  |       | 301    
|Non-cash charge                                                                 |  |                     |       |   |                              |   | (8,850  | )                                                  |  |   | 310                                                 |   |  |       | (301   
|Cash payments                                                                   |  |                     | (2,535 | ) |                              |   |        |                                                    |  |   | (5,980                                              | ) |  |       |       
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at June 30, 2003                                                        |  |                     | 176    |   |                              |   |        |                                                    |  |   | 4,314                                               |   |  |       |       
|Less: accrued restructuring costs, current                                      |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Cash payments                                                                   |  |                     | (142   | ) |                              |   |        |                                                    |  |   | (642                                                | ) |  |       |       
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Balance at September 30, 2003                                                   |  | $                   | 34     |   |                              | $ |        |                                                    |  | $ | 3,672                                               |   |  | $     |       
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Less: accrued restructuring costs, current                                      |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|Accrued restructuring costs, non current                                        |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        
|                                                                                |  |                     |        |   |                              |   |         |                                                    |  |   |                                                     |   |  |       |        



Merger Fees. In
connection with the terminated merger between us and Avanex Corporation, which was not approved at the special meeting of our stockholders held on August 15, 2002, we incurred $1.1 million and $1.3 million in merger fees for the three months ended
September 30, 2002 and the fiscal year ended June 30, 2003, respectively.



Interest and Other Income, Net. Interest and other income, net, declined to $552,000 for the three months ended September 30, 2003 from $1.2 million for the three months ended September
30, 2002. The decrease in interest income was primarily due to lower yields on our cash investments, overall decreased cash balances from the use of cash in the fiscal quarters loss from operations and financing outlays relating to repurchase
of common stock and repayment of capital lease obligations. In addition, interest income decreased as a result of repayment of interest bearing notes receivable from an officer.



Gain on Sale of Assets. Gain on sale of assets increased $348,000 to a gain of $215,000 for the three months ended
September 30, 2003 from a loss of $133,000 for the three months ended September 30, 2002. The increase was primarily due to the sale of excess fixed assets and intangible assets greater than the carrying amount of these assets.



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Provision for Income Taxes. We have recorded a gross deferred tax asset of $113.6 million as of
September 30, 2003, 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. In assessing the realizability of deferred tax assets, management recorded a
valuation allowance to the extent we do not have a carryback right. Based on our history of losses and uncertainty of generating future taxable income, the realizable portion of the deferred tax assets is equal only to the amount of income tax
expense expected to be paid during fiscal 2004, which is zero, and represents the amount that we believe will more likely than not be realizable based on current available objective evidence.



Discontinued Operation. In June 2003, we adopted a plan to sell our
Shanghai operation. We will continue to operate it until it is sold. For the periods presented, the Shanghai operation is accounted as a discontinued operation in the financial statements. Income (loss) from discontinued operation consists of an
operating income of $103,000 and an operating loss of $273,000 incurred by the Shanghai operation during the three months ended September 30, 2003 and 2002, respectively.



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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 $28.0 million of common stock repurchases, net of proceeds from exercise of stock options, employee stock purchase plan and warrants through September 30, 2003. In August 2000, we received $50.0
million in connection with the issuance to Cisco Systems of a convertible promissory note, which along with the related accrued interest expense automatically converted into 3,298,773 shares of common stock upon the closing of our initial public
offering in October 2000. Our initial public offering resulted in net proceeds of approximately $263.7 million, before offering expenses of approximately $2.7 million. As of September 30, 2003, we had cash, cash equivalents and short-term
investments of $189.1 million and working capital of $189.0 million.



Our operating activities provided cash of $404,000 in the three months ended September 30, 2003. Cash provided by operating activities was primarily attributable to depreciation and amortization expense of $2.1 million, non-cash
compensation expense of $777,000, a decrease in prepaid expenses and other assets of $254,000, an increase in accounts payable of $1.0 million and increases in accrued liabilities and accrued restructuring costs of $199,000. These amounts were
partially offset by a loss from continuing operations incurred during the three months ended September 30, 2003 of $2.4 million and increases in accounts receivable of $1.3 million and inventories of $218,000.



Our investing activities provided cash of $2.1 million in the three months
ended September 30, 2003 due to maturities of short-term investments of $51.5 million and proceeds from sales of property and equipment of $393,000, partially offset by purchases of short-term investments of $49.7 million and property and equipment
of $51,000. During the remaining nine months of fiscal 2004, we expect to use approximately $600,000 for the purchase of property and equipment worldwide, excluding property and equipment acquired through acquisitions. We expect to use cash
generated from our initial public offering for these expenditures.



Our financing activities provided cash of $156,000 in the three months ended September 30, 2003 due to proceeds from issuance of common stock of $851,000 partially offset by repayment of capital lease obligations of $695,000.



Our principal source of liquidity at September 30, 2003 consisted of $189.1
million in cash, cash equivalents and short-term investments. We believe that our current cash, cash equivalents and short-term investments balance and any cash generated from operations, will be sufficient to meet our operating and capital
requirements for at least the next 12 months. We may use cash, cash equivalents and short-term investments from time to time to fund our acquisition of businesses and technologies. We may be required to raise funds through public or private
financings, strategic relationships or other arrangements. We cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed could harm our ability to pursue our business strategy and achieve and maintain profitability.



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Contractual Obligations



Our contractual obligations as of September 30, 2003 have been summarized below (in thousands):



|                          |  | Total            |       | Contractual Obligations Due by Period
|------------------------- |  | ---------------- | ----- | -------------------------------------
|                          |  | Less than 1 year |       | 1-3 years                            
|Contractual Obligations   |  |                  |       |                                      
|Capital lease obligations |  | $                | 866   |                                      
|Operating leases          |  |                  | 4,655 |                                      
|Purchase obligations      |  | $                | 1,798 |                                      
|                          |  |                  |       |                                      
|Total                     |  | $                | 7,319 |                                      
|                          |  |                  |       |                                      



Recent Accounting Pronouncements



In June 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated
with exit or disposal activities and supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for
initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We believe that the adoption of SFAS No. 146 on January 1, 2003 did not have a material impact on our financial
position, results of operations or cash flows.



In November
2002, the FASB Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the
adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We believe that the adoption of this standard will not
have a material impact on our financial position, results of operations or cash flows.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 addresses certain financial instruments that, under
previous guidance, could be accounted for as equity, but now must be classified as liabilities in statements of financial position. These financial instruments include: 1) mandatorily redeemable financial instruments, 2) obligations to repurchase
the issuers equity shares by transferring assets, and 3) obligations to issue a variable number of shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. We did not have any such financial instruments as of September 30, 2003. The implementation of SFAS No. 150 is not expected to have a material effect on our financial position,
results of operations or cash flows.



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RISK FACTORS



We operate in a rapidly changing environment that involves many risks, some of which are beyond our control. The following is a discussion that highlights
some of these risks. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, operations or financial results.



RISKS RELATED TO OUR BUSINESS



WE HAVE INCURRED SIGNIFICANT LOSSES, AND OUR FAILURE TO INCREASE OUR REVENUES COULD PREVENT US FROM ACHIEVING PROFITABILITY.



We have incurred significant losses since our inception in 1995 and expect
to incur losses in the future. We incurred net losses of $2.3 million, $36.8 million, $68.4 million and $80.4 million for the three months ended September 30, 2003 and the fiscal years ended June 30, 2003, 2002 and 2001, respectively. We have not
achieved profitability on a quarterly or annual basis since inception. As of September 30, 2003, we had an accumulated deficit of $220.3 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 ten customers, although not the same ten customers for each period, together accounted for 78%, 72%, 73% and 83% of our
revenues in the three months ended September 30, 2003 and the fiscal years ended June 30, 2003, 2002 and 2001, respectively. Nortel Networks Corporation and HuaWei Technologies Co. Ltd. each accounted for greater than 10% of our revenue for the
three months ended September 30, 2003. Nortel Networks Corporation, Adva AG Optical Networking and Marubun Corporation each accounted for greater than 10% of our revenues for the fiscal year ended June 30, 2003, and Siemens AG and Marubun
Corporation each accounted for greater than 10% of our revenues for the fiscal year ended June 30, 2002. Agere Systems, Inc., Lucent Technologies, Nortel Networks Corporation and Sycamore Networks each accounted for greater than 10% of our revenues
for the fiscal year ended June 30, 2001. We expect that we will continue to depend upon a small number of customers, although potentially not the same customers, for a substantial portion of our revenues.



Our revenues generated from these customers, individually or in the
aggregate, may not reach or exceed historic levels in any future period. We may not be the sole source of supply to our customers, and they may choose to purchase products from other vendors. Furthermore, the businesses of our existing customers are
experiencing a 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.



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OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER, AND THEREFORE, MAY VARY FROM INVESTORS EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DROP.



It is difficult to forecast our revenues accurately. Moreover, our revenues, expenses and operating results have varied significantly from quarter to
quarter in the past and may continue to fluctuate significantly in the future. The factors, many of which are more fully discussed in other risk factors, that are likely to cause these variations include, among others:



| | - |  | economic downturn and uncertainty of the fiber optic industry;
| | - |  | --------------------------------------------------------------



| | - |  | economic conditions specific to the communications and related industries and the development and size of the markets for our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| | - |  | fluctuations in demand for, and sales of, our products;
| | - |  | -------------------------------------------------------



| | - |  | cancellations of orders and shipment rescheduling;
| | - |  | --------------------------------------------------



| | - |  | our ability to successfully improve our manufacturing capability in our facilities in China;
| | - |  | --------------------------------------------------------------------------------------------



| | - |  | the availability of raw materials used in our products and increases in the price of these raw materials;
| | - |  | ---------------------------------------------------------------------------------------------------------



| | - |  | the ability of our manufacturing operations in China to timely produce and deliver products in the quantity and of the quality we require;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | our ability to achieve acceptable production yields in China;
| | - |  | -------------------------------------------------------------



| | - |  | the practice of communication equipment suppliers to sporadically place large orders with short lead times;
| | - |  | -----------------------------------------------------------------------------------------------------------



| | - |  | the mix of products and the average selling prices of the products we sell;
| | - |  | ---------------------------------------------------------------------------



| | - |  | competitive factors, including introductions of new products, new technologies and product enhancements by competitors, consolidation of competitors in the fiber optic components
and subsystems market and pricing pressures;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | our ability to develop, introduce, manufacture and ship new and enhanced optical networking products in a timely manner without defects; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | 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.



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WE DEPEND ON THE CONTINUED GROWTH AND SUCCESS OF THE COMMUNICATIONS INDUSTRY, WHICH IS EXPERIENCING A SIGNIFICANT
ECONOMIC DOWNTURN, AS WELL AS RAPID CONSOLIDATION AND REALIGNMENT AND MAY NOT CONTINUE TO DEMAND FIBER OPTIC PRODUCTS AT HISTORICAL RATES, THEREBY REDUCING DEMAND FOR OUR PRODUCTS AND HARMING OUR OPERATING RESULTS.



We depend on the continued growth and success of the communications
industry, including the continued growth of the Internet as a widely-used medium for commerce and communication and the continuing demand for increased bandwidth over communications networks. As a result of recent unfavorable economic conditions and
reduced capital spending in the communications industry, our growth rate may be significantly lower than our historical quarterly growth rate.



Furthermore, the rate at which communications service providers and other fiber optic network users have built new fiber optic networks or installed new
systems in their existing fiber optic networks has fluctuated in the past and these fluctuations may continue in the future. These fluctuations may result in reduced demand from historical rates for new or upgraded fiber optic systems that utilize
our products and, therefore, may result in reduced demand for our products.



The communications industry is also experiencing rapid consolidation and realignment, as industry participants seek to capitalize on the rapidly changing competitive landscape developing around the Internet and new
communications technologies such as fiber optic and wireless communications networks. As the communications industry consolidates and realigns to accommodate technological and other developments, our customers may consolidate or align with other
entities in a manner that harms our business.



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. For example, we did not
experience revenue growth during fiscal 2003 as compared to fiscal 2002. In addition, we did not experience such growth during fiscal 2002 as compared to fiscal 2001. In fiscal 2003, 2002 and 2001, our net loss was $36.8 million, $68.4 million and
$80.4 million, respectively.



New product development and
introduction can also result in a mismatching of research and development expenses and sales and marketing expenses that are incurred in one quarter with revenues that are not recognized, if at all, until a subsequent quarter when the new product is
introduced and commercially accepted. If growth in our revenues does not exceed the increase in our expenses, our results of operations will be harmed.



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WE COMPETE IN A HIGHLY COMPETITIVE INDUSTRY, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OUR REVENUES COULD DECLINE
FURTHER, WHICH WOULD HARM OUR OPERATING RESULTS.



The
market for fiber optic components and subsystems is intensely competitive. We believe that our principal competitors are the major manufacturers of optical components and subsystems, including vendors selling to third parties and business divisions
within communications equipment suppliers. Our principal competitors in the fiber optic components and subsystems market include Avanex Corporation (including the photonic technologies business of Corning Incorporated), DiCon Fiberoptics, Inc.,
Furukawa Electrical Co., Ltd., FDK Corporation, NEL Hitachi Cable, Santec Corporation, Tyco Electronics and JDS Uniphase Corporation. We believe that we primarily compete with diversified suppliers, such as JDS Uniphase, Santec and FDK, for the
majority of our product line and to a lesser extent with niche players that offer a more limited product line. Competitors in any portion of our business may also rapidly become competitors in other portions of our business. In addition, our
industry has recently experienced significant consolidation, and we anticipate that further consolidation will occur. This consolidation has further increased competition.



Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing,
manufacturing and other resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies and to changes in customer requirements, to devote greater resources to the development, promotion and
sale of products, or to deliver competitive products at lower prices.



Several of our existing and potential customers are also current and potential competitors of ours. These companies may develop or acquire additional competitive products or technologies in the future and thereby reduce or cease their
purchases from us. In light of the consolidation in the optical networking industry, we also believe that the size of the optical component and subsystem suppliers will become increasingly important to our current and potential customers in the
future. Current and potential vendors may also consolidate with our competitors and thereby reduce or cease providing materials and equipment to us. Also, we expect to pursue optical contract manufacturing opportunities in the future. We may not be
able to compete successfully with existing or new competitors, and the competitive pressures we face may result in lower prices for our products, loss of market share, the unavailability of materials and equipment used in our products, or reduced
gross margins, any of which could harm our business.



New
technologies are emerging due to increased competition and customer demand. The introduction of new products incorporating new technologies or the emergence of new industry standards could make our 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.



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IF WE FAIL TO EFFECTIVELY MANAGE OUR MANUFACTURING CAPABILITY IN CHINA, WE MAY NOT BE ABLE TO DELIVER SUFFICIENT
QUANTITIES OF PRODUCTS TO OUR CUSTOMERS IN A TIMELY MANNER, WHICH WOULD HARM OUR OPERATING RESULTS.



As a result of the closure of other facilities in connection with our recent restructuring efforts, we manufacture substantially all of our products in
our facilities in Zhuhai, China. These restructuring efforts also included transferring expertise and resources relating to manufacturing, such as production control, logistics, planning and management and quality control, from our United States
facilities to our facilities in Zhuhai, China. The quality of our products and our ability to ship products on a timely basis may suffer if we cannot effectively maintain the necessary expertise and resources transferred from the United States to
China. Additional risks associated with improving our manufacturing processes and capability in China include:



| | - |  | a lack of availability of qualified management and manufacturing personnel;
| | - |  | ---------------------------------------------------------------------------



| | - |  | difficulties in achieving adequate yields from new manufacturing lines;
| | - |  | -----------------------------------------------------------------------



| | - |  | inability to quickly implement an adequate set of financial controls to track and control levels of inventory; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| | - |  | our inability to procure the necessary raw materials and equipment.
| | - |  | -------------------------------------------------------------------



Communications equipment suppliers typically require that their vendors commit to provide specified quantities of products over a given period of time. We
could be unable to pursue many large orders if we do not have sufficient manufacturing capability to enable us to commit to provide customers with specified quantities of products. If we are unable to commit to deliver sufficient quantities of our
products to satisfy a customers anticipated needs, we will lose the order and the opportunity for significant sales to that customer for a lengthy period of time. Furthermore, if we fail to fulfill orders to which we have committed, we will
lose revenue opportunities and our customer relationships may be harmed.



IF
WE 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 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 will continue to place, a significant strain on our management systems and resources. Reductions in our workforce, including reductions in research and development and manufacturing personnel, may weaken our research and
development efforts or cause us to have difficulty responding to sudden increases in customer orders. Moreover, we cannot assure you that our cost-cutting measures will achieve the benefits we project. In addition, our ability to effectively manage
our operations will be challenged to the extent that we begin expanding our workforce. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to train and
manage our workforce worldwide. Any failure to effectively manage our operations could harm our operating results.



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IF WE FAIL TO EFFECTIVELY CONTROL OUR INVENTORY LEVELS, OUR OPERATING RESULTS COULD BE HARMED.



Because we experience long lead times for raw materials and are often
required to purchase significant amounts of raw materials far in advance of product shipments, we may not effectively control our inventory levels, which could harm our operating results. If we underestimate our requirements, we may have inadequate
inventory, which could result in delays in shipments and loss of customers. On the other hand, if we purchase raw materials in anticipation of orders that do not materialize, we will have to carry or write off excess inventory and our gross margins
will decline. For example, for the fiscal years ended June 30, 2002 and 2001, our gross margin was negatively impacted by a provision of $10.4 million and $30.6 million, respectively, for excess and obsolete inventory due to the downturn in the
fiber optics industry. Conversely, our revenue was also favorably impacted by the unexpected utilization of fully reserved inventory of $515,000, $619,000, $469,000, $530,000 and $480,000 in the first quarter of fiscal 2004, the fourth, the third
and the second quarter of fiscal 2003 and the fourth quarter of fiscal 2002, respectively. Any difficulty managing our inventory levels may cause us to poorly utilize our manufacturing capacity and further harm our operating efficiency.



We have implemented an automated manufacturing management system to
replace our previous system that tracked most of our data, including some inventory levels, manually. The conversion from our previous systems used in Zhuhai, China occurred in the fourth quarter of fiscal 2001, and the conversion at our Zhuhai Free
Trade Zone facility occurred in the second quarter of fiscal 2003. Failure to effectively and properly utilize the new management systems in China could harm our results and increase the risk that we may fail to effectively manage our inventory.



SUBSTANTIALLY ALL OF OUR MANUFACTURING OPERATIONS ARE LOCATED IN
CHINA, WHICH EXPOSES US TO THE RISK THAT OUR FAILURE TO COMPLY WITH THE LAWS AND REGULATIONS OF CHINA, OR EVENTS IN THAT COUNTRY, WILL DISRUPT OUR OPERATIONS.



Substantially all of our manufacturing operations are located in China and are subject to the laws and regulations of China.
Our operations in China may be adversely affected by changes in the laws and regulations of China, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. Chinas
central or local governments may impose new, stricter regulations or interpretations of existing regulations, which would require additional expenditures. 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 out of our control in China, such as political unrest, terrorism, war, labor strikes and work stoppages, could disrupt our operations.
There is currently political tension between the United States and North Korea and the United States and China, which could, in either case, result in hostilities or a deterioration in relations that would impact our trade relations with China.
There is also significant tension between China and Taiwan, which could result in hostilities or lead to a breakdown in trade relations between China and the United States. Additionally, China continues its condemnation of the United States
pledge of military support to Taiwan, which could lead to hostilities. If hostilities or other events cause a disruption in our operations, it would be difficult for us to establish manufacturing operations at an alternative location on comparable
terms.



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BECAUSE WE DEPEND ON THIRD PARTIES TO SUPPLY SOME OF OUR RAW MATERIALS AND EQUIPMENT, WE MAY NOT BE ABLE TO OBTAIN
SUFFICIENT QUANTITIES OF THESE MATERIALS AND EQUIPMENT, WHICH COULD LIMIT OUR ABILITY TO FILL CUSTOMER ORDERS AND HARM OUR OPERATING RESULTS.



Difficulties in obtaining raw materials in the future may limit our product shipments. We depend on third parties to supply the raw materials and
equipment we use to manufacture our products. To be competitive, we must obtain from our suppliers, on a timely basis, sufficient quantities of raw materials at acceptable prices. We obtain most of our critical raw materials from a single or limited
number of suppliers and generally do not have long-term supply contracts with them. As a result, our suppliers could terminate the supply of a particular material at any time without penalty.



Our failure to obtain these materials or other single or limited-source raw
materials could delay or reduce our product shipments, which could result in lost orders, increase our costs, reduce our control over quality and delivery schedules and require us to redesign our products. Some of our raw material suppliers are
single sources, and finding alternative sources may involve significant expense and delay, if these sources can be found at all. For example, all of our GRIN lenses, which are incorporated into substantially all of our products, are obtained from
Nippon Sheet Glass, the dominant supplier worldwide of GRIN lenses. If a significant supplier became unable or unwilling to continue to manufacture or ship materials in required volumes, we would have to identify and qualify an acceptable
replacement. A material delay or reduction in shipments, any need to identify and qualify replacement suppliers or any significant increase in our need for raw materials that cannot be met on acceptable terms could harm our business. In addition,
due to the severe downturn in the optical and communications industries, manufacturers and vendors that we rely upon for raw materials may scale back their operations or cease to do business entirely as a result of financial hardship or other
reasons. Delays in the delivery of raw materials, increases in the cost of the raw materials or the unavailability of the raw materials could harm our operating results.



We also depend on a limited number of manufacturers and vendors that make and sell the complex equipment we use in our
manufacturing process. In periods of high market demand, the lead times from order to delivery of this equipment could be as long as six months. Delays in the delivery of this equipment or increases in the cost of this equipment could harm our
operating results.



DISRUPTION TO COMMERCIAL ACTIVITIES IN THE UNITED STATES
OR IN OTHER COUNTRIES MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS, OUR ABILITY TO RAISE CAPITAL OR OUR FUTURE GROWTH.



We derive a substantial portion of our revenues from customers located outside the United States and a substantial portion of our operations are located
in China. Our international operations expose us to a number of additional risks associated with international operations, including, without limitation:



| | - |  | fluctuations in currency exchange rates, particularly with respect to the U.S. dollar and Chinese Renminbi exchange rate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| | - |  | disruptions to commercial activities or damage to our facilities as a result of political unrest, war, terrorism, labor strikes and work stoppages;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



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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.



The recent outbreak of severe acute respiratory syndrome, or SARS, that began
in China, Hong Kong, Singapore and Vietnam seems to have subsided but may reappear and then may have a negative impact on our operations and financial results. Risks related to the outbreak of SARS, include, but are not limited to, temporary closure
of one or more of our facilities in China which, in turn, would reduce our manufacturing capability; disruption to our research and development efforts located at our China facilities; and loss of product orders from our customers and loss of raw
materials or equipment from our suppliers to the extent that the operations of our customers or suppliers, respectively, are impacted by the outbreak of SARS. The outbreak of SARS has also increased political and social tension which may generally
affect the China economy and the international economy and, as a result, could lead to reduced sales in international retail channels and increased supply chain costs for us.



A significant portion of our operations are conducted in currencies other than the United States dollar, particularly, in
Chinese Renminbi. Our operating results are therefore subject to fluctuations in foreign currency exchange rates. To the extent that the United States dollar weakens relative to other currencies, our sales made in foreign currencies would be
positively impacted although intercompany payments from our China subsidiaries to our parent corporation that are made in United States dollars would be negatively impacted. Conversely, to the extent that the United States dollar strengthens
relative to other currencies, our sales made in foreign currencies would be negatively impacted although intercompany payments from our China subsidiaries to our parent corporation that are made in United States dollars would be positively impacted.
A number of commentators have recently suggested that a strengthening of the Chinese Renminbi relative to the United States dollar is anticipated at some point in the future, however, governmental authorities in China have been noncommittal to date.
To reduce our gains and losses associated with converting foreign currencies into United States dollars, we may elect in the future to enter into foreign exchange forward contracts to hedge our foreign currency exposure. However, we cannot be
certain that any such hedging activities will be effective, or available to us at commercially reasonable rates. As a result, we will continue to experience foreign currency gains and losses.



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



Chinas government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases,
the remittance of currency out of China. Any shortages in the availability of foreign currency



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may restrict the ability of our Chinese subsidiaries to obtain and remit sufficient foreign currency to pay dividends to us, or otherwise satisfy their
foreign currency denominated obligations, such as payments to us for components which we export to them and for technology licensing fees. Such shortages may also cause us to experience difficulties in completing the administrative procedures
necessary to obtain and remit needed foreign currency. Under the current foreign exchange control system sufficient foreign currency is presently available for our Chinese subsidiaries to purchase imported components or to repatriate profits to us,
but as demands on Chinas foreign currency reserves increase over time to meet its commitments, sufficient foreign currency may not be available to satisfy Chinas currency needs.



Our business could be negatively impacted if we are unable to convert and
remit our sales received in Renminbi into U.S. dollars. Under existing foreign exchange laws, Renminbi held by our Chinese subsidiaries can be converted into foreign currencies and remitted out of China to pay current account items such as payments
to suppliers for imports, labor services, payment of interest on foreign exchange loans and distributions of dividends so long as our subsidiaries have adequate amounts of Renminbi to purchase the foreign currency. Expenses of a capital nature such
as the repayment of bank loans denominated in foreign currencies, however, require approval from appropriate governmental authorities before Renminbi can be used to purchase foreign currency for remittance out of China. This system could be changed
at any time by executive decision of the State Council to impose limits on current account convertibility of the Renminbi or other similar restrictions.



Moreover, even though the Renminbi is intended to be freely convertible on current accounts, the State Administration of Foreign Exchange, which is
responsible for administering Chinas foreign currency market, has a significant degree of administrative discretion in interpreting and implementing foreign exchange control regulations. From time to time, the State Administration of Foreign
Exchange has used this discretion in ways that effectively limit the convertibility of current account payments and restrict remittances out of China. Furthermore, in many circumstances the State Administration of Foreign Exchange must approve
foreign currency conversions and remittances. Under the current foreign exchange control system, sufficient foreign currency may not always be available in the future at a given exchange rate to satisfy our currency demands.



IF TAX BENEFITS AVAILABLE TO OUR SUBSIDIARIES LOCATED IN CHINA ARE REDUCED OR REPEALED,
OUR BUSINESS COULD SUFFER.



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/or a 50% reduction in
national income tax rate for the following three years. If our Chinese subsidiaries are unable to extend their tax benefits, our financial condition and results of operations may be adversely impacted. The tax holiday for one of our subsidiaries
expired December 31, 2001, and we are in the second year of a 50% reduction in the national income tax rate. However, operations in such subsidiary have been substantially moved to our Zhuhai Free Trade Zone facility. In addition, local enterprise
income tax is often waived or reduced during this tax holiday/incentive period. Under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled to an additional three
year reduction in national income tax by 50%, with a provision that the income tax rate as so reduced may not be lower than 10%. We have substantially moved all of our manufacturing operations to our Zhuhai Free Trade Zone facility. If such
consolidation causes adverse tax treatment, our financial condition and results of operations may be adversely impacted.



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OUR WAVELENGTH EXPANSION PRODUCTS HAVE ACCOUNTED FOR A MAJORITY OF OUR REVENUES, AND OUR REVENUES COULD BE HARMED IF
THE PRICE OF, OR DEMAND FOR, THESE PRODUCTS FURTHER DECLINES OR IF THESE PRODUCTS FAIL TO ACHIEVE BROADER MARKET ACCEPTANCE.



We believe that our future growth and a significant portion of our future revenues will depend on the commercial success of our wavelength expansion
products. Customers that have purchased wavelength expansion products may not continue to purchase these products from us. Although we currently offer a broad spectrum of products, sales of our wavelength expansion products accounted for a majority
of our revenues in the three months ended September 30, 2003 and the fiscal years ended June 30, 2003, 2002 and 2001. These products include, among others, dense wavelength division multiplexers, or DWDMs. These products accounted for 65%, 67%, 66%
and 57% of our revenues in the three months ended September 30, 2003 and the fiscal years ended June 30, 2003, 2002 and 2001, 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.



OUR FAILURE TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS IN A COST-EFFECTIVE
MANNER COULD DELAY PRODUCT SHIPMENTS TO OUR CUSTOMERS AND HARM OUR OPERATING RESULTS.



Because manufacturing our products involves complex and precise processes and the majority of our manufacturing costs are relatively fixed, manufacturing yields are critical to our results of operations. Lower than
expected manufacturing yields could delay product shipments and harm our operating results. Factors that affect our manufacturing yields include the quality of raw materials used to make our products, quality of workmanship and our manufacturing
processes. Our or our suppliers inadvertent use of defective materials could significantly reduce our manufacturing yields.



Furthermore, because of the large labor component in and complexity of the manufacturing process, quality of workmanship is critical to achieving
acceptable yields. We cannot assure you that we will be able to hire and train a sufficient number of qualified personnel to cost-effectively produce our products with the quality and in the quantities required by our customers.



Changes in our manufacturing processes or those of our suppliers could also
impact our yields. In some cases, existing manufacturing techniques, which involve substantial manual labor, may not allow us to cost-effectively meet our manufacturing yield goals so that we maintain acceptable gross margins while meeting the cost
targets of our customers. We will need to develop new manufacturing processes and techniques that



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will involve higher levels of automation in order to increase our gross margins and help achieve the targeted cost levels of our customers. We may not
achieve manufacturing cost levels that will allow us to achieve acceptable gross margins or fully satisfy customer demands. Additionally, our competitors are automating their manufacturing processes. If we are unable to achieve higher levels of
automation and our competitors are successful, it will harm our gross margins.



OUR PRODUCTS MAY HAVE DEFECTS THAT ARE NOT DETECTED UNTIL FULL DEPLOYMENT OF A CUSTOMERS EQUIPMENT, WHICH COULD RESULT IN A LOSS OF CUSTOMERS, DAMAGE TO OUR REPUTATION AND SUBSTANTIAL COSTS.



Our products are deployed in large and complex optical networks and must be
compatible with other system components. Our products can only be fully tested for reliability when deployed in networks for long periods of time. Our customers may discover errors, defects or incompatibilities in our products after they have been
fully deployed and operated under peak stress conditions. Our products may also have errors, defects or incompatibilities that are not found until after a system upgrade is installed. Errors, defects, incompatibilities or other problems with our
products could result in:



| | - |  | loss of customers;
| | - |  | ------------------



| | - |  | loss of or delay in revenues;
| | - |  | -----------------------------



| | - |  | loss of market share;
| | - |  | ---------------------



| | - |  | damage to our brand and reputation;
| | - |  | -----------------------------------



| | - |  | inability to attract new customers or achieve market acceptance;
| | - |  | ----------------------------------------------------------------



| | - |  | diversion of development resources;
| | - |  | -----------------------------------



| | - |  | increased service and warranty costs;
| | - |  | -------------------------------------



| | - |  | legal actions by our customers; and
| | - |  | -----------------------------------



| | - |  | increased insurance costs.
| | - |  | --------------------------



If any of these occur, our operating results could be harmed.



IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OUR ABILITY TO SUCCEED WILL BE HARMED.



Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our
proprietary technology. We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, the steps we have taken may not prevent the misappropriation
of our intellectual property, particularly in foreign countries, such as China, where the laws may not protect our proprietary rights as fully as in the United States. To date, we hold 46 issued patents, have 4 allowed applications awaiting issuance
and 26 pending patent applications in the United States. In addition, we currently have 30 pending patent applications in the



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Peoples Republic of China, 16 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., in the United States District Court for the Northern District of Texas alleging, among other things, infringement of two U.S. patents allegedly owned by Chorum relating to fiber optical
interleaving, based on our manufacture of and offer to sell various fiber optic interleaver products. On May 7, 2001, we filed a lawsuit in the United States District Court for the District of Delaware, alleging, among other matters, that Chorum
infringes one of our patents relating to fiber optic couplers based on Chorums manufacture of and offer to sell various DWDM products.



In October 2001, we reached an agreement with Chorum LP and its affiliates to dismiss the patent infringement litigation between the companies without
prejudice. We cannot assure you that Chorum or Oplink will not in the future elect to refile the prior patent infringement actions or file new patent infringement actions against the other.



We are also currently subject to a lawsuit filed by Oz Optics Limited et
al. alleging trade secret misappropriation and other related claims. The plaintiffs seek actual damages against four individuals, including our former Vice President of Product Line Management, Zeynep Hakimoglu, and three other unrelated
individuals, and us in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. The plaintiffs sought a temporary restraining order in December 2001,
which the court denied, and withdrew their preliminary injunction motion against us. We answered the complaint on January 22, 2002, denying plaintiffs claims. The case is in the early stages of discovery and no trial date has been set.
Although we believe that the claims against us are without merit and we intend to defend ourselves against such claims vigorously, we cannot assure you that this litigation will be resolved in our favor or without substantial cost or diversion of
the attention of our management and key technical personnel.



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Both prosecuting or defending lawsuits involving our intellectual property may be costly and time
consuming and may also divert the efforts and attention of our management and technical personnel. Intellectual property litigation is often highly complex and can extend for a protracted period of time, which can substantially increase the cost of
litigation. Accordingly, the expenses and diversion of resources associated with intellectual property litigation to which we may become a party could seriously harm our business and financial condition. Any intellectual property litigation also
could invalidate our proprietary rights and force us to do one or more of the following:



| | - |  | obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at
all;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | stop selling, incorporating or using our products that use the challenged intellectual property;
| | - |  | ------------------------------------------------------------------------------------------------



| | - |  | pay substantial money damages; or
| | - |  | ---------------------------------



| | - |  | redesign the products that use the technology.
| | - |  | ----------------------------------------------



Any of these actions could result in a substantial reduction in our revenue and could result in losses over an extended period of time.



WE ARE THE TARGET OF A SECURITIES CLASS ACTION COMPLAINT AND ARE AT RISK OF SECURITIES
CLASS ACTION LITIGATION, WHICH WILL LIKELY RESULT IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT ATTENTION AND RESOURCES.



In November 2001, we and certain of our officers and directors were named as defendants in a class action shareholder complaint filed in the United States
District Court for the Southern District of New York, now captioned, In re Oplink Communications, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the amended complaint, the plaintiffs allege that we, certain of our
officers and directors and the underwriters of our initial public offering, or IPO, violated section 11 of the Securities Act of 1933 based on allegations that our registration statement and prospectus failed to disclose material facts regarding the
compensation to be received by, and the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission
constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed by plaintiffs (the Plaintiffs) against hundreds of other public companies (the Issuers) that
went public in the late 1990s (collectively, the IPO Lawsuits).



On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, we joined in a global motion to dismiss
the IPO Lawsuits filed by all of the Issuers (among others). On October 9, 2002, the Court entered an order dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of
limitations with respect to these officers and directors until September 30, 2003. On February 19, 2003, the Court issued a decision denying the motion to dismiss the Section 11 claims against us and almost all of the Issuers, and granting the
motion to dismiss the Section 10(b) claim against us. The Section 10(b) claim was dismissed without leave to amend.



In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of
all claims against the Issuers and their officers and directors



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in the IPO Lawsuits. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement or
judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the difference between the actual recovery and $1 billion from the insurers for the Issuers. In September 2003, in connection with the
tentative settlement, those officers and directors who had entered tolling agreements with the Plaintiffs (described above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized. Although we have
approved this settlement proposal in principle, it remains subject to a number of procedural conditions, as well as formal approval by the Court.



IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE MARKET ACCEPTANCE, SALES OF OUR PRODUCTS COULD DECLINE, WHICH WOULD HARM OUR OPERATING
RESULTS.



The communications industry is characterized by
rapid technological changes, frequent new product introductions, changes in customer requirements and evolving industry standards. As a result, our products could quickly become obsolete as new technologies are introduced and incorporated into new
and improved products. Our future success depends on our ability to anticipate market needs and to develop products that address those needs.



Our failure to predict market needs accurately or to develop new products or product enhancements in a timely manner will harm market acceptance and sales
of our products. In this regard, we are currently developing bandwidth creation products as well as bandwidth management products. If the development of these products or any other future products takes longer than we anticipate, or if we are unable
to develop and introduce these products to market, our revenues could suffer and we may not gain market share. Even if we are able to develop and commercially introduce these new products, the new products may not achieve widespread market
acceptance. Furthermore, we have implemented, and may continue to implement in the future, significant cost-cutting measures such as reductions in our workforce, including reductions in research and development and manufacturing personnel, that may
weaken our research and development efforts or cause us to have difficulty responding to sudden increases in customer orders.



In addition, we recently expanded our operations to include optical contract manufacturing services. We cannot, however, assure you that we will be able
to successfully manage our manufacturing capabilities in a cost-effective manner or gain market acceptance with respect to any optical contract manufacturing service offerings. In addition, because profit margins with respect to optical contract
manufacturing services may be smaller than the margins applicable to our current and past product offerings, our gross margins may decline and our business may be harmed.



BECAUSE NONE OF OUR CUSTOMERS ARE OBLIGATED TO PURCHASE OUR PRODUCTS, THEY MAY AND DO CANCEL OR DEFER THEIR PURCHASES ON SHORT NOTICE AND
AT ANY TIME, WHICH COULD HARM OUR OPERATING RESULTS.



We
do not have contracts with our customers that provide any assurance of future sales, and sales are typically made pursuant to individual purchase orders, often with extremely short lead times. Accordingly, our customers:



| | - |  | may and do stop purchasing our products at any time without penalty;
| | - |  | --------------------------------------------------------------------



| | - |  | are free to purchase products from our competitors;
| | - |  | ---------------------------------------------------



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| | - |  | are not required to make minimum purchases; and
| | - |  | -----------------------------------------------



| | - |  | may and do cancel orders that they place with us.
| | - |  | -------------------------------------------------



Sales to any single customer may and do vary significantly from quarter to quarter. Our customers generally do not place purchase orders far in advance.
In addition, our customer purchase orders have varied significantly from quarter to quarter. This means that customers who account for a significant portion of our revenues in one quarter may not and do not place any orders in the succeeding
quarter, which makes it difficult to forecast revenue in future periods. Moreover, our expense levels are based in part on our expectations of future revenue, and we may be unable to adjust costs in a timely manner in response to further revenue
shortfalls. This can result in significant quarterly fluctuations in our operating results.



OUR REVENUES AND RESULTS OF OPERATIONS MAY BE HARMED IF WE FAIL TO INCREASE THE VOLUME OF ORDERS, WHICH WE RECEIVE AND FILL ON A SHORT-TERM BASIS.



Historically, a substantial portion of our net revenues in any fiscal period has been derived from orders in backlog.
Currently, due to the downturn in the fiber optics industry, we are substantially dependent upon orders we receive and fill on a short-term basis. Our customers can generally cancel, reschedule or delay orders in backlog without obligation to us. As
a result, we cannot rely on orders in backlog as a reliable and consistent source of future revenue. If any of our customers did in fact cancel or delay these orders, and we were not able to replace them with new orders for product to be supplied on
a short-term basis, our results of operations could be harmed.



OUR LENGTHY
AND VARIABLE QUALIFICATION AND SALES CYCLE MAKES IT DIFFICULT TO PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE, WHICH MAY HARM OUR OPERATING RESULTS.



Our customers typically expend significant efforts in evaluating and qualifying our products and manufacturing process prior
to placing an order. This evaluation and qualification process frequently results in a lengthy sales cycle, typically ranging from nine to twelve months and sometimes longer. While our customers are evaluating our products and before they place an
order with us, we may incur substantial sales, marketing, research and development expenses, expend significant management efforts, increase manufacturing capacity and order long lead-time supplies. Even after this evaluation process, it is possible
that a potential customer will not purchase our products.



In
addition, product purchases are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for which our products represent a very small percentage of their overall purchase activity. Long sales cycles
may cause our revenues and operating results to vary significantly and unexpectedly from quarter to quarter, which could cause volatility in our stock price.



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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, especially in the San Francisco Bay area. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. In addition, our
management team has experienced significant personnel changes over the past year and may continue to experience changes in the future. A number of members of our management team, including Frederick R. Fromm, formerly Chief Executive Officer and
President, Weiming Li, formerly Vice President and General Manager, Oplink Zhuhai, Weizhong Li, formerly Chief Technology Officer, Jingyu Xu, formerly Senior Vice President, Engineering Christian A.Lepiane, formerly Vice President, Worldwide Sales,
Zeynep Hakimoglu, formerly Vice President, Product Line Management and Linda Reddick, formerly Vice President and Controller, have recently resigned or been terminated in connection with our restructuring efforts. Joseph Y. Liu has recently resumed
the position of President and Chief Executive Officer and several other members of our team have also recently assumed expanded roles. River Gong assumed the position of Vice President, Sales and Xinglong Wang joined our management team as Vice
President, Operations. If our management team continues to experience high attrition or does not work effectively together, it could substantially harm our business.



BECAUSE SOME OF OUR THIRD-PARTY SALES REPRESENTATIVES AND DISTRIBUTORS CARRY PRODUCTS OF ONE OR MORE OF OUR COMPETITORS, THEY MAY NOT
RECOMMEND OUR PRODUCTS OVER COMPETITORS PRODUCTS.



A
majority of our revenues are derived from sales through our domestic and international sales representatives and distributors. Our sales representatives and distributors are independent organizations that generally have exclusive geographic
territories and generally are compensated on a commission basis. We are currently migrating some of our larger customers to direct sales. We expect that we will continue to rely on our independent sales representatives and distributors to market,
sell and support many of our products for a substantial portion of our revenues. Some of our third-party sales representatives and distributors carry products of one or more of our competitors. As a result, these sales representatives and
distributors may not recommend our products over competitors products.



BECAUSE SOME OF OUR OPERATIONS ARE LOCATED IN ACTIVE EARTHQUAKE FAULT ZONES, WE FACE THE RISK THAT A LARGE EARTHQUAKE COULD HARM OUR OPERATIONS.



Some of our operations are located in San Jose, California, an active earthquake fault zone. This region has experienced
large earthquakes in the past and may likely experience them in the future. A large earthquake in the San Jose area could disrupt our operations for an extended period of time, which would limit our ability to supply our products to our customers in
sufficient quantities on a timely basis, harming our customer relationships.



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



We employ a number of foreign nationals in our U.S. operations and as a result we are subject to various laws related to the status of those employees with the Bureau of Citizenship and Immigration Services. We also
send our U.S. employees to China from time to time and for varying durations of time to assist with our Chinese operations. Depending on the durations of such arrangements, we may be required to withhold and pay personal income taxes in respect of
the affected U.S. employees directly to the Chinese tax authorities, and the affected U.S. employees may be required to register with various Chinese governmental authorities. Our failure to comply with the foregoing laws and regulations or any
other applicable laws and regulations could subject us to liability.



In addition, we are subject to laws relating to the storage, use, discharge and disposal of toxic or otherwise hazardous or regulated chemicals or materials used in our manufacturing processes. While we believe that we are currently in
compliance in all material respects with these laws and regulations, if we fail to store, use, discharge or dispose of hazardous materials appropriately, we could be subject to substantial



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liability or could be required to suspend or adversely modify our manufacturing operations. In addition, we could be required to pay for the cleanup of our
properties if they are found to be contaminated, even if we are not responsible for the contamination.



BECAUSE THE FIBER OPTIC COMPONENTS AND SUBSYSTEMS INDUSTRY IS CAPITAL INTENSIVE, OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO RAISE ANY NEEDED ADDITIONAL CAPITAL.



The optical components and subsystems industry is capital intensive, and the
transition of our manufacturing facilities to China, the development and marketing of new products and the hiring and retention of personnel have required and will continue to require a significant commitment of resources. Furthermore, we may
continue to incur significant operating losses if the market for optical components and subsystems develops at a slower pace than we anticipate, or if we fail to establish significant market share and achieve a significantly increased level of
revenue. If cash from available sources is insufficient for these purposes, or if additional cash is used for acquisitions or other unanticipated uses, we may need to raise additional capital. Additional capital may not be available on terms
favorable to us, or at all. If we are unable to raise additional capital when we require it, our business could be harmed. In addition, any additional issuance of equity or equity-related securities to raise capital will be dilutive to our
stockholders.



BECAUSE THE OPTICAL COMPONENTS AND SUBSYSTEMS INDUSTRY IS
EVOLVING RAPIDLY AND IS HIGHLY COMPETITIVE, OUR STRATEGY INVOLVES ACQUIRING OTHER BUSINESSES AND TECHNOLOGIES TO GROW OUR BUSINESS. IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES OR TECHNOLOGIES, OUR OPERATING RESULTS MAY BE HARMED.



The optical components and subsystems industry is
evolving rapidly and is highly competitive. Accordingly, we have pursued and expect to continue to pursue acquisitions of businesses and technologies, or the establishment of joint venture arrangements, that could expand our business. The
negotiation of potential acquisitions or joint ventures, as well as the integration of an acquired or jointly developed business or technology, could cause diversion of managements time and other resources or disrupt our operations. Future
acquisitions could result in:



| | - |  | additional operating expenses without additional revenues;
| | - |  | ----------------------------------------------------------



| | - |  | potential dilutive issuances of equity securities;
| | - |  | --------------------------------------------------



| | - |  | the incurrence of debt and contingent liabilities;
| | - |  | --------------------------------------------------



| | - |  | amortization of other intangibles;
| | - |  | ----------------------------------



| | - |  | research and development write-offs; and
| | - |  | ----------------------------------------



| | - |  | other acquisition-related expenses.
| | - |  | -----------------------------------



Furthermore, we may not be able to successfully integrate acquired businesses or joint ventures with our operations, and we may not receive the intended
benefits of any future acquisition or joint venture.



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RISKS RELATED TO 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.



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, 2003, approximately 25% 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.



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, 2003. 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;
| | - |  | ------------------------------------------------------------------------------------------------



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| | - |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| | - |  | 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.



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Item 3. Quantitative and Qualitative Disclosure About Market Risk



We are exposed to market risk related to fluctuations in interest rates and in foreign currency exchange rates as follows:



Interest Rate Exposure. The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. As of June 30, 2003, all of our investments were in money market funds, certificates of deposits, municipal bonds
or high quality commercial paper with maturities of less than six months from June 30, 2003. Declines in interest rates could have a material impact on interest earnings for our investment portfolio. The following table summarizes our current
investment securities (in thousands, except percentages):



|                                       |  | Carrying Value at June 30, 2003 |         | AverageRate of Return at June 30,2003 |     |   | Carrying Value at June 30, 2002 |   | AverageRate of Return at June 30,2002 | 
|-------------------------------------- |  | ------------------------------- | ------- | ------------------------------------- | --- | - | ------------------------------- | - | ------------------------------------- | 
|                                       |  |                                 |         | (Annualized)                          |     |   |                                 |   | (Annualized)                          | 
|Investment Securities:                 |  |                                 |         |                                       |     |   |                                 |   |                                       | 
|Cash equivalents - variable rate       |  | $                               | 54,292  |                                       | 1.2 | % |                                 | $ | 215,208                               | 
|Cash equivalents - fixed rate          |  |                                 | 64,198  |                                       | 1.2 | % |                                 |   |                                      | 
|Short-term investments - variable rate |  |                                 | 38,927  |                                       | 1.2 | % |                                 |   |                                      | 
|Short-term investments - fixed rate    |  |                                 | 27,678  |                                       | 1.2 | % |                                 |   | 5,700                                 | 
|                                       |  |                                 |         |                                       |     |   |                                 |   |                                       | 
|Total                                  |  | $                               | 185,095 |                                       |     |   |                                 | $ | 220,908                               | 
|                                       |  |                                 |         |                                       |     |   |                                 |   |                                       | 



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.



Our market risk for the quarter ended September 30, 2003 has not changed
significantly from our market risk for the fiscal year ended June 30, 2003 as described above.



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, our management, with the participation
of our principal executive officer, Joseph Y. Liu, and our principal financial officer, Bruce D. Horn, has concluded that our disclosure controls and procedures were effective as of September 30, 2003.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Changes in internal controls. There was no change in our internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Limitations on the Effectiveness of Controls and Procedures. Our management, including our chief executive officer and our chief financial officer,
does not expect that our disclosure controls, internal controls and related procedures will necessarily prevent all error and all fraud. A control system, no matter how well conceived and operated, cannot provide absolute assurance that the
objectives of the control system are met. Any control system will reflect inevitable limitations, such as resource constraints, a cost-benefit analysis based on the level of benefit of additional controls relative to their costs, assumptions about
the likelihood of future events and human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Accordingly, our disclosure controls and procedures are
designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and our principal financial officer have concluded, based on their
evaluation as of September 30, 2003, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure controls and procedures were met.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



In November
2001, we and certain of our officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned, In re Oplink Communications, Inc.
Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the amended complaint, the plaintiffs allege that we, certain of our officers and directors and the underwriters of our initial public offering, or IPO, violated section 11
of the Securities Act of 1933 based on allegations that our registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The
complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
Similar complaints were filed by plaintiffs (the Plaintiffs) against hundreds of other public companies (the Issuers) that went public in the late 1990s (collectively, the IPO Lawsuits).



On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New York. On July 15, 2002, we joined in a global motion to dismiss the IPO Lawsuits filed by all of the Issuers (among others). On October 9, 2002, the Court entered an order
dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling the statute of limitations with respect to these officers and directors until September 30, 2003. On February 19, 2003, the Court
issued a decision denying the motion to dismiss the Section 11 claims against us and almost all of the Issuers, and granting the motion to dismiss the Section 10(b) claim against us. The Section 10(b) claim was dismissed without leave to amend.





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In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement that would, among other
things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO Lawsuits. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1
billion in settlement or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the difference between the actual recovery and $1 billion from the insurers for the Issuers. In September 2003, in
connection with the tentative settlement, those officers and directors who had entered tolling agreements with the Plaintiffs (described above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized.
Although we have approved this settlement proposal in principle, it remains subject to a number of procedural conditions, as well as formal approval by the Court.



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 mode dispersion
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 in the
early stages of discovery and no trial date has been set. We believe that the claims against us are without merit and intend to defend ourselves against such claims vigorously.



In addition, we are 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 our consolidated financial
position, results of operations or cash flows.



Item 2. Changes in Securities and Use of Proceeds



| | (a) |  | Not applicable
| | --- |  | --------------



| | (b) |  | Not applicable
| | --- |  | --------------



| | (c) |  | Not applicable
| | --- |  | --------------



| | (d) |  | On October 3, 2000, the SEC declared effective our Registration Statement on Form S-1 (No. 333-41506). Pursuant to this Registration Statement, we completed an initial public
offering of 15,755,000 shares of common stock, including the over-allotment shares, at an initial public offering price of $18.00 per share. We incurred expenses of approximately $22.6 million, of which $19.9 million represented underwriting
discounts and commissions and $2.7 million represented other related expenses. The net offering proceeds to us after total expenses were $261.0 million.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2003, we had $189.1 million in cash, cash equivalents and short-term investments. All remaining proceeds
are invested in cash, cash equivalents, or short-term investments consisting of highly liquid commercial paper, money market funds, government and non-governmental debt securities and certificates of deposit. Consistent with the use of proceeds as
discussed in our Registration Statement on Form S-1, we have approved a program to repurchase up to an aggregate of $40.0 million of our common stock. Such repurchases may be



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made from time to time on the open market at prevailing market prices or in negotiated transactions off the market or pursuant to a 10b5-1 plan adopted by
us. As of September 30, 2003, there were repurchases of an aggregate of $35.2 million under our repurchase program. The use of these proceeds does not represent a material change in the use of proceeds described in our public offering prospectus.



Item 3. Defaults Upon Senior Securities



None



Item 4. Submission of Matters to a Vote of Security Holders



None



Item 5. Other Information



In
accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the Act), we are required to disclose the non-audit services approved by our Audit Committee to be
performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. Other than certain tax
services, our Audit Committee has not approved the engagement of PricewaterhouseCoopers LLP for any non-audit services.



Oplink completed the previously announced acquisition of substantially all of the assets, including intellectual property, of privately held RedClover
Networks, Inc. in early November 2003. Oplink also assumed certain liabilities in connection with the acquisition.



Item 6. Exhibits and Reports on Form 8-K



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



|Exhibit No. |     |  | Description                                                                                                                                                                                                                                
|----------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |    
|3.1         | (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) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                               
|            |    
|31.2        |     |  | Certification of Chief Financial Officer Required under Rule 13a-14(a) or Rule 15d-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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------



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|(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.



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



On July 31, 2003, Oplink Communications, Inc. filed a Current Report on Form 8-K under Item 12. Results of Operations and Financial Condition
announcing that it had issued a press release on July 31, 2003 regarding its financial results for the quarter and fiscal year ended June 30, 2003.



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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, 2003 |  | By:                                         
|                        |  | Bruce D. Horn                               
|                        |  | Chief Financial Officer                     
|                        |  | (Principal Financial and Accounting Officer)



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