UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

  For the quarterly period ended December 31, 2004 *

or

  For the transition period from                                         to                                        

Commission file number 000-31581

OPLINK COMMUNICATIONS, INC.

46335 Landing Parkway, Fremont, California 94538
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (510) 933-7200

3469 North First Street, San Jose, California 95134
(Former name or former address, if changed since last report.)

     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.

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

  The number of shares of the Registrant’s common stock outstanding as of January 31, 2005 was 148,209,475.

* Our quarter ended formally on January 2, 2005. For more information see Part I, Note 2 of Notes to Condensed Consolidated Financial Statements regarding Registrant’s fiscal periods.

OPLINK COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1- FINANCIAL STATEMENTS

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.

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

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

2. Basis of Presentation. The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. The financial statements presented herein have been prepared by management, without audit by 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. January 2, 2005 and December 28, 2003 represent the Sunday closest to the period ended December 31, 2004 and December 31, 2003, respectively. The first quarter of fiscal 2005 was a 14-week quarter, one week more than a typical quarter. Fiscal year 2005 will consist of 53 weeks, one week more than a typical year.

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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 decided not to dispose of this facility and returned it to continuing operations. Amounts in the financial statements and related notes for all periods presented are reclassified to reflect the Shanghai operation as part of continuing operations in accordance with SFAS No. 144.

     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 December 31, 2004, the results of its operations for the three and six-month periods ended December 31, 2004 and 2003 and its cash flows for the six-month periods ended December 31, 2004 and 2003. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year.

3. 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):

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

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     The reconciliation of net loss to comprehensive loss for the three and six months ended December 31, 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):

     The contractual maturities, amortized cost and fair value of available-for-sale and held-to-maturity securities classified as short-term and long-term investments at December 31, 2004 are presented in the following table (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):

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

     In July 2004, the Company completed the purchase of a building in Fremont, California for $4.8 million in cash to house its U.S. operation. The facility consists of approximately 52,000 square feet.

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

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

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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 changes in accrued restructuring costs in the six months ended December 31, 2004 is as follows (in thousands):

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.” Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“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

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applied to account for stock-based employee compensation (in thousands, except per share data):

     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 or in negotiated transactions. As of December 31, 2004, repurchases of an aggregate of $35.2 million of the Company’s common stock have been made under the Company’s repurchase program.

13. Recent Accounting Pronouncements. On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in the Company’s consolidated financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective beginning in the Company’s first quarter of fiscal 2006. The adoption of SFAS No. 123(R) could have a material impact on the Company’s financial position, results of operations and cash flows.

     In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). The amendments made by SFAS No. 151 will improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. The

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Company believes the adoption of SFAS No. 151 will not have a material impact on its financial position, results of operations or cash flows.

     On December 16, 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets” (“SFAS No. 153”), an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the Company’s first quarter of fiscal 2006. The Company believes the adoption of SFAS No. 153 will not have a material impact on its financial position, results of operations or cash flows.

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

14. Contingencies. In November 2001, the Company and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned In re Oplink Communications, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the amended complaint, the plaintiffs allege that the Company, certain of the Company’s officers and directors and the underwriters of the Company’s initial public offering, or IPO, violated Section 11 of the Securities Act of 1933 based on allegations that the Company’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed by plaintiffs (the “Plaintiffs”) against hundreds of other public companies (the “Issuers”) that went public in the late 1990s and early 2000s (collectively, the “IPO Lawsuits”).

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

     In June 2003, the Issuers and Plaintiffs reached a tentative settlement agreement and entered 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 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

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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 certification of the class and 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 alleged trade secret misappropriation and related claims against the four individuals and the Company concerning OZ’s alleged polarization mode dispersion technology. The plaintiffs sought actual damages against the four individuals and the Company in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. The plaintiffs sought a temporary restraining order in December 2001, which the court denied, and withdrew their preliminary injunction motion against the Company. The Company answered the complaint on January 22, 2002, denying plaintiffs’ claims. In August 2004, the Company settled the lawsuit with respect to the claims against the Company and OZ agreed to dismiss the case against the Company with prejudice. To the Company’s knowledge OZ is continuing to pursue its lawsuit against all the defendants other than the Company, and the Company may be obligated to indemnify Ms. Hakimoglu for certain amounts in connection with her prior employment with the Company. In the event that the Company incurs such an obligation, the Company believes it has obtained sufficient director and officer liability insurance to cover this contingency.

     The Company is subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with 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 would purchase all of the shares of EZconn and certain assets related to the business of EZconn. On January 17, 2005, the Company and EZconn agreed to terminate all agreements relating to the Company’s proposed acquisition of EZconn, due to recent market changes and competitive circumstances. The Company and EZconn have entered into a settlement agreement whereby EZconn will pay $2.0 million in termination fees to the Company. The Company received the payment from EZconn in January 2005. The Company incurred approximately $1.0 million to $1.2 million of expenses including withholding tax in connection with the terminated transaction.

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

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     Our management team, on an internal basis, informally monitors worldwide economic trends and in particular activity within the telecommunication economic space. This includes known contracts being placed by end users with our current or potential new customers. Over the past several quarters, we have noticed a general increase in spending activity in the telecommunications 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 growth in our revenues. However, our belief that our current or potential new customers are receiving orders does not necessarily mean we will be a beneficiary of such orders, but does provide us with an early notice of potential activity. To obtain orders from our current or potential new customers, we would need to be selected as a potential vendor and, subsequently, would need to demonstrate we can meet all of the order and quality requirements of our 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 sales of our bandwidth creation products, which include our wavelength expansion products, in particular, multiplexers.

Acquisition. On October 28, 2004, we and our newly-formed, wholly-owned Cayman Islands subsidiary, Cayman Oplink Communications, Inc., entered into a stock purchase agreement with all the shareholders of EZconn Corporation (“EZconn”), a privately-held Taiwanese company that manufactures cable and photonics components for broadband access equipment manufacturers. Pursuant to the stock purchase agreement and related ancillary agreements, we would purchase all of the shares of EZconn and certain assets related to the business of EZconn. On January 17, 2005, we and EZconn agreed to terminate all agreements relating to our proposed acquisition of EZconn, due to recent market changes and competitive circumstances. We and EZconn have entered into a settlement agreement whereby EZconn will pay $2.0 million to us in termination fees. We received the payment from EZconn in January 2005. We incurred approximately $1.0 million to $1.2 million of expenses including withholding tax in connection with the terminated transaction.

Use of Estimates and Critical Accounting Policies

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

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

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

     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)

     Our revenue for the three months ended December 31, 2004 was comparable with that of the three months ended December 31, 2003. During the second quarter of fiscal 2005, we experienced an increase in sales to our large customers due to a general increase in spending activity in the telecommunications industry. The increase was offset by a decline in sales to selected customers as a result of manufacturing-related problems at our China manufacturing facilities and decreases in average selling prices of our products. We have identified and are in the process of remedying these problems. However, we have no assurance that the customers who were affected by our manufacturing-related problems will continue to place orders with us in the future. The increase in revenue for the six months ended December 31, 2004 compared to the six months ended December 31, 2003 was primarily due to increased unit shipments of our wavelength expansion products to existing and new customers primarily as a result of a general increase in

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spending activity in the telecommunications industry. The increase in revenue was partially offset by a decline in sales from selected customers due to manufacturing-related issues at our China facilities as well as decreases in the average selling prices of our products during the six months ended December 31, 2004 as compared to the six months ended December 31, 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 third quarter of fiscal 2005 to be comparable with that of the second quarter of fiscal 2005.

     Gross Profit:

(In thousands, except percentages)

     The decrease in gross profit for the three months ended December 31, 2004 compared to the three months ended December 31, 2003 was primarily due to higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations, higher material costs, higher warranty expenses and a smaller benefit from the unexpected sales of fully reserved inventory. The increase in material costs was primarily due to decreases in average selling prices of our products and changes of our product mix. The increase in warranty expense was due to manufacturing-related problems at our China manufacturing facilities. Our gross profit for the three months ended December 31, 2004 and 2003 was positively impacted by the unexpected sale of fully reserved inventory of $50,000 and $240,000, respectively. 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.

     The decrease in gross profit for the six months ended December 31, 2004 compared to the six months ended December 31, 2003 was primarily due to higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations, higher warranty expenses and a smaller benefit from the unexpected sales of fully reserved inventory. Our gross profit for the six months ended December 31, 2004 and 2003 was positively impacted by the unexpected sale of fully reserved inventory of $104,000 and $755,000, respectively. The decrease in our gross profit was partially offset by greater revenue and a decrease in non-cash compensation expense.

     Our gross profit margin decreased for the three months ended December 31, 2004 compared to the three months ended December 31, 2003 primarily due to higher depreciation expense, material costs and warranty expense and a smaller benefit from the unexpected sales of fully reserved inventory. Our gross profit margin decreased for the six months ended December 31, 2004 compared to the six months ended December 31, 2003 due to a smaller benefit from the unexpected sales of fully reserved inventory and higher warranty expense.

     We expect our gross profit margin in the third quarter of fiscal 2005 to increase slightly compared to the second quarter of fiscal 2005.

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     Research and Development:

(In thousands, except percentages)

     The increases in research and development expenses for the three and six months ended December 31, 2004 compared to the three and six months ended December 31, 2003 were primarily due to higher personnel costs as a result of the acquisitions of RedClover Networks, Inc., Accumux Technologies, Inc. and Gigabit Optics Corporation in fiscal 2004, partially offset by lower depreciation expense and 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 expenses to be approximately the same in the third quarter of fiscal 2005 compared to the second quarter of fiscal 2005.

     Sales and Marketing:

(In thousands, except percentages)

     The increases in sales and marketing expenses for the three and six months ended December 31, 2004 compared to the three and six months ended December 31, 2003 were primarily due to a one-time settlement of commission payable with an external sales representative. We expect our quarterly sales and marketing expenses to decrease slightly in the third quarter of fiscal 2005 compared to the second quarter of fiscal 2005.

     General and Administrative:

(In thousands, except percentages)

     The decrease in general and administrative expenses for the three months ended December 31, 2004 compared to the three months ended December 31, 2003 was primarily due to lower non-cash

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compensation expense and lower professional services fees related to compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). We incurred higher expenses associated with implementing a more comprehensive internal control program in response to new laws and requirements from the Securities and Exchange Commission during the three months ended December 31, 2003. The decrease was partially offset by a one-time charge resulting from the settlement of a lawsuit in December 2004. Additionally, in the three months ended December 31, 2003 we recognized a one-time benefit resulting from the collection of accounts receivable that had been previously fully reserved.

     The decrease in general and administrative expenses for the six months ended December 31, 2004 compared to the six months ended December 31, 2003 was primarily due to lower non-cash compensation expense and no expenses incurred in connection with the exploration of strategic business opportunities, partially offset by increased legal costs resulting from the settlement of two legal issues. In the six months ended December 31, 2003, we incurred $890,000 of expenses associated with the exploration of strategic business opportunities. We expect our general and administrative expenses to decrease slightly in the third quarter of fiscal 2005 compared to the second quarter of fiscal 2005.

     Non-Cash Compensation Expense:

(In thousands, except percentages)

     From July 1, 1998 through December 31, 2004, we recorded an aggregate of $59.0 million in deferred non-cash compensation, net of recoveries resulting from stock option cancellations. The decreases in non-cash compensation expenses for the three and six months ended December 31, 2004 compared to the three and six months ended December 31, 2003 were primarily due to the method under which the deferred non-cash compensation was amortized, as set out in FASB Interpretation No. 28, which results in higher compensation expense in the earlier vesting periods of the related options.

     Restructuring Costs and Other Charges. A summary of the changes in accrued restructuring costs in the six months ended December 31, 2004 is as follows (in thousands):

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     Interest and Other Income, Net :

(In thousands, except percentages)

     The increases in interest income for the three and six months ended December 31, 2004 compared to the three and six months ended December 31, 2003 were primarily due to higher yields on our investments. The average rate of return for the three months ended December 31, 2004 was 2.1% as compared to the average rate of return of 1.1% for the three months ended December 31, 2003.

     Gain (Loss) on Sale of Assets. We recorded a gain of $7,000 and a loss of $9,000 for the three and six months ended December 31, 2004, respectively, and a loss of $90,000 and a gain of $125,000 for the three and six months ended December 31, 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 December 31, 2004, which net of a valuation allowance reduces the net deferred tax asset to zero, an amount that management believes will more likely than not be realized.

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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 $24.3 million in common stock repurchases, net of proceeds from exercise of stock options, employee stock purchase plan and warrants through December 31, 2004. In August 2000, we received $50.0 million in connection with the issuance to Cisco Systems, Inc. of a convertible promissory note, which along with the related interest expense automatically converted into 3,298,773 shares of our common stock upon the closing of our initial public offering in October 2000. As of December 31, 2004, we had cash, cash equivalents and short-term and long-term investments of $185.3 million and working capital of $140.4 million. We estimate that the sum of our cash, cash equivalents and short-term and long-term investments at the end of the third quarter of fiscal 2005 will be comparable with the sum of our cash, cash equivalents and short-term and long-term investments at the end of the second quarter of fiscal year 2005.

     Six Months Ended December 31, 2004

     Our operating activities provided cash of $835,000 in the six months ended December 31, 2004 as a result of our net loss for the six months ended December 31, 2004 of $3.2 million adjusted by $4.7 million primarily for the non-cash charges of depreciation and amortization, amortization of deferred stock compensation and amortization of premium on investments offset by a net change in assets and liabilities of $735,000.

     In the six months ended December 31, 2004, the changes in assets and liabilities were primarily the result of changes in accounts receivable, inventories and prepaid expenses and other current assets. Accounts receivable provided $760,000 of cash primarily due to decreased shipments during the six months ended December 31, 2004. Days sales outstanding in accounts receivable ended second quarter of fiscal 2005 at 76 days, as compared to 71 days at the end of the fourth quarter of fiscal 2004.

     Inventories used $1.0 million of cash during the first six months of fiscal 2005 primarily due to purchases of inventory to address longer lead time for materials.

     Prepaid expenses and other current assets used $763,000 of cash during the first six months of fiscal 2005 primarily due to prepayment of premiums for directors and officers insurance and an increase in interest receivable. Interest receivable increased primarily due to the timing of interest payments generated by our investments and higher yields on our investments.

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

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     Our investing activities used cash of $16.5 million in the first six months of fiscal 2005. The net cash used in investing activities in the six months ended December 31, 2004 was primarily due to purchases of short-term and long-term investments of $26.6 million partially offset by maturities of short-term and long-term investments of $16.0 million resulting in use of cash of $10.0 million. We invested a significant amount of our excess cash to purchase short-term and long-term investments in the first six months of fiscal 2005 in an effort to take advantage of higher yields and increase returns on our investments. We used approximately $4.8 million to purchase a building in Fremont, California to house our US operations and approximately $1.2 million to purchase equipment primarily for our Shanghai operation in the first six months of fiscal 2005. During the remaining six months of fiscal 2005, we expect to use approximately $400,000 for capital expenditures worldwide, net of proceeds from sales of excess equipment.

     Our financing activities provided cash of $561,000 in the first six months of fiscal 2005, primarily due to proceeds from issuance of our common stock of $630,000 in connection with the exercise of stock options and employee stock purchase plan and partial repayment of a note receivable from a stockholder of $12,000, partially offset by repayment of capital lease obligations of $81,000.

     Six Months Ended December 31, 2003

     Our operating activities used cash of $1.6 million in the first six months of fiscal 2004 as a result of our net loss for the six months ended December 31, 2003 of $4.4 million adjusted by $6.3 million primarily for the non-cash charges of depreciation and amortization, amortization of deferred stock compensation and in-process research and development, offset by a net change in assets and liabilities of $3.5 million.

     In the first six months of fiscal 2004, the changes in assets and liabilities were primarily the result of changes in accounts receivable, inventory and accrued liabilities and accrued restructuring costs. Accounts receivable used $1.2 million of cash primarily due to increased shipments during the first six months of fiscal 2004. Days sales outstanding in accounts receivable ended the second quarter of fiscal 2004 at 66 days, as compared to 72 days at the end of the fourth quarter of fiscal 2003.

     Inventories used $1.3 million of cash during the first six months of fiscal 2004 primarily as a result of increased volumes of sales and associated purchases of inventory required to meet customer demand.

     Accrued liabilities and accrued restructuring costs consumed $1.1 million in cash in the first six months of fiscal 2004 as we paid for obligations we had accrued at the time we incurred restructuring charges. The payments were primarily for operating leases of excess facilities.

     Our investing activities provided cash of $7.5 million in the first six months of fiscal 2004. The net cash provided by investing activities in the first six months of fiscal 2004 was primarily due to maturities of short-term investments of $95.3 million and proceeds from sales of property and equipment of $464,000, partially offset by purchases of short-term and long-term investments of $87.9 million.

     Our financing activities provided cash of $2.1 million in the first six months of fiscal 2004 primarily due to proceeds from the issuance of our common stock of $3.2 million in connection with the exercise of stock options and employee stock purchase plan partially offset by repayment of capital lease obligations of $1.1 million.

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Contractual Obligations

     Our contractual obligations as of December 31, 2004 have been summarized below (in thousands):