UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

or

Commission file number 000-31581

OPLINK COMMUNICATIONS, INC.

3469 North First Street, San Jose, CA 95134
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 433-0606

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes  [X]    No  [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).        Yes  [X]    No  [   ]

   The number of shares of the Registrant’s common stock outstanding as of October 31, 2004 was 148,117,271.

OPLINK COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

OPLINK COMMUNICATIONS, INC.

(1) The Condensed Consolidated Balance Sheet at June 30, 2004 has been derived from the audited financial statements at that date.

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

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OPLINK COMMUNICATIONS, INC.

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

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OPLINK COMMUNICATIONS, INC.

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

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OPLINK COMMUNICATIONS, INC.

1. Description of Business. Oplink Communications, Inc. (“Oplink” or the “Company”) provides design, integration and Optical Manufacturing Solutions, or OMS, for optical networking components and subsystems that expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, reshape light profile to enable extended signal reach and provide signal transmission and reception within an optical network. The Company’s product portfolio includes solutions for next-generation, all-optical Dense and Coarse Wavelength Division Multiplexing, or DWDM and CWDM, respectively, optical amplification, switching and routing, monitoring and conditioning, dispersion management and line transmission applications. The Company offers advanced and cost-effective optical-electrical components and subsystem manufacturing through its facilities in Zhuhai and Shanghai, China. In addition, the Company maintains optical-centric front-end design, application, and customer service functions at its headquarters in San Jose, California. As a Photonic Foundry, Oplink offers its customers expert OMS for the production and packaging of highly integrated optical subsystems and turnkey solutions based upon a customer’s specific product design and specification. The Company’s broad line of products and services increases the performance of optical networks and enables optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks. The Company’s customers include telecommunications, data communications and cable TV equipment manufacturers around the globe.

     The Company was incorporated in September 1995, began selling its products in 1996 and established operations in Zhuhai, China in April 1999. The Company is headquartered in San Jose, California and its primary manufacturing facility and component research and development resources are in Zhuhai, China. The Company conducts its business within one business segment and has no organizational structure dictated by product, service lines, geography or customer type.

2. Basis of Presentation. The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. The financial statements presented herein have been prepared by management, without audit by independent auditors who do not express an opinion thereon, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2004 included in the Company’s Annual Report on Form 10-K.

     The Company operates and reports using a fiscal year, which ends on the Sunday closest to June 30. Interim fiscal quarters end on the Sundays closest to each calendar quarter end. For presentation purposes, the Company presents each fiscal year as if it ended on June 30. The Company presents each of the fiscal quarters as if it ended on the last day of each calendar quarter. October 3, 2004 and September 28, 2003 represent the Sunday closest to the period ended September 30, 2004 and September 30, 2003, respectively. The first quarter of fiscal 2005 is a 14-week quarter, one week more than a typical quarter. Fiscal year 2005 will consist of 53 weeks, one week more than a typical year.

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     The Company’s consolidated financial statements for all periods presented account for the Shanghai operation as part of continuing operations rather than as a discontinued operation. In May 2003, the Company adopted a plan to sell its Shanghai operation. As the sale of the Shanghai operation represented a disposal of a “component of an entity” as defined in SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” (“SFAS No. 144”), the Shanghai operation was accounted for as a discontinued operation. In May 2004, one year following the planned sale of its Shanghai operation and after considering growth in the telecommunications market, the Company determined that this facility is more strategic to its operations than in prior periods due to the need to ensure a supply of the parts manufactured at the Shanghai facility as a result of an increase in demand for these types of parts in the market and the acquisition of one of the Company’s suppliers by one of the Company’s competitors. Therefore, the Company has decided not to dispose of this facility and has returned it to continuing operations. Amounts in the financial statements and related notes for all periods presented are reclassified to reflect the Shanghai operation as part of continuing operations in accordance with SFAS No. 144.

     In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at September 30, 2004, the results of its operations for the three-month periods ended September 30, 2004 and 2003 and its cash flows for the three-month periods ended September 30, 2004 and 2003. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year.

3. Net Loss Per Share. The Company computes net loss per share in accordance with SFAS No. 128, “Earnings Per Share,” and SEC Staff Accounting Bulletin (“SAB”) No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period and common equivalent shares outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are composed of the incremental common shares issuable upon the exercise of stock options. The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations for the periods presented (in thousands, except per share data):

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4. Comprehensive Loss. Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on investments.

     The reconciliation of net loss to comprehensive loss for the three months ended September 30, 2004 and 2003 is as follows (in thousands):

5. Short-Term and Long-Term Investments. The Company generally invests its excess cash in debt instruments of the U.S. Treasury, government agencies and corporations with strong credit ratings. Such investments are made in accordance with the Company’s investment policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. To date, the Company has not experienced any significant losses on its investments.

     Short-term and long-term investments consist of the following (in thousands):

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     One security which was categorized as held-to-maturity was called by the issuer in September 2004. No gain or loss was recognized as the security was called at the purchase price.

6. Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of (in thousands):

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

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     In July 2004, the Company completed the purchase of a building in Fremont, California for a total cost of $4.8 million in cash. It is currently intended that the site will be the future location of the Company’s U.S. headquarters. The facility consists of approximately 52,000 square feet.

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

9. Product Warranties. The Company provides reserves for the estimated cost of product warranties at the time revenue is recognized based on its historical experience of known product failure rates and expected material and labor costs to provide warranty services. The Company generally provides a one-year warranty on its products. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts necessary, the Company may reverse a portion of such provisions in future periods.

     Changes in the warranty liability, which is included as a component of “Accrued liabilities” on the Condensed Consolidated Balance Sheet, is as follows (in thousands):

10. Restructuring Costs and Other Charges. A summary of the restructuring charges accrued in fiscal 2004 and the three months ended September 30, 2004 is as follows (in thousands):

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11. Stock-Based Compensation. The Company accounts for its stock-based compensation issued to employees using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock issued to Employees.” SFAS No. 123 establishes accounting and disclosure requirement using a fair value method of accounting for stock-based employee compensation plans as well as stock and other equity instruments issued to non-employees which are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18 and valued using the Black-Scholes option-pricing model.

     The following table sets forth the pro forma information as if the provisions of SFAS No. 123 had been applied to account for stock-based employee compensation (in thousands, except per share data):

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     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:

12. Repurchase of Common Stock. On September 26, 2001, the Company’s Board of Directors authorized a program to repurchase up to an aggregate of $21.2 million of the Company’s common stock. On September 19, 2002, the Company’s Board of Directors approved an increase in the Company’s buyback plan to repurchase up to an aggregate of $40.0 million of the Company’s common stock. Such repurchases may be made from time to time on the open market at prevailing market prices, in negotiated transactions or pursuant to a 10b5-1 plan adopted by the Company. The Company adopted a 10b5-1 plan in August 2002, which allows the Company to repurchase shares of its common stock during a period in which the Company is in possession of material non-public information, provided the Company communicated share repurchase instructions to the broker at a time when the Company was not in possession of such material non-public information. As of September 30, 2004, repurchases of an aggregate of $35.2 million have been made under the Company’s repurchase program.

13. Recent Accounting Pronouncements. On March 31, 2004, the FASB issued a proposed Statement, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statement of operations. The proposed standard would require that the modified prospective method be used, which requires that the fair value of new awards granted from the beginning of the year of adoption (plus unvested awards at the date of adoption) be expensed over the vesting period. In addition, the proposed statement encourages the use of the “binomial” approach to value stock options, which differs from the Black-Scholes option pricing model that the Company currently uses in the footnotes to its condensed consolidated financial statements. The recommended effective date of the proposed standard for public companies is currently for fiscal years beginning after June 15, 2005.

     Should this proposed statement be finalized in its current form, it will have a significant impact on the Company’s operating results as the Company will be required to expense the fair value of its stock option grants and stock purchases under the Company’s employee stock purchase plan rather than disclose the impact on its consolidated net loss within its footnotes, as is the Company’s current practice. In addition, there are a number of implementation questions that are not fully resolved by the proposed statement. As a result, there may be additional changes reflected in the Company’s financial statements upon issuance of the final standard.

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     At its November 2003 meeting, the Emerging Issues Task Force (“EITF”) reached a consensus on disclosure guidance previously discussed under EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. The Company adopted the disclosure requirements during the fiscal year ended June 30, 2004.

     At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The Company’s adoption of this consensus on the recognition and measurement guidance did not have a material impact on its financial position, results of operations or cash flows.

     In various areas, including revenue recognition and stock option accounting, accounting standards and practices continue to evolve. Additionally, the SEC and the FASB’s Emerging Issues Task Force continue to address revenue and stock option related accounting issues. The management of the Company believes it is in compliance with all of the rules and related guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas could impact the Company’s future accounting for its operations.

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

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

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     In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement and entered a memorandumof understanding, providing for, among other things, a dismissal with prejudice and full release of the Issuers and their officers and directors from all further liability resulting from Plaintiffs’ claims, and the assignment to Plaintiffs of certain potential claims that the Issuers may have against the underwriters. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement or judgment against the underwriter defendants in the IPO Lawsuits, the Plaintiffs would be entitled to payment by each participating Issuer’s insurer of a pro rata share of any shortfall in the Plaintiff’s guaranteed recovery. In such event, the Company’s obligation would be limited to reimbursement of the Company’s insurer up to the amount remaining under the deductible of the Company’s insurance policy. In September 2003, in connection with the tentative settlement, the Company’s officers and directors who had entered tolling agreements with the Plaintiffs (described above) agreed to extend those agreements so that they would not expire prior to any settlement being finalized. In June 2004, the Company executed a settlement agreement with the Plaintiffs pursuant to the terms of a memorandum of understanding. The settlement is subject to a number of conditions, including action by the Court certifying a class action for settlement purposes and formally approving the settlement. The underwriters have opposed both the certification of the class and the judicial approval of the settlement. Pending a definitive settlement, the Company continues to believe that the action against the Company is without merit and intends to defend against it vigorously.

     On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively, “OZ”) sued four individuals and the Company in California Superior Court for the County of Alameda. One of the four individual defendants is Zeynep Hakimoglu, who joined the Company on November 1, 2001 as Vice President of Product Line Management. The other three are unrelated to the Company. Zeynep Hakimoglu’s employment with the Company terminated on December 17, 2002. The complaint alleges trade secret misappropriation and related claims against the four individuals and the Company concerning OZ’s alleged polarization mode dispersion technology. The plaintiffs seek actual damages against the four individuals and the Company in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. The plaintiffs sought a temporary restraining order in December 2001, which the court denied, and withdrew their preliminary injunction motion against the Company. The Company answered the complaint on January 22, 2002, denying plaintiffs’ claims. The case is currently in discovery with a trial date set for April 8, 2005. In August 2004, the Company settled the lawsuit with respect to the claims against the Company and OZ agreed to dismiss the case against the Company with prejudice. To the Company’s knowledge OZ is continuing to pursue its lawsuit against all the defendants other than the Company, and the Company may be obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her prior employment with the Company. In the event that the Company incurs such an obligation, the Company believes it has obtained sufficient director and officer liability insurance to cover this contingency.

     The Company is subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

15. Subsequent Events. On October 28, 2004, the Company and Cayman Oplink Communications, Inc., a newly formed, wholly owned Cayman Islands subsidiary of the Company (“Buyer”), entered into a stock purchase agreement with all the shareholders of EZconn Corporation (“EZconn”), a privately-held Taiwanese company that manufactures cable and photonics components for broadband access equipment manufacturers. Pursuant to the stock purchase agreement and related ancillary agreements, Buyer will pay $30 million for all of the shares of EZconn and certain assets related to the business of EZconn, of which $9

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million will be paid in cash and $21 million will be paid in shares of common stock of the Company to be issued pursuant to a subscription agreement entered into by the Company and eight of the shareholders of EZconn. Buyer will also assume approximately $12 million in net debt of EZconn, which will be repaid at or promptly following the closing of the acquisition. The closing of the acquisition is subject to the Company’s satisfactory completion of its due diligence investigation of EZconn, approval by the Investment Commission of the Ministry of Economic Affairs of the Republic of China and certain other customary closing conditions. The acquisition is expected to close in January 2005.

     Pursuant to the subscription agreement between the Company and eight of the shareholders of EZconn, the Company will issue $21 million in shares of its common stock to such persons upon the closing of the acquisition of EZconn contemplated by the stock purchase agreement. The shares of common stock will be issued at a price per share based on the 20-day average closing price of the Company’s common stock for the period ending one day prior to the closing of the acquisition of EZconn, provided that (i) if the 20-day average closing price exceeds $1.83, the price per share shall be $1.83, and (ii) if the 20-day average closing price is less than $1.66, the price per share shall be $1.66. The shares of common stock will not be issued unless the acquisition of EZconn contemplated by the stock purchase agreement is consummated and will not be registered under the Securities Act of 1933, as amended, or any state securities laws. The Company has agreed to grant certain registration rights to the eight purchasers.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

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

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes in this report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, related financial information and audited consolidated financial statements contained in our Form 10-K for the fiscal year ended June 30, 2004 as filed with the Securities and Exchange Commission on September 10, 2004.

     In May 2003, we adopted a plan to sell our Shanghai operation. As the sale of the Shanghai operation represented a disposal of a “component of an entity” as defined in SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” (“SFAS No. 144”), the Shanghai operation was accounted for as a discontinued operation. In May 2004, one year following the planned sale of our Shanghai operation and after considering growth in the telecommunications market, we determined that this facility is more strategic to our operations than in prior periods due to the need to ensure a supply of the parts manufactured

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at the Shanghai facility as a result of an increase in demand for these types of parts in the market and the acquisition of one of our suppliers by one of our competitors. Therefore, we have decided not to dispose of this facility and have returned it to continuing operations. Operating results of the Shanghai operation have been reclassified from discontinued to continuing operations for all periods presented.

Overview

     We provide design, integration and Optical Manufacturing Solutions, or OMS, for optical networking components and subsystems that expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, reshape light profile to enable extended signal reach and provide signal transmission and reception within an optical network. Our product portfolio includes solutions for next-generation, all-optical Dense and Coarse Wavelength Division Multiplexing, or DWDM and CWDM, respectively, optical amplification, switching and routing, monitoring and conditioning, dispersion management and line transmission applications. We offer advanced and cost-effective optical-electrical components and subsystem manufacturing through our facilities in Zhuhai and Shanghai, China. In addition, we maintain optical-centric front-end design, application, and customer service functions at our headquarters in San Jose, California. As a Photonic Foundry, we offer our customers expert OMS for the production and packaging of highly integrated optical subsystems and turnkey solutions based upon a customer’s specific product design and specification. Our broad line of products and services increases the performance of optical networks and enables optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks. Our customers include telecommunications, data communications and cable TV equipment manufacturers around the globe.

     Our management team, on an internal basis, informally monitors worldwide economic trends and in particular activity within the telecommunication economic space. This would include known contracts being placed by end users with our current or potential new customers. Over the past several quarters, we have noticed a general increase in spending activity in the telecommunications space as well as a general improvement in the worldwide economic environment. We have also noticed a general increase in the number of contracts being placed by end users with our current or potential new customers, which we believe indicates a trend towards increasing opportunities for our revenue growth. However, the fact that our current or potential new customers are receiving orders does not necessarily mean we will be a beneficiary of such orders, but does provide us with an early notice of potential activity. To obtain orders from our current or potential new customers we would need to be selected as a potential vendor and subsequently would need to demonstrate we can meet all of the order requirements of our customer. To the extent we receive new orders, these orders may be only for trial units and future full deployment orders may not necessarily follow.

REVENUES. We generate substantially all of our revenues from the sale of fiber optic components and subsystems. To date, we have developed over 160 standard products that are sold or integrated into customized solutions for our customers. Our products are generally categorized into two major groups: (i) our bandwidth creation products, which include wavelength expansion and optical amplification products; and (ii) our bandwidth management products, which include wavelength performance monitoring and protection, and optical switching products. A majority of our revenues are derived from our bandwidth creation products, which include our wavelength expansion products, in particular, multiplexers.

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ACQUISITION. On October 28, 2004, we and our newly formed, wholly owned Cayman Islands subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase agreement with all the shareholders of EZconn Corporation, a privately-held Taiwanese company that manufactures cable and photonics components for broadband access equipment manufacturers. Pursuant to the stock purchase agreement and related ancillary agreements, our Cayman Island subsidiary will pay $30 million for all of the shares of EZconn and certain assets related to the business of EZconn, of which $9 million will be paid in cash and $21 million will be paid in shares of our common stock to be issued pursuant to a subscription agreement entered into by us and eight of the shareholders of EZconn. Our Cayman Islands subsidiary will also assume approximately $12 million in net debt of EZconn, which will be repaid at or promptly following the closing of the acquisition. The closing of the acquisition is subject to the satisfactory completion of our due diligence investigation of EZconn, approval by the Investment Commission of the Ministry of Economic Affairs of the Republic of China and certain other customary closing conditions. The acquisition is expected to close in January 2005.

     Pursuant to the subscription agreement entered into by us and eight of the shareholders of EZconn, we will issue $21 million in shares of our common stock to such persons upon the closing of the acquisition of EZconn contemplated by the stock purchase agreement. The shares of common stock will be issued at a price per share based on the 20-day average closing price of our common stock for the period ending one day prior to the closing of the acquisition of EZconn, provided that (i) if the 20-day average closing price exceeds $1.83, the price per share shall be $1.83, and (ii) if the 20-day average closing price is less than $1.66, the price per share shall be $1.66. The shares of common stock will not be issued unless the acquisition of EZconn contemplated by the stock purchase agreement is consummated and will not be registered under the Securities Act of 1933, as amended, or any state securities laws. We have agreed to grant certain registration rights to the eight purchasers.

Use of Estimates and Critical Accounting Policies

     The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure. On an ongoing basis, we evaluate our estimates, including those related to product returns, accounts receivable, inventories, intangible assets, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis, and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies, and our procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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

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may have a material impact on our financial condition or results of operations. Our critical accounting policies cover the following areas:

-		revenue recognition and product returns;
-		warranty obligations;
-		risk evaluation;
-		allowance for doubtful accounts;
-		excess and obsolete inventory;
-		long-lived asset valuation; and
-		business combination.

     Additional information about these critical accounting policies may be found in the “Management’s Discussion & Analysis of Financial Condition and Results of Operations” section included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

Results of Operations

     Revenues:

(In thousands, except percentages)

     The increase in revenue for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to increased unit shipments of our wavelength expansion products and optical switching and routing products to existing and new customers. The increase in shipments was primarily due to a general increase in spending activity in the telecommunications industry. The increase in revenue associated with increased unit shipments was partially offset by decreases in the average selling prices of our products during the three months ended September 30, 2004 as compared to the three months ended September 30, 2003.

     We anticipate that there will be further declines in average selling prices through the fiscal year ending June 30, 2005. We also expect our revenue in the second quarter of fiscal 2005 to be approximately $9.0 million.

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     Gross Profit:

(In thousands, except percentages)

     The increase in gross profit for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to greater revenue. The increase in gross profit was partially offset by higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations. In addition, our gross profit for the three months ended September 30, 2004 was positively impacted by the unexpected sale of inventory of $54,000 that had been previously fully reserved, partially offset by $27,000 of non-cash compensation expense. Our gross profit for the three months ended September 30, 2003 was positively impacted by the unexpected sale of inventory that had been previously fully reserved of $515,000, partially offset by $76,000 of non-cash compensation expense. Unexpected sales of fully reserved inventory decreased over the past several quarters. However, we have no visibility to the amount of such sales in the future, if any.

     Our gross profit margin increased for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 due to greater revenue resulting in lower manufacturing costs relative to our production volume. The increase in gross profit margin was partially offset by a smaller benefit from the unexpected sales of fully reserved inventory and higher depreciation expense.

     We expect our gross profit margin in the second quarter of fiscal 2005 to be approximately the same as the first quarter of fiscal 2005.

     Research and Development:

(In thousands, except percentages)

     The increase in research and development expenses for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to higher personnel costs as a result of the acquisition of RedClover, Accumux and Gigabit, partially offset by a decrease in non-cash compensation expense. We believe that developing customer solutions at the prototype stage is critical to our strategic product development objectives. We further believe that, in order to meet the changing requirements of our customers, we will need to fund investments in several concurrent product development projects. We expect our quarterly research and development expense to be approximately the same in the second quarter of fiscal 2005 compared to the first quarter of fiscal 2005.

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     Sales and Marketing:

(In thousands, except percentages)

     The increase in sales and marketing expense for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to higher personnel-related costs. We expect our quarterly sales and marketing expenses to remain relatively flat in the second quarter of fiscal 2005 compared to the first quarter of fiscal 2005.

     General and Administrative:

(In thousands, except percentages)

     The decrease in general and administrative expenses for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to $890,000 of expenses associated with the exploration of strategic business opportunities in the three months ended September 30, 2003 and lower non-cash compensation expense, partially offset by increased legal costs resulting from the settlement of the lawsuit with OZ Optics Limited, Inc., additional professional services fees related to Sarbanes-Oxley compliance and higher personnel-related costs. We expect our general and administrative expenses to remain relatively flat in the second quarter of fiscal 2005 compared to our expenses in the first quarter of fiscal 2005.

     Non-Cash Compensation Expense:

(In thousands, except percentages)

     From July 1, 1998 through September 30, 2004, we recorded an aggregate of $59.0 million in deferred non-cash compensation, net of recoveries resulting from stock option cancellations. The decrease in non-cash compensation expenses for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to the method under which the deferred non-cash compensation was amortized, as set out in FASB Interpretation No. 28, which results in higher compensation expense in the earlier vesting periods of the related options.

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     Restructuring Costs and Other Charges. A summary of the restructuring charges accrued in fiscal 2004 and the three months ended September 30, 2004 is as follows (in thousands):

     Interest and Other Income, Net:

(In thousands, except percentages)

     The increase in interest income for the three month ended September 30, 2004 compared to the three months ended September 30, 2003 was primarily due to higher yields on our investments. The average rate of return for the three months ended September 30, 2004 was 1.9% as compared to the average rate of return of 1.2% for the three months ended September 30, 2003.

     Gain (Loss) on Sale of Assets. We recorded a loss of $16,000 and a gain of $215,000 for the three months ended September 30, 2004 and 2003, respectively, from the sale of fixed assets and intangible assets less than or greater than the carrying amount of these assets.

     Provision for Income Taxes. We have recorded a gross deferred tax asset of $56.4 million as of September 30, 2004, which net of a valuation allowance reduces the net deferred tax asset to zero, an amount that management believes will more likely than not be realized.

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Liquidity and Capital Resources

     Since our inception, we have financed our operations primarily through issuances of equity, which totaled approximately $319.4 million in aggregate net proceeds, offset by $24.8 million in common stock repurchases, net of proceeds from exercise of stock options, employee stock purchase plan and warrants through September 30, 2004. In August 2000, we received $50.0 million in connection with the issuance to Cisco Systems of a convertible promissory note, which along with the related interest expense automatically converted into 3,298,773 shares of common stock upon the closing of our initial public offering in October 2000. As of September 30, 2004, we had cash, cash equivalents and short-term and long-term investments of $185.5 million and working capital of $149.0 million. We estimate that the sum of our cash, cash equivalents and short-term and long-term investments at the end of the second quarter of fiscal 2005 will be lower than the sum of our cash, cash equivalents and short-term and long-term investments at the end of the first quarter of fiscal year 2005 due to our acquisition of EZconn Corporation.

     Three Months Ended September 30, 2004

     Our operating activities provided cash of $291,000 in the first quarter of fiscal 2005 as a result of our net loss for the first quarter of fiscal 2005 of $874,000 adjusted by $2.4 million primarily for the non-cash charges of depreciation and amortization, amortization of deferred stock compensation as well as a net changes in assets and liabilities of $1.2 million.

     In the three months ended September 30, 2004, the changes in assets and liabilities were primarily the result of changes in accounts receivable and inventories. Accounts receivable used $608,000 of cash primarily due to one of our large customers’ scheduled payment date falling immediately after our fiscal quarter end. As a result, days sales outstanding in accounts receivable ended first quarter of fiscal 2005 at 84 days, as compared to 71 days at the end of the fourth quarter of fiscal 2004.

     Inventories used $614,000 of cash during the first quarter of fiscal 2005 primarily due to purchases of inventory to address longer lead time for materials.

     We typically bill customers on an open account basis with net thirty to ninety day payment terms. We would generally expect the level of accounts receivable at the end of any quarter to reflect the level of sales in that quarter and to change from one period to another in a direct relationship to the change in the level of sales. Our level of accounts receivable would also increase if customers delayed their payments or if we offered extended payment terms to our customers.

     Additionally, in order to maintain an adequate supply of product for our customers, we must carry a certain level of inventory. Our inventory level may vary based primarily upon orders received from our customers, our forecast of demand for these products and lead time for materials. These considerations are balanced against risk of obsolescence or potentially excess inventory levels. We generally expect the level of inventory to vary from one period to another as a result of changes in the level of sales.

     Our investing activities used cash of $10.9 million in the first quarter of fiscal 2005. The net cash used in investing activities in the three months ended September 30, 2004 was primarily due to purchases of short-term and long-term investments of $18.6 million partially offset by maturities of short-term and long-term investments of $12.5 million resulting in use of cash of $6.1 million. We invested a significant amount of our excess cash to purchase short-term and long-term investments in the first quarter of fiscal 2005 in an

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effort to take advantage of higher yields and increase returns on our investments. We used approximately $4.8 million to purchase a building in Fremont, California in the first quarter of fiscal 2005 to house our US operations. During the remaining nine months of fiscal 2005, we expect to use approximately $1.4 million for capital expenditures worldwide, excluding property and equipment acquired through acquisitions.

     On October 28, 2004, we and our newly formed, wholly owned Cayman Islands subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase agreement with all the shareholders of EZconn Corporation, a privately-held Taiwanese company that manufactures cable and photonics components for broadband access equipment manufacturers. Pursuant to the stock purchase agreement and related ancillary agreements, our Cayman Island subsidiary will pay $30 million for all of the shares of EZconn and certain assets related to the business of EZconn, of which $9 million will be paid in cash and $21 million will be paid in shares of our common stock to be issued pursuant to a subscription agreement entered into by us and eight of the shareholders of EZconn. Our Cayman Islands subsidiary will also assume approximately $12 million in net debt of EZconn, which will be repaid at or promptly following the closing of the acquisition. The closing of the acquisition is subject to the satisfactory completion of our due diligence investigation of EZconn, approval by the Investment Commission of the Ministry of Economic Affairs of the Republic of China and certain other customary closing conditions. The acquisition is expected to close in January 2005.

     Our financing activities provided cash of $15,000 in the first quarter of fiscal 2005 primarily due to proceeds from issuance of common stock of $84,000 in connection with the exercise of stock options and partial repayment of a note receivable from a stockholder of $12,000, partially offset by repayment of capital lease obligations of $81,000. Pursuant to the subscription agreement entered into by us and eight of the shareholders of EZconn, we will issue $21 million in shares of our common stock to such persons upon the closing of the acquisition of EZconn contemplated by the stock purchase agreement. The shares of common stock will be issued at a price per share based on the 20-day average closing price of our common stock for the period ending one day prior to the closing of the acquisition of EZconn, provided that (i) if the 20-day average closing price exceeds $1.83, the price per share shall be $1.83, and (ii) if the 20-day average closing price is less than $1.66, the price per share shall be $1.66. The shares of common stock will not be issued unless the acquisition of EZconn contemplated by the stock purchase agreement is consummated and will not be registered under the Securities Act of 1933, as amended, or any state securities laws. We have agreed to grant certain registration rights to the eight purchasers.

     Three Months Ended September 30, 2003

     Our operating activities provided cash of $509,000 in the first quarter of fiscal 2004 as a result of our net loss for the quarter of $2.3 million adjusted by $2.7 million primarily for the non-cash charges of depreciation and amortization, amortization of deferred stock compensation offset by a net change in assets and liabilities of $39,000.

     In the first quarter of fiscal 2004, the changes in assets and liabilities were primarily the result of changes in accounts receivable and accounts payable. Accounts receivable used $1.3 million of cash primarily due to increased shipments during the first quarter of fiscal 2004. Days sales outstanding in accounts receivable ended the first quarter of fiscal 2004 at 75 days, as compared to 72 days at the end of the fourth quarter of fiscal 2003.

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     Accounts payable provided cash of $1.0 million due to a lower accounts payable balance at the end of the fourth quarter of fiscal year 2003 compared to the end of first quarter of fiscal 2004 primarily due to higher inventory purchases as a result of increased demand for our products by our customers.

     Our investing activities provided cash of $2.1 million in first quarter of fiscal 2004. The net cash provided by investing activities in the first quarter of fiscal 2004 was primarily due to maturities of short-term investments of $51.5 million and proceeds from sales of property and equipment of $418,000, partially offset by purchases of short-term investments of $49.7 million.

     Our financing activities provided cash of $156,000 in the first quarter of fiscal 2004 primarily due to proceeds from the issuance of common stock of $851,000 in connection with the exercise of stock options partially offset by repayment of capital lease obligations of $695,000.

Contractual Obligations

     Our contractual obligations as of September 30, 2004 have been summarized below (in thousands):

     On October 28, 2004, we entered into an agreement to acquire privately held EZconn, or EZconn. Under the terms of the proposed acquisition agreement, we will pay $30 million for all of the shares of EZconn and certain assets related to the business of EZconn, of which $9 million will be paid in cash and $21 million will be paid in shares of Oplink’s common stock. We will also assume approximately $12 million in net debt of EZconn, which will be paid at or promptly following the closing. The acquisition is expected to close in January 2005.

Recent Accounting Pronouncements

     On March 31, 2004, the FASB issued a proposed Statement, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statements of operations. The proposed standard would require that the modified prospective method be used, which requires that the fair value of new awards granted from the beginning of the year of adoption (plus unvested awards at the date of adoption) be expensed over the vesting period. In addition, the proposed statement encourages the use of the “binomial” approach to value stock options, which differs from the Black-Scholes option pricing model that we currently use in the footnotes to our condensed consolidated financial statements. The recommended effective date of the proposed standard for public companies is currently for fiscal years beginning after June 15, 2005.

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     Should this proposed statement be finalized in its current form, it will have a significant impact on our operating results as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net loss within our footnotes, as is our current practice. In addition, there are a number of implementation questions that are not fully resolved by the proposed statement. As a result, there may be additional changes reflected in our consolidated financial statements upon issuance of the final standard.

     At its November 2003 meeting, the Emerging Issues Task Force (“EITF”) reached a consensus on disclosure guidance previously discussed under EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. We adopted the disclosure requirements during the fiscal year ended June 30, 2004.

     At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The adoption of this consensus on the recognition and measurement guidance did not have a material impact on our financial position, results of operations, or cash flows.

     In various areas, including revenue recognition and stock option accounting, accounting standards and practices continue to evolve. Additionally, the SEC and the FASB’s Emerging Issues Task Force continue to address revenue and stock option related accounting issues. The management of Oplink believes it is in compliance with all of the rules and related guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas could impact Oplink’s future accounting for its operations.

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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 $874,000, $6.4 million, $36.8 million and $68.4 million for the three months ended September 30, 2004 and the fiscal years ended June 30, 2004, 2003 and 2002, respectively. We have not achieved profitability on a quarterly or annual basis since inception. As of September 30, 2004, we had an accumulated deficit of $225.3 million. We will need to generate significantly greater revenues while containing costs and operating expenses to achieve profitability. Our revenues may not grow in future quarters, and we may never generate sufficient revenues to achieve profitability.

We depend upon a small number of customers for a substantial portion of our revenues, and any decrease in revenues from, or loss of, these customers without a corresponding increase in revenues from other customers would harm our operating results.

     We depend upon a small number of customers for a substantial portion of our revenues. Our top five customers, although not the same five customers for each period, together accounted for 68%, 69%, 56% and 49% of our revenues in the three months ended September 30, 2004 and the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Nortel Networks Corporation (“Nortel”), Hua Wei Technologies Co. Ltd. and Marubun Corporation (“Marubun”) each accounted for greater than 10% of our revenue for the three months ended September 30, 2004. For the three months ended September 30, 2004, a substantial portion of our shipments to Marubun, our third-party sales representative, were to fulfill purchase orders placed by Fujitsu Limited (“Fujitsu”) through Marubun. Through Marubun and through direct sales, Fujitsu accounted for greater than 10% of our revenues for the three months ended September 30, 2004. Nortel, Sanmina-SCI Corporation (“Sanmina”) and Marubun each accounted for greater than 10% of our revenue for the fiscal year ended June 30, 2004. For the fiscal year ended June 30, 2004, a substantial portion of our shipments to Sanmina, a contract manufacturer, were to fulfill purchase orders placed by Tellabs, Inc. (“Tellabs”). Through Sanmina and through direct sales, Tellabs accounted for greater than 10% of our revenues for the fiscal year ended June 30, 2004. For the fiscal year ended June 30, 2004, a substantial portion of our shipments to Marubun were to fulfill purchase orders placed by Fujitsu through Marubun. Through Marubun and through direct sales, Fujitsu accounted for greater than 10% of our revenues for the fiscal year ended June 30, 2004. Nortel, Adva AG Optical Networking and Marubun each accounted for greater than 10% of our revenues for the fiscal year ended June 30, 2003. A substantial portion of our shipments to Marubun during fiscal 2003 were to fulfill purchase orders placed by Fujitsu and NEC Corporation (“NEC”). Neither Fujitsu nor NEC accounted for greater than 10% percent of our revenues for fiscal 2003. We expect that we will continue to depend upon a small number of customers, although potentially not the same customers, for a substantial portion of our revenues. For instance, Tellabs accounted for greater than 10% of our revenue for the quarter ended June 30, 2004, March 31, 2004 and December 31,

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2003 and the fiscal year ended June 30, 2004, respectively. However, it did not account for greater 10% of our revenue for the quarter ended September 30, 2004.

     Our revenues generated from these customers, individually or in the aggregate, may not reach or exceed historic levels in any future period. We may not be the sole source of supply to our customers, and they may choose to purchase products from other vendors. Furthermore, the businesses of our existing customers are currently experiencing slow growth following a protracted downturn, which is resulting, in some instances, in significantly decreased sales to these customers and harming our results of operations. Loss or cancellations of orders from, or any further downturn in the business of, any of our customers could harm our business. Our dependence on a small number of customers may increase if the fiber optic components and subsystems industry and our target markets continue to consolidate.

Our quarterly revenues and operating results are difficult to predict and may continue to fluctuate significantly from quarter to quarter and, therefore, may vary from investors’ expectations, which could cause our stock price to drop.

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

-		economic downturn and uncertainty of the fiber optic industry;
-		economic conditions specific to the communications and related industries and the development and size of the markets for our products;
-		fluctuations in demand for, and sales of, our products;
-		changes in customer, geographic or product mix and the average selling prices of the products we sell;
-		cancellations of orders and shipment rescheduling;
-		the ability of our manufacturing operations in China to timely produce and deliver products in the quantity and of the quality our customers require;
-		the availability of raw materials used in our products and increases in the price of these raw materials;
-		our ability to successfully improve our manufacturing capability and achieve acceptable production yields in our facilities in China;
-		the practice of communication equipment suppliers to sporadically place large orders with short lead times;
-		competitive factors, including introductions of new products, new technologies and product enhancements by competitors, consolidation of competitors in the fiber optic components and subsystems market and pricing pressures;

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-		our ability to develop, introduce, manufacture and ship new and enhanced optical networking products in a timely manner without defects; and
-		costs associated with and the outcomes of any intellectual property or other litigation to which we are, or may become, a party.

     Due to the factors noted above and other risks discussed in this section, we believe that quarter-to-quarter comparisons of our operating results will not be meaningful. Moreover, if we experience difficulties in any of these areas, our operating results could be significantly and adversely affected and our stock price could decline. Also, it is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors, which could cause our stock price to fall.

The pending acquisition of EZconn may not be consummated or may be difficult to integrate, which would disrupt our business and could harm our operating results.

     On October 28, 2004, we entered into a Stock Purchase Agreement with all the shareholders of EZconn Corporation (“EZconn”), a privately-held Taiwanese company that manufactures cable and photonics components for broadband access equipment manufacturers. The transaction is expected to close by January 2005. However, the consummation of the transaction is subject to regulatory approvals, the satisfactory completion of our due diligence investigation of EZconn, and other customary closing conditions. Therefore, we cannot assure you that the transaction will be consummated.

     Even if the transaction with EZconn is consummated, our management and financial controls, personnel, computer systems and other corporate support systems may not be adequate to manage the increase in the size and scope of our operations as a result of the completed acquisition. In addition, we may not be able to generate revenue from the EZconn operations consistent with historical results. We may not be able to realize positive earnings that we expect will result from the addition of the EZconn operations to our business. Additionally we may need to expend additional cash for working capital and capital expenditures. Moreover, we expect the transaction to result in intangible assets with definite useful lives to be amortized over several years and may also incur a one-time charge associated with the write-off of in-process research and development in the quarter in which the transaction closes.

There are risks associated with doing business in Taiwan.

     If we successfully complete our proposed acquisition of EZconn, we will have substantial manufacturing operations in Taiwan. There are several risks associated with doing business in Taiwan, including:

-		risks related to Taiwan’s tense political and economic relationship with China;
-		fluctuations in the exchange rate between New Taiwan Dollars and U.S. Dollars;
-		the risk of an outbreaks of Severe Acute Respiratory Syndrome (or SARS) or other disease;
-		the risk of earthquakes, typhoons and other natural disasters;
-		risks related to potential changes in Taiwanese laws or regulatory requirements, such as foreign exchange control regulations, import and export regulations, quotas, tariffs or other trade policies; and

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-

other risks normally associated with undertaking business operations in foreign countries.

     Any or a combination of these risks could adversely impact our operating results.

If we are unable to successfully integrate acquired businesses or technologies, our operating results may be harmed.

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

-		additional operating expenses without additional revenues;
-		potential dilutive issuances of equity securities;
-		the incurrence of debt and contingent liabilities;
-		amortization of other intangibles;
-		research and development write-offs; and
-		other acquisition-related expenses.

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

If we fail to effectively manage our manufacturing capability, produce products meeting our customers quality requirements and achieve acceptable production yields in China, we may not be able to deliver sufficient quantities of products that meet all of the order requirements to our customers in a timely manner, which would harm our operating results.

     We manufacture substantially all of our products in our facilities in Zhuhai and Shanghai, China. The quality of our products and our ability to ship products on a timely basis may suffer if we cannot effectively maintain the necessary expertise and resources to effectively manage our manufacturing activities in China.

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

     Furthermore, because of the large labor component in and complexity of the manufacturing process, quality of workmanship is critical to achieving acceptable yields. We cannot assure you that we will be able

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to hire and train a sufficient number of qualified personnel to produce our products cost-effectively with the quality and in the quantities required by our customers.

     Changes in our manufacturing processes or those of our suppliers could also impact our yields. In some cases, existing manufacturing techniques, which involve substantial manual labor, may not allow us to meet our manufacturing yield goals cost-effectively so that we maintain acceptable gross margins while meeting the cost targets of our customers. We will need to develop new manufacturing processes and techniques that will involve higher levels of automation in order to increase our gross margins and help achieve the targeted cost levels of our customers. We may not achieve manufacturing cost levels that will allow us to achieve acceptable gross margins or fully satisfy customer demands. Additionally, our competitors are automating their manufacturing processes. If we are unable to achieve higher levels of automation and our competitors are successful, it will harm our gross margins.

     Additional risks associated with managing our manufacturing processes and capability in China include:

-		a potential lack of availability of qualified management and manufacturing personnel;
-		our ability to maintain quality;
-		our ability to procure the necessary raw materials and equipment on a timely basis; and
-		our ability to quickly and effectively implement an adequate set of financial controls to track and control levels of inventory.

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

We depend on the growth and success of the communications industry, which has recently experienced a significant economic downturn as well as rapid consolidation and realignment including outsource manufacturing and may not continue to demand fiber optic products at historical rates, thereby reducing demand for our products and harming our operating results, and if it does not recover then we will not be able to grow our business.

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

     Furthermore, the rate at which communications service providers and other fiber optic network users have built new fiber optic networks or installed new systems in their existing fiber optic networks has fluctuated in the past and these fluctuations may continue in the future. These fluctuations may result in

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reduced demand from historical rates for new or upgraded fiber optic systems that utilize our products and, therefore, may result in reduced demand for our products.

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

     Our customers’ continued outsourcing may result in their utilizing large well established contract manufacturers to provide final system assembly, rather than utilizing us for final system assembly. We may therefore be required to provide lower level components to these contractor manufacturers rather than final system assembly to our current customers potentially resulting in reduced revenues and lower gross margins and profits.

Because none of our customers are obligated to purchase our products, they may cancel or defer their purchases at any time and on short notice, which could harm our operating results.

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

-		may stop purchasing our products or defer their purchases at any time without penalty;
-		are free to purchase products from our competitors;
-		are not required to make minimum purchases; and
-		may cancel orders that they place with us.

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

Because we depend on third parties to supply some of our raw materials and equipment, we may not be able to obtain sufficient quantities of these materials and equipment, or these materials may become unavailable due to technological changes, which could limit our ability to fill customer orders and harm our operating results.

     Difficulties in obtaining raw materials in the future may delay or limit our product shipments, which could result in lost orders, increase our costs, reduce our control over quality and delivery schedules and require us to redesign our products. We depend on third parties to supply the raw materials and equipment we use to manufacture our products. To be competitive, we must obtain from our suppliers, on a timely

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basis, sufficient quantities of raw materials at acceptable prices. We obtain most of our critical raw materials from a single or limited number of suppliers and generally do not have long-term supply contracts with them. As a result, our suppliers could terminate the supply of a particular material at any time without penalty. Due to the severe downturn in the optical and communications industries, manufacturers and vendors that we rely upon for raw materials may scale back their operations or cease to do business entirely as a result of financial hardship or other reasons. In addition, our suppliers could terminate the supply of a particular material due to technological changes, which would require us to redesign our products, identify and qualify acceptable replacement suppliers. However, we cannot be certain that we could obtain qualifications for such replacements from our customers. In addition, some of the equipment we use is relatively complex and, in periods of high market demand, the lead times from order to delivery of this equipment could be as long as six months.

Our revenues and results of operations may be harmed if we fail to increase the volume of orders, which we receive and fill on a short-term basis.

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

     In addition, a portion of our net revenues in the fiscal year ended June 30, 2004 has been derived from trial orders. If our products fail to meet our customers’ specifications, we may not be able to convert the trial orders to production orders and therefore our revenues and operating results may vary significantly and unexpectedly from quarter to quarter, which could cause volatility in our stock price.

If our customers insist on outsourcing to contract manufacturers to provide final assembly of their products, we will only be able to sell components, which would harm our business.

     Our customers’ continued outsourcing may result in their utilizing large well established contract manufacturers to provide final system assembly, rather than utilizing us for final system assembly. We may therefore be required to provide lower level components to these contractor manufacturers rather than final system assembly to our current customers potentially resulting in reduced revenues and lower gross margins and profits.

Because a high percentage of our expenses is fixed in the short term, our operating results are likely to be harmed if we do not experience growth in generating and recognizing revenues.

     A high percentage of our expenses, including those related to manufacturing, engineering, research and development, sales and marketing and general and administrative functions, is fixed in the short term. As a result, if we do not experience growth in generating and recognizing revenues, our quarterly operating results are likely to be harmed.

     New product development and introduction can also result in a mismatching of research and development expenses and sales and marketing expenses that are incurred in one quarter with revenues that

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are not recognized, if at all, until a subsequent quarter when the new product is introduced and commercially accepted. If growth in our revenues does not exceed the increase in our expenses, our results of operations will be harmed.

We compete in a highly competitive industry, and if we are unable to compete successfully our revenues could decline, which would harm our operating results.

     The market for fiber optic components and subsystems is intensely competitive. We believe that our principal competitors are the major manufacturers of optical components and subsystems, including vendors selling to third parties and business divisions within communications equipment suppliers. Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing, manufacturing and other resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies and to changes in customer requirements, to devote greater resources to the development, promotion and sale of products, or to deliver competitive products at lower prices. Competitors in any portion of our business may also rapidly become competitors in other portions of our business. In addition, our industry has recently experienced significant consolidation, and we anticipate that further consolidation will occur. This consolidation has further increased competition.

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

     New technologies are emerging due to increased competition and customer demand. The introduction of new products incorporating new technologies or the emergence of new industry standards could make our existing products noncompetitive. For example, new technologies are being developed in the design of wavelength division multiplexers that compete with the thin film filters that we incorporate in our products. These technologies include arrayed waveguide grating, or AWG, and planar lightwave circuit, or PLC. Additionally, a new technology being developed in the design of equalization and switching is microelectro-mechanical systems, or MEMs, that compete with bulk micro-optics that we incorporate into our product. If our competitors adopt new technologies before we do, we could lose market share and our business would suffer.

If we are unable to develop new products and product enhancements that achieve market acceptance, sales of our products could decline, which would harm our operating results.

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

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

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

If we fail to control our inventory levels or our inventory mix effectively, our operating results could be harmed.

     Because we experience long lead times for raw materials and are often required to purchase significant amounts of raw materials far in advance of product shipments, we are required to estimate our needs, which estimates may not be accurate and may result in suboptimal inventory levels or inventory mix, which could harm our operating results. If we underestimate our requirements, we may have inadequate inventory, which could result in delays in shipments and loss of customers. On the other hand, if we purchase raw materials in anticipation of orders that do not materialize, we will have to carry or write off excess inventory and our gross margins will decline. For example, for the fiscal years ended June 30, 2002 and 2001, our gross margin was negatively impacted by a provision of $10.4 million and $30.6 million, respectively, for excess and obsolete inventory due to the downturn in the fiber optics industry. Conversely, our gross margins were positively impacted by the unexpected utilization of fully reserved inventory of $54,000, $1.0 million and $1.6 million in the three months ended September 30, 2004 and fiscal 2004 and 2003, respectively. Though unexpected utilization of fully reserved inventory decreased over the past several quarters, we have no visibility to the amount of such sales in the future, if any. Any difficulty managing our inventory levels, including failure to effectively and properly utilize the automated management systems in China, may cause us to poorly utilize our manufacturing capacity and further harm our operating efficiency.

Disruption to commercial activities in the United States or in other countries, particularly in China, may adversely impact our results of operations, our ability to raise capital or our future growth.

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

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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.

     Substantially all of our manufacturing operations are located in China and are subject to the laws and regulations of China. Our operations in China may be adversely affected by changes in the laws and regulations of China, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. China’s central or local governments may impose new, stricter regulations or interpretations of existing regulations, which would require additional expenditures. In April 2004, Chinese leaders noted concerns regarding China’s recent economic growth and indicated, without providing specific details, that they may take very forceful measures to bring the economy under control. On October 28, 2004, the People’s Bank of China, China’s central bank, announced that it will raise both lending and deposit interest rates 0.27 percentage effective October 29, 2004. China’s economy differs from the economies of many countries in terms of structure, government involvement, specificity and enforcement of governmental regulations, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency and rate of inflation, among others. Our results of operations and financial condition may be harmed by changes in the political, economic or social conditions in China.

     In addition, events in China over which we have no control, such as political unrest, terrorism, war, labor strikes and work stoppages, could disrupt our operations. There is currently political tension between the United States and North Korea and the United States and China, which could, in either case, result in hostilities or a deterioration in relations that would impact our trade relations with China. There is also significant tension between China and Taiwan, which could result in hostilities or lead to a breakdown in trade relations between China and the United States. Additionally, China continues its condemnation of the United States’ pledge of military support to Taiwan, which could lead to hostilities. If hostilities or other events cause a disruption in our operations, it would be difficult for us to establish manufacturing operations at an alternative location on comparable terms.

The outbreak of any widespread illnesses, such as SARS, could disrupt our operations and harm our financial results.

     The relatively recent outbreak of severe acute respiratory syndrome, or SARS, that began in China, Hong Kong, Singapore and Vietnam may have a negative impact on our operations and financial results. In addition, there may be other epidemics or illnesses that effect our international operations, such as the Asian bird influenza. Risks related to the outbreak of SARS and other illnesses, include, but are not limited to, temporary closure of one or more of our facilities in China, which, in turn, would cause a reduction of our manufacturing capability and a disruption to our research and development efforts located at our China

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facilities. We could also experience a loss of product orders from our customers and loss of raw materials or equipment from our suppliers to the extent that the operations of our customers or suppliers, respectively, are impacted by the outbreak of SARS. The outbreak of SARS has also increased political and social tension, which may generally affect the China economy and the international economy and, as a result, could lead to reduced sales in international retail channels and increased supply chain costs for us.

Because a large portion of our business is located outside the United States, fluctuations in currency exchange rates, particularly with respect to the U.S. dollar and Chinese Renminbi exchange rate, could adversely impact our operating results.

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

Power shortages at our manufacturing facilities in China may cause disruptions and harm our operations.

     China has also recently experienced acute power shortages, and the government has begun imposing regular power cuts in some areas. If any of our facilities or the facilities of our suppliers are impacted by these power shortages, we may be forced to shut down our production activities in China frequently due to power shortages or incur additional costs to supply electricity internally, which may cause production delays or increase manufacturing costs and harm our operating results.

Currency restrictions in China may limit the ability of our subsidiaries in China to obtain and remit foreign currency necessary for the purchase of imported components, and may limit our ability to obtain and remit foreign currency in exchange for Renminbi earnings.

     China’s government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Any shortages in the availability of foreign currency may restrict the ability of our Chinese subsidiaries to obtain and remit sufficient foreign currency to pay dividends to us, or otherwise satisfy their foreign currency denominated obligations, such as payments to us for components, which we export to them and for technology licensing fees. Such shortages may also cause us to experience difficulties in completing the administrative procedures necessary to obtain and remit needed foreign currency. Under the current foreign exchange control system, sufficient foreign currency is presently available for our Chinese subsidiaries to purchase imported components or to repatriate profits to

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us, but as demands on China’s foreign currency reserves increase over time to meet its commitments, sufficient foreign currency may not be available to satisfy China’s currency needs.

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

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

If tax benefits available to our subsidiaries located in China are reduced or repealed, our business could suffer.

     Our subsidiaries located in China enjoy tax benefits in China that are generally available to foreign investment enterprises, including full exemption from national enterprise income tax for two years starting from the first profit-making year and a 50% reduction in national income tax rate for the following three years. In addition, local enterprise income tax is often waived or reduced during this tax holiday/incentive period. Furthermore, under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled to an additional three-year reduction in national income tax by 50%, with a provision that the income tax rate as so reduced may not be lower than 10%. However, the Chinese government recently announced that preferential tax treatment for foreign enterprises may be repealed beginning in 2006. If China elects to repeal or reduce the tax benefits available to us in the future or we fail to continue to qualify for the tax benefits, our financial condition and results of operations may be adversely impacted.

Our wavelength expansion products have accounted for a majority of our revenues, and our revenues could be harmed if the price of, or demand for, these products further declines or if these products fail to achieve broader market acceptance.

     We believe that our future growth and a significant portion of our future revenues will depend on the commercial success of our wavelength expansion products. Customers that have purchased wavelength expansion products may not continue to purchase these products from us. Although we currently offer a broad spectrum of products, sales of our wavelength expansion products accounted for a majority of our

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revenues in the three months ended September 30, 2004 and the fiscal years ended June 30, 2004, 2003 and 2002. These products include, among others, dense wavelength division multiplexers, or DWDMs. These products accounted for 60%, 65%, 67% and 66% of our revenues in the three months ended September 30, 2004 and the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Any decline in the price of, or demand for, our wavelength expansion products, or their failure to achieve broader market acceptance, could harm our revenues.

The optical networking component industry is experiencing declining average selling prices, which could cause our gross margins to decline and harm our operating results.

     The optical networking component industry is experiencing declining average selling prices, or ASPs, as a result of increasing competition and declining market demand. We anticipate that ASPs will continue to decrease in the future in response to product and new technology introductions by competitors, price pressures from significant customers and greater manufacturing efficiencies achieved through increased automation in the manufacturing process. These declining ASPs have contributed and may continue to contribute to a decline in our gross margins, which could harm our results of operations.

If we fail to effectively manage our operations, including any reductions or increases in the number of our employees, our operating results could be harmed.

     Primarily as a result of the relatively recent economic downturn and slowdown in capital spending, particularly in the communications industry, we have implemented, and may continue to implement in the future, a number of cost-cutting measures, including reductions in our workforce. The impact of these cost-cutting measures, combined with the challenges of managing our geographically-dispersed operations, has placed, and may continue to place, a significant strain on our management systems and resources. Moreover, we cannot assure you that our cost-cutting measures will achieve the benefits we project. In addition, our ability to effectively manage our operations will be challenged to the extent that we begin expanding our workforce. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to train and manage our workforce worldwide. Any failure to effectively manage our operations could harm our operating results.

Our products may have defects that are not detected until full deployment of a customer’s equipment, which could result in a loss of customers, damage to our reputation and substantial costs.

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

-		loss of customers;
-		loss of or delay in revenues;
-		loss of market share;

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-		damage to our brand and reputation;
-		inability to attract new customers or achieve market acceptance;
-		diversion of development resources;
-		increased service and warranty costs;
-		legal actions by our customers; and
-		increased insurance costs.

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

If we are unable to protect our proprietary technology, our ability to succeed will be harmed.

     Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology. We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, the steps we have taken may not prevent the misappropriation of our intellectual property, particularly in foreign countries, such as China, where the laws may not protect our proprietary rights as fully as in the United States. As of September 30, 2004, we hold 62 issued patents, have 8 allowed applications awaiting issuance and 48 pending patent applications in the United States. In addition, we have 7 issued patents and 29 pending patent applications in the People’s Republic of China, 21 of which are counterparts to U.S. patents or patent applications. We cannot assure you that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented. Rights granted under these patents may not provide us with meaningful protection or any commercial advantage. If we are unable to protect our proprietary technology, our ability to succeed will be harmed. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights. These claims could result in costly litigation and the diversion of our technical and management personnel.

We may be involved in intellectual property disputes in the future, which will divert management’s attention and could cause us to incur significant costs and prevent us from selling or using the challenged technology.

     Participants in the communications and fiber optic components and subsystems markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors and academic institutions. We have no means of knowing that a patent application has been filed in the United States until the patent is issued. Optical component suppliers may seek to gain a competitive advantage or other third parties may seek an economic return on their intellectual property portfolios by making infringement claims against us.

     From time to time we may be involved in lawsuits as a result of alleged infringement of others’ intellectual property. For example, in June 2000, Chorum Technologies, Inc. filed a lawsuit against us and our wholly-owned subsidiary, Telelight Communication Inc., alleging, among other things, infringement of two U.S. patents allegedly owned by Chorum relating to fiber optical interleaving, based on our manufacture

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of and offer to sell various fiber optic interleaver products. On May 7, 2001, we filed a lawsuit alleging, among other matters, that Chorum infringes one of our patents relating to fiber optic couplers based on Chorum’s manufacture of and offer to sell various DWDM products.

     In December 2001, Oz Optics Limited et al. filed a lawsuit against us and four individuals, including our former Vice President of Product Line Management, Zeynep Hakimoglu (and three other unrelated individuals), alleging trade secret misappropriation and other related claims. Under the complaint, the plaintiffs sought damages against the four individuals in the amounts of approximately $17,550,000, and against us in the amount of approximately $1,500,000, as well as enhanced damages, injunctive relief, costs and attorney fees, and other relief. We settled the lawsuit against us in August 2004 and Oz Optics agreed to dismiss the case against us with prejudice. However, we cannot assure you that Oz Optics will not choose to pursue further litigation against us in the future. In addition, to our knowledge Oz Optics is continuing to pursue its lawsuit against all of the defendants other than us, and we may be obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her prior employment with us.

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

-		obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;
-		stop selling, incorporating or using our products that use the challenged intellectual property;
-		pay substantial money damages; or
-		redesign the products that use the technology.

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

We are the target of a securities class action complaint and are at risk of securities class action litigation, which will likely result in substantial costs and divert management attention and resources.

     We are one of hundreds of defendants in a consolidated set of class action lawsuits, filed by plaintiffs (the “Plaintiffs”) against hundreds of public companies (the “Issuers”) that went public in the late 1990s and early 2000s (collectively, the “IPO Lawsuits”). In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement and entered a memorandum of understanding, providing for, among other things, a dismissal with prejudice and full release of the Issuers and their officers and directors from all further liability resulting from Plaintiffs’ claims, and the assignment to Plaintiffs of certain potential claims that the Issuers may have against the underwriters. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement or judgment against the underwriter defendants in the IPO Lawsuits, the Plaintiffs would be entitled to payment by each participating Issuer’s insurer of a pro

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rata share of any shortfall in the plaintiff’s guaranteed recovery. In such event, our obligation would be limited to reimbursement of our insurer up to the amount remaining under the deductible of our insurance policy. In June 2004, Oplink executed a settlement agreement with the Plaintiffs pursuant to the terms of a memorandum of understanding. The settlement is subject to a number of conditions, including action by the Court certifying a class action for settlement purposes and formally approving the settlement. The underwriters have opposed both the certification of the class and the judicial approval of the settlement. Pending a definitive settlement, we continue to believe that the action against us is without merit and intend to defend against it vigorously.

Our lengthy and variable qualification and sales cycle requires us to incur substantial costs to make a sale, and if the sale does not occur then we will have incurred these expenses without obtaining increased sales.

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

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

We depend on key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our key employees and hire additional personnel, our ability to sell our products could be harmed.

     Our future success depends upon the continued services of our executive officers and other key engineering, finance, sales, marketing, manufacturing and support personnel. In addition, we depend substantially upon the continued services of key management personnel at our Chinese subsidiaries. None of our officers or key employees are bound by an employment agreement for any specific term, and these personnel may terminate their employment at any time. In addition, we do not have “key person” life insurance policies covering any of our employees.

     Our ability to continue to attract and retain highly-skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly-skilled personnel is intense. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs. In addition, our management team has experienced significant personnel changes over the past two years and may continue to experience changes in the future. If our management team experiences further changes and does not work effectively together, it could substantially harm our business.

Because some of our third-party sales representatives and distributors carry products of one or more of our competitors, they may not recommend our products over competitors’ products.

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

Because some of our operations are located in active earthquake fault zones, we face the risk that a large earthquake could harm our operations.

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

Our failure to comply with governmental regulations could subject us to liability.

     Our failure to comply with a variety of federal, state and local laws and regulations in the United States and China could subject us to criminal, civil and administrative penalties. Our products are subject to U.S. export control laws and regulations that regulate the export of products and disclosure of technical information to foreign countries and citizens. In some instances, these laws and regulations may require licenses for the export of products to, and disclosure of technology in, some countries, including China, and disclosure of technology to foreign citizens. With the exception of two commodity classifications we obtained from the Department of Commerce in 2001 with respect to some of our current products, we have generally relied on self-classification in determining whether an export license is required and have determined that export licenses are not required. As we develop and commercialize new products and technologies, the list of products and technologies subject to U.S. export controls changes, or in the event that the relevant export authorities disagree with the outcome of our self-classification, we may be required to obtain export licenses or other approvals with respect to those products and technologies and may possibly be subject to penalties under applicable laws. We cannot predict whether these licenses and approvals will be required and, if so, whether they will be granted. The failure to obtain any required license or approval could harm our business.

     We ship inventory and other materials to and from our facilities in China and, as a result, are subject to various Chinese and U.S. customs-related laws. Given the geographic distance and changing regulations and governmental standards, it can be difficult to monitor and enforce compliance with customs laws. In fact, there have been inventory and other materials shipped to and from our facilities in China for which, upon arrival of the goods, there was not sufficient documentation to demonstrate the items comply with all local customs regulations. The U.S. Customs Service may also require us to revise product classifications from time to time with respect to various items imported into the United States. In such cases we may be required to pay any increase in customs duty to account for the difference in duty actually paid by Oplink and the duty owed under the amended product classification, and may also be subject to penalties under applicable laws.

     In addition, from time to time we enter into transfer pricing arrangements with our subsidiaries to establish sales prices for internal distributions of goods that have the effect of allocating taxes between the

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parent corporation and our subsidiaries. In general, these transfer prices have not been approved by any governmental entity and, therefore, may be challenged by the applicable tax authorities. China tax authorities have recently announced that they plan to increase transfer pricing audits and specifically identified telecommunications companies, among others, as priority targets.

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

     In addition, we are subject to laws relating to the storage, use, discharge and disposal of toxic or otherwise hazardous or regulated chemicals or materials used in our manufacturing processes. While we believe that we are currently in compliance in all material respects with these laws and regulations, if we fail to store, use, discharge or dispose of hazardous materials appropriately, we could be subject to substantial liability or could be required to suspend or adversely modify our manufacturing operations. In addition, we could be required to pay for the cleanup of our properties if they are found to be contaminated, even if we are not responsible for the contamination.

Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

     We must comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) by June 30, 2005. Rules describing the requirements for our auditors to be able to attest to our compliance under Section 404 were adopted in June 2004, and we, along with our external service providers, are currently interpreting what qualifies as compliance with Section 404. Because the matter of Section 404 compliance is new, there is no precedent or proven method for such compliance, and our management must exercise significant judgment in our effort to comply with Section 404. As a result of this uncertainty, although we currently anticipate that we will timely complete all such actions, we cannot at this time be certain that all such actions will timely be completed. Possible consequences of failure include sanction or investigation by regulatory authorities, such as the Securities Exchange Commission or the Nasdaq National Market, and inability to timely file our Annual Report on Form 10-K for fiscal 2005. If we fail to comply in a timely manner and any of these consequences were to result, public perception of our internal controls could be damaged, causing our financial results to suffer and our stock price to decline.

Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.

     The Sarbanes-Oxley Act of 2002 has required and will continue to require changes in some of our corporate governance and securities disclosure or compliance practices. That Act also requires the SEC to promulgate new rules on a variety of subjects, in addition to rule proposals already made, and The Nasdaq National Market has revised its requirements for companies that are Nasdaq-listed. We expect these developments will (i) require us to devote additional resources to our operational, financial and management information systems procedures and controls to ensure our continued compliance with current and future

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laws and regulations, (ii) will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage, increase our level of self-insurance, or incur substantially higher costs to obtain coverage, and (iii) could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

Changes in existing financial accounting standards or practices or taxation rules or practices may adversely affect our results of operations.

     Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective. For example, we currently are not required to expense stock-based compensation charges in connection with stock option grants to our employees and stock purchases under our employee stock purchase plan. However, the Financial Accounting Standards Board (“FASB”) has announced a proposal to change generally accepted accounting principles in the United States that, if implemented, would require us to expense stock-based compensation charges for employee stock option grants and stock purchases. Such charges would negatively impact our operating results.

Because the fiber optic components and subsystems industry is capital intensive, our business may be harmed if we are unable to raise any needed additional capital.

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

RISKS RELATED TO OUR COMMON STOCK

Insiders continue to have substantial control over us, which may negatively affect your investment.

     Our current executive officers, directors and their affiliates own, in the aggregate, as of September 30, 2004, approximately 16.2% of our outstanding shares. As a result, these persons and/or entities acting together will be able to substantially influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This ability may have the effect of delaying a change in control, which may be favored by our other stockholders, or entrenching current management.

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Because of the early stage of our business and the rapid changes taking place in the fiber optics industry, we expect to experience significant volatility in our stock price, which could cause you to lose all or part of your investment.

     Because of the early stage of our business and the rapid changes taking place in the fiber optics industry, we expect the market price of our common stock to fluctuate significantly. For example, the market price of our common stock has fluctuated from a high sales price of $40.81 to a low sales price of $0.53 during the period from October 3, 2000, the date of our initial public offering to September 30, 2004. These fluctuations may occur in response to a number of factors, some of which are beyond our control, including:

-		economic downturn in the fiber optics industry;
-		preannouncement of financial results;
-		quarterly variations in our operating results;
-		changes in financial estimates by securities analysts and our failure to meet estimates;
-		changes in market values of comparable companies;
-		announcements by us or our competitors of new products or of significant acquisitions, strategic partnerships or joint ventures;
-		any loss by us of a major customer;
-		the outcome of, and costs associated with, any litigation to which we are or may become a party;
-		additions or departures of key management or engineering personnel; and
-		future sales of our common stock.

     The price of our securities may also be affected by general economic and market conditions, and the cost of operations in our product markets. While we cannot predict the individual effect that these factors may have on the price or our securities, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time. There can be no assurance that these factors will not have an adverse effect on the trading prices of our common stock.

Provisions of our charter documents and Delaware law may have anti-takeover effects that could prevent any change in control, which could negatively affect your investment.

     Provisions of Delaware law and of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions permit us to:

-

issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders;

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-		provide for a classified board of directors;
-		eliminate the right of the stockholders to call a special meeting of stockholders;
-		eliminate the right of stockholders to act by written consent; and
-		impose various procedural and other requirements, which could make it difficult for stockholders to effect certain corporate actions.

     On March 18, 2002, our Board of Directors adopted a share purchase rights plan, which has certain additional anti-takeover effects. Specifically, the terms of the plan provide for a dividend distribution of one preferred share purchase right for each outstanding share of common stock. These rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors.

     Any of the foregoing provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

If we are unable to maintain our Nasdaq National Market listing, the liquidity of our common stock would be seriously impaired and we would become subject to various statutory requirements, which would likely harm our business and place downward pressure on our common stock price.

     We may be subject to delisting from The Nasdaq National Market from time to time to the extent our stock price falls below the minimum bid price requirements or we otherwise do not satisfy other requirements for continued listing. For example, on October 17, 2002, we received a determination letter from Nasdaq advising us that our common stock no longer meets the requirements for the continued listing on The Nasdaq National Market. The notification was based on the failure by us to maintain a minimum bid price of $1.00 as required by Nasdaq listing maintenance standards. In May 2003, Nasdaq confirmed that we had evidenced compliance with all requirements necessary for continued listing on The Nasdaq National Market and that our common stock would continue to be listed on The Nasdaq National Market. There can be no assurance, however, that Nasdaq will not again initiate delisting procedures if we cannot maintain compliance with the listing requirements.

     In the event that we fail to meet the continued listing standards, our common stock may be delisted from The Nasdaq National Market and trade on the Nasdaq SmallCap Market or, possibly, the over-the-counter bulletin board, commonly referred to as the “pink sheets.” Such alternatives are generally considered as less efficient markets and could seriously impair the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could materially harm our business. If we are delisted from The Nasdaq National Market, we will also face a variety of legal and other consequences that will likely negatively affect us including, without limitation, the following:

-		the state securities law exemptions available to us would be more limited and, as a result, future issuances of our securities may require time-consuming and costly registration statements;
-		due to the application of different securities law exemptions and provisions, we may be required to amend our stock option and stock purchase plans and comply with time-consuming and costly administrative procedures;

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-		the coverage of us by securities analysts may decrease or cease entirely;
-		we may lose current or potential investors and customers;
-		we may be unable to regain or maintain compliance with the listing requirements of either The Nasdaq SmallCap Market or The Nasdaq National Market; and
-		we may lose our exemption from the provisions of Section 2115 of the California Corporations Code which imposes aspects of California corporate law on certain non-California corporations operating within California. As a result, (i) our Board of Directors would no longer be classified and our stockholders would elect all of our directors at each annual meeting, (ii) our stockholders would be entitled to cumulative voting, and (iii) we would be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters’ rights in connection with certain strategic transactions.

     In addition, some companies that face delisting as a result of bid prices below the Nasdaq’s maintenance standards seek to maintain their listings by effecting reverse stock splits. At our annual stockholders’ meeting in November 2002, our stockholders approved a proposal to permit the Board of Directors to effect, at its sole discretion, a reverse split of our common stock at any time prior to our next annual stockholders’ meeting. There is no assurance, however, that effecting a reverse stock split (if our Board of Directors elects to effect a split) would result in a sustained increase in the share price and, as a result, our stock price may be adversely affected.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

     Interest Rate Exposure. The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in are subject to market risk. To minimize this risk, we maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate bonds. As of September 30, 2004, all of our short-term investments were in high quality commercial paper, corporate bonds and government debt securities with maturities of less than twelve months from September 30, 2004. As of September 30, 2004, our long-term investments primarily consist of corporate bonds and government debt securities with maturities of less than three years from September 30, 2004. We invested our excess cash in long-term investments to take advantage of higher yields generated by these investments. We intend to hold these long-term investments to maturity and we believe we have the ability to hold them to maturity. However, liquidating our long-term investments before maturity could have a material impact on our interest earnings. We do not hold any instruments for trading purposes. Declines in interest rates could have a material impact on interest earnings for our investment portfolio. The following table summarizes our current investment securities (in thousands, except percentages):

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     Foreign Currency Exchange Rate Exposure. We operate in the United States, manufacture in China, and the substantial majority of our sales to date have been made in U.S. dollars. Certain expenses from our China operations are incurred in the Chinese Renminbi. We expect that gains and losses from fluctuations in the currency exchange rate related to sales which are made in Chinese Renminbi are likely to be substantially offset from fluctuations in the currency exchange rate related to intercompany payments from our subsidiaries in China to our parent corporation which are made in U.S. dollars. Accordingly, we believe that we currently have no material exposure to foreign currency rate fluctuations.

     We expect our international revenues and expenses to be denominated largely in U.S. dollars. We believe that our China operations will likely expand in the future and account for a larger portion of our worldwide manufacturing and revenue. As a result, we anticipate that we may experience increased exposure to the risks of fluctuating currencies and may choose to engage in currency hedging activities to reduce these risks. However, we cannot be certain that any such hedging activities will be effective, or available to us at commercially reasonable rates.

ITEM 4 - CONTROLS AND PROCEDURES.

(a)		Evaluation of disclosure controls and procedures. Subject to the limitations on the effectiveness of the controls as described below, based on an evaluation of our disclosure controls and procedures conducted by our management, including our principal executive officer and principal financial officer, our principal executive officer, Joseph Y. Liu, and our principal financial officer, Bruce D. Horn, have concluded that our disclosure controls and procedures were effective as of September 30, 2004.
(b)		Changes in internal controls. There was no change in our internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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     Limitations on the Effectiveness of Controls and Procedures. Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls, internal controls and related procedures will necessarily prevent all error and all fraud. A control system, no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the control system are met. Any control system will reflect inevitable limitations, such as resource constraints, a cost-benefit analysis based on the level of benefit of additional controls relative to their costs, assumptions about the likelihood of future events and human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and our principal financial officer have concluded, based on their evaluation as of September 30, 2004, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure controls and procedures were met.

PART II. OTHER INFORMATION

ITEM 1- LEGAL PROCEEDINGS

     On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively, “OZ”) sued four individuals and us in California Superior Court for the County of Alameda. One of the four individual defendants is Zeynep Hakimoglu, who joined Oplink on November 1, 2001 as Vice President of Product Line Management. The other three are unrelated to us. Zeynep Hakimoglu’s employment with us terminated on December 17, 2002. The complaint alleges trade secret misappropriation and related claims against the four individuals and us concerning OZ’s alleged polarization modedispersion technology. The plaintiffs seek actual damages against the four individuals and us in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. The plaintiffs sought a temporary restraining order in December 2001, which the court denied, and withdrew their preliminary injunction motion against us. We answered the complaint on January 22, 2002, denying plaintiffs’ claims. The case is currently in discovery with a trial date set for April 8, 2005. In August 2004, we settled the lawsuit against us and OZ agreed to dismiss the case against us with prejudice. To our knowledge OZ is continuing to pursue its lawsuit against all of the defendants other than us, and we may be obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her prior employment with us. In the event that we incur such an obligation, we believe we have obtained sufficient director and officer liability insurance to cover this contingency.

ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

     None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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ITEM 5 - OTHER INFORMATION

     On October 28, 2004, we and our newly formed, wholly owned Cayman Islands subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase agreement with all the shareholders of EZconn Corporation, a privately-held Taiwanese company that manufactures cable and photonics components for broadband access equipment manufacturers. Pursuant to the stock purchase agreement and related ancillary agreements, our Cayman Island subsidiary will pay $30 million for all of the shares of EZconn and certain assets related to the business of EZconn, of which $9 million will be paid in cash and $21 million will be paid in shares of our common stock to be issued pursuant to a subscription agreement entered into by us and eight of the shareholders of EZconn. Our Cayman Islands subsidiary will also assume approximately $12 million in net debt of EZconn, which will be repaid at or promptly following the closing of the acquisition. The closing of the acquisition is subject to the satisfactory completion of our due diligence investigation of EZconn, approval by the Investment Commission of the Ministry of Economic Affairs of the Republic of China and certain other customary closing conditions. The acquisition is expected to close in January 2005.

     Pursuant to the subscription agreement entered into by us and eight of the shareholders of EZconn, we will issue $21 million in shares of our common stock to such persons upon the closing of the acquisition of EZconn contemplated by the stock purchase agreement. The shares of common stock will be issued at a price per share based on the 20-day average closing price of our common stock for the period ending one day prior to the closing of the acquisition of EZconn, provided that (i) if the 20-day average closing price exceeds $1.83, the price per share shall be $1.83, and (ii) if the 20-day average closing price is less than $1.66, the price per share shall be $1.66. The shares of common stock will not be issued unless the acquisition of EZconn contemplated by the stock purchase agreement is consummated and will not be registered under the Securities Act of 1933, as amended, or any state securities laws. We have agreed to grant certain registration rights to the eight purchasers.

ITEM 6 - EXHIBITS

(1)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1/A, No. 333-41506, as filed on October 3, 2000.
(2)		Previously filed as an Exhibit to the Registrant’s Report on Form 8-K filed on March 22, 2002 and incorporated herein by reference.

* The certifications attached as Exhibits 32.1 and 32.2 accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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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.

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Exhibit Index

* 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.

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