UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

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

     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 þ No o

     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 April 30, 2005 was 148,720,202.

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.

OPLINK COMMUNICATIONS, INC.

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

4

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 an independent registered public accounting firm that does 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.

     In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at March 31, 2005, the results of its operations for the three and nine-month periods ended March 31, 2005 and 2004 and its cash flows for the nine-month periods ended March 31, 2005 and 2004. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year.

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     The Company operates and reports using a fiscal year that 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. April 3, 2005 and March 28, 2004 represent the Sunday closest to the period ended March 31, 2005 and March 31, 2004, 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.

     The Company’s condensed 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 Statement of Financial Accounting Standards (“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.

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 and nine months ended March 31, 2005 and 2004 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.

     Investments in auction rate securities have been reclassified from cash equivalents to short-term investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the underlying securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined during the prior auction.

     Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on our ability to either liquidate our holdings or roll our investment over to the next reset period.

     Based upon the Company’s re-evaluation of these securities, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as short-term investments as of June 30, 2004. This resulted in a reclassification from cash and cash equivalents to short-term investment of $53.7 million on the June 30, 2004 condensed consolidated balance sheet. In addition, purchases of investments and sales of investments, included in the accompanying condensed consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during the periods presented. The Company accounts for its marketable securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in auction rate securities are classified as “available for sale” and are reported at fair value in the Company’s balance sheets. The short-term nature and structure, the frequency with which the interest rate resets and the ability to sell auction rate securities at par and at the Company’s discretion indicates that such securities should more appropriately be classified as short-term investments with the intent of meeting the Company’s short-term working capital requirements.

     Short-term and long-term investments at March 31, 2005 consist of the following (in thousands):

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     The amortized cost and fair value of available-for-sale and held-to-maturity investments at March 31, 2005 and June 30, 2004 are presented in the following tables (in thousands):

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     The amortized cost and estimated fair value of debt securities at March 31, 2005, by contractual maturities, are shown below (in thousands):

     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 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):

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10. Restructuring Costs and Other Charges. A summary of the changes in accrued restructuring costs in the nine months ended March 31, 2005 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.” SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), establishes accounting and disclosure requirements 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 March 31, 2005, repurchases of an aggregate of $35.2 million of the Company’s common stock have been made under the Company’s repurchase program. The Company did not repurchase any common stock during the nine-month period ended March 31, 2005.

13. Recent Accounting Pronouncements. On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 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.

     In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) which provides guidance regarding the application of SFAS No. 123(R). SAB 107 expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial

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instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to adoption of SFAS 123(R) and disclosures in Management’s Discussion and Analysis (“MD&A”) subsequent to adoption of SFAS 123(R).

     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 SFAS 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 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 SFAS 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”).

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     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 into 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 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 formal settlement agreement with the Plaintiffs pursuant to the terms of a memorandum of understanding. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. In addition, the settlement is still subject to statutory notice requirements as well as final judicial approval. Pending final approval of the 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

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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. Merger Fees. On October 28, 2004, the Company and its 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, the Company was to 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 entered into a settlement agreement whereby EZconn paid $2.0 million to the Company in termination fees. The Company incurred approximately $1.1 million of expenses including withholding tax in connection with the terminated transaction and recorded a gain of $904,000 for the three and nine months ended March 31, 2005.

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 thereto 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 Statement of Financial Accounting Standards (“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

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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.

     Our management team, on an internal basis, informally monitors worldwide economic trends and in particular activity within the telecommunication sector. 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 sector 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 current or potential new customers. 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) bandwidth creation products, which include wavelength expansion and optical amplification products; and (ii) 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

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agreement and related ancillary agreements, we were to 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 entered into a settlement agreement whereby EZconn paid $2.0 million to us in termination fees. We incurred approximately $1.1 million of expenses including withholding tax in connection with the terminated transaction and recorded a gain of $904,000 for the three and nine months ended March 31, 2005.

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.

     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.

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     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 decrease in revenue for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily due to 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 believe we have remedied these manufacturing-related problems. However, we have no assurance that we can prevent such problems from reoccurring in the future. In addition, 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 nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 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 spending activity in the telecommunications industry. This increase was partially offset by a decline in revenue 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 nine months ended March 31, 2005 as compared to the nine months ended March 31, 2004.

     We anticipate that there will be further declines in average selling prices through the fiscal year ending June 30, 2005 and this trend may continue in future periods. We also expect our revenue in the fourth quarter of fiscal 2005 to increase slightly compared to the third quarter of fiscal 2005.

     Gross Profit:

(In thousands, except percentages)

     The decrease in gross profit for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily due to a decrease in revenue, higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations and a higher excess inventory charge, partially offset by a benefit as a result of the resolution of vendor liabilities. Our gross profit for the three months ended March 31, 2005 and 2004 was positively impacted by the

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unexpected sale of fully reserved inventory of $86,000 and $167,000, respectively. Unexpected sales of fully reserved inventory has decreased over the past several quarters except for the third quarter of fiscal 2005. However, we have no way of predicting the amount of such sales in the future, if any.

     The decrease in gross profit for the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 was primarily due to a smaller benefit from the unexpected sales of fully reserved inventory, higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations, a higher excess inventory charge and higher warranty expenses, partially offset by greater revenue. Our gross profit for the nine months ended March 31, 2005 and 2004 was positively impacted by the unexpected sale of fully reserved inventory of $190,000 and $922,000, respectively. The increase in warranty expense was due to manufacturing-related problems at our China manufacturing facilities.

     Our gross margin decreased for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 primarily due to a higher excess inventory charge, lower revenue resulting in higher manufacturing costs relative to our production volume and higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations, partially offset by a benefit as a result of the resolution of vendor liabilities. Our gross margin decreased for the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 due to a smaller benefit from the unexpected sales of fully reserved inventory, higher depreciation expense resulting from the return of our Shanghai operation to continuing operations from discontinued operations and a higher excess inventory charge.

     We expect our gross margin in the fourth quarter of fiscal 2005 to remain approximately the same as our gross margin in the third quarter of fiscal 2005.

     Research and Development:

(In thousands, except percentages)

     The decrease in research and development expenses for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily due to lower depreciation expense partially offset by higher non-recurring engineering charges. The increase in research and development expenses for the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 was 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 and higher non-recurring engineering charges, partially offset by lower depreciation expense and lower 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 remain approximately flat in the fourth quarter of fiscal 2005 compared to the third quarter of fiscal 2005.

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     Sales and Marketing:

(In thousands, except percentages)

     The decrease in sales and marketing expenses for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily due to lower non-cash compensation expense. The increase in sales and marketing expenses for the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 was primarily due to a one-time settlement of commission payable to an external sales representative in the second quarter of fiscal 2005. We expect our quarterly sales and marketing expenses to remain approximately flat in the fourth quarter of fiscal 2005 compared to the third quarter of fiscal 2005.

     General and Administrative:

(In thousands, except percentages)

     The decrease in general and administrative expenses for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily due to lower non-cash compensation expense. The decrease in general and administrative expenses for the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 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 and settlement costs resulting from two legal issues. In the nine months ended March 31, 2004, we incurred $890,000 of expenses associated with the exploration of strategic business opportunities. We expect our general and administrative expenses to increase in the fourth quarter of fiscal 2005 compared to the third quarter of fiscal 2005 due to professional fees to comply with the regulatory requirements of the Sarbanes-Oxley Act of 2002.

     Non-Cash Compensation Expense:

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(In thousands, except percentages)

     From July 1, 1998 through March 31, 2005, we have 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 nine months ended March 31, 2005 compared to the three and nine months ended March 31, 2004 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 nine months ended March 31, 2005 is as follows (in thousands):

     In-Process Research and Development (“IP R&D”):

(In thousands, except percentages)

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     We acquired RedClover, Accumux and Gigabit in November 2003, February 2004 and March 2004, respectively. As a result of these acquisitions, we recorded $704,000 and $1.6 million of IP R&D for the three and nine months ended March 31, 2004, respectively.

     The value of the IP R&D products was determined by estimating the net cash flows from the sale of the products resulting from the completion of the respective R&D projects, reduced by the portion of the net cash flows from the revenue attributable to core technology. The resulting cash flows were then discounted back to their present value using a discount rate ranging from 35% to 45%. At the time of the acquisitions, these products had not yet reached technological feasibility and had no alternative future use. The fair value assigned to the IP R&D in connection with the acquisitions of RedClover, Accumux and Gigabit was charged to expense at the time of each acquisition, respectively.

     Interest and Other Income, Net:

(In thousands, except percentages)

     The increases in interest income for the three and nine months ended March 31, 2005 compared to the three and nine months ended March 31, 2004 were primarily due to higher yields on our investments. The average rate of return for the three months ended March 31, 2005 was 2.5% as compared to the average rate of return of 1.5% for the three months ended March 31, 2004.

     (Loss) Gain on Disposal of Assets:

(In thousands, except percentages)

     We recorded losses of $168,000 and $177,000 for the three and nine months ended March 31, 2005, respectively, and a loss of $20,000 and a gain of $105,000 for the three and nine months ended March 31, 2004, respectively, from the disposal 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 March 31, 2005, 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.

     Merger Fees. 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

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purchase agreement and related ancillary agreements, we were to 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 entered into a settlement agreement whereby EZconn paid $2.0 million to us in termination fees. We incurred approximately $1.1 million of expenses including withholding tax in connection with the terminated transaction and recorded a gain of $904,000 for the three and nine months ended March 31, 2005.

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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, partially offset by $24.3 million in common stock repurchases, net of proceeds from the exercise of stock options, employee stock purchase plan and warrants through March 31, 2005. 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 March 31, 2005, we had cash, cash equivalents and short-term and long-term investments of $185.6 million and working capital of $133.9 million. We estimate that the sum of our cash, cash equivalents and short-term and long-term investments at the end of the fourth 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 third quarter of fiscal year 2005.

     Nine Months Ended March 31, 2005

     Our operating activities provided cash of $1.3 million in the nine months ended March 31, 2005 as a result of our net loss for the nine months ended March 31, 2005 of $3.5 million adjusted by $7.1 million primarily for the non-cash charges of depreciation and amortization, amortization of premium on investments and amortization of deferred stock compensation, partially offset by a net change in assets and liabilities of $2.3 million. On January 17, 2005, we and EZconn Corporation (“EZconn”) agreed to terminate all agreements relating to our proposed acquisition of EZconn, due to recent market changes and competitive circumstances. According to the termination agreement with Ezconn, Ezconn paid us $2.0 million in termination fees in January 2005. We incurred approximately $1.1 million of expenses including withholding tax in connection with the terminated transaction and recorded a gain of $904,000 for the nine months ended March 31, 2005.

     In the nine months ended March 31, 2005, the changes in assets and liabilities were primarily the result of changes in accounts receivable, inventories and accrued liabilities and accrued restructuring costs. Accounts receivable provided $410,000 of cash primarily due to decreased shipments during the three months ended March 31, 2005 compared to the three months ended June 30, 2004 even though days sales outstanding in accounts receivable ended the third quarter of fiscal 2005 at 77 days, as compared to 71 days at the end of the fourth quarter of fiscal 2004.

     Inventories used $1.3 million of cash during the nine months ended March 31, 2005 primarily due to purchases of inventory to address longer lead time for materials as well as increased customer demands in the next quarter.

     Accrued liabilities and accrued restructuring costs consumed $1.3 million in cash in the nine months ended March 31, 2005 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.

     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.

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     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.

     Our investing activities used cash of $29.8 million in the nine months ended March 31, 2005. The net cash used in investing activities in the nine months ended March 31, 2005 was primarily due to purchases of investments of $125.5 million, partially offset by sales of investments of $101.7 million. We invested a significant amount of our excess cash to purchase investments in the nine 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 nine months ended March 31, 2005. During the remaining three months of fiscal 2005, we expect to use approximately $400,000 for capital expenditures worldwide.

     Our financing activities provided cash of $641,000 in the nine months ended March 31, 2005, primarily due to proceeds from issuance of our common stock of $710,000 in connection with the exercise of stock options and the 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.

     Nine Months Ended March 31, 2004

     Our operating activities used cash of $1.0 million in the nine months ended March 31, 2004 as a result of our net loss of $5.8 million during the period, adjusted by $9.5 million primarily for the non-cash charges of depreciation and amortization, amortization of deferred stock compensation and in-process research and development, partially offset by a net change in assets and liabilities of $4.7 million.

     In the nine months ended March 31, 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 $2.1 million of cash primarily due to increased shipments during the nine months ended March 31, 2004. Days sales outstanding in accounts receivable ended the third quarter of fiscal 2004 at 68 days, as compared to 72 days at the end of the fourth quarter of fiscal 2003.

     Inventories used $1.2 million of cash during the nine months ended March 31, 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 $1.4 million in cash in the nine months ended March 31, 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 used cash of $26.7 million in the nine months ended March 31, 2004. The net cash used by investing activities in the nine months ended March 31, 2004 was primarily due to purchases of investments of $165.7 million, partially offset by sales of investments of $138.3 million and proceeds from sales of property and equipment of $500,000.

     Our financing activities provided cash of $2.2 million in the nine months ended March 31, 2004 primarily due to proceeds from the issuance of our common stock of $3.5 million in connection with the

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exercise of stock options and employee stock purchase plan, partially offset by repayment of capital lease obligations of $1.4 million.

Contractual Obligations

     Our contractual obligations as of March 31, 2005 have been summarized below (in thousands):

Recent Accounting Pronouncements

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires us to measure all employee stock-based compensation awards using a fair value method and record such expense in our 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.

     In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) which provides guidance regarding the application of SFAS No. 123(R). SAB 107 expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to adoption of SFAS 123(R) and disclosures in Management’s Discussion and Analysis (“MD&A”) subsequent to adoption of SFAS 123(R).

     SFAS No. 123(R) is effective beginning in our first quarter of fiscal 2006. The adoption of SFAS No. 123(R) could have a material impact on our financial position, results of operations and cash flows.

     In November 2004, the FASB issued SFAS 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. We believe

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

     On December 16, 2004, the FASB issued SFAS 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 our first quarter of fiscal 2006. We believe the adoption of SFAS No. 153 will 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. We believe we are 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 our future accounting for our 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 while controlling costs and operating expenses 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 $3.5 million, $6.4 million, $36.8 million and $68.4 million for the nine months ended March 31, 2005 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 March 31, 2005, we had an accumulated deficit of $228.0 million. Moreover, we will need to generate significantly greater revenues while controlling 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 may also continue to incur significant operating losses if the markets for our products do not grow.

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 62%, 64%, 69%, 56% and 49% of our revenues in the three and nine months ended March 31, 2005 and the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Flextronics Canada, Inc. (“Flextronics”) and Marubun Corporation (“Marubun”) each accounted for greater than 10% of our revenues for the three months ended March 31, 2005. For the three months ended March 31, 2005, primarily all of our shipments to Flextronics, a contract manufacturer, were to fulfill purchase orders placed by Nortel Networks Corporation (“Nortel”). Through Flextronics and through direct sales, Nortel accounted for greater than 10% of our revenues for the three months ended March 31, 2005. For the three months ended March 31, 2005, a substantial portion of our shipments to Marubun were to fulfill purchase orders placed by Fujitsu Limited (“Fujitsu”). Through Marubun and through direct sales, Fujitsu accounted for greater than 10% of our revenues for the three months ended March 31, 2005. Nortel, including sales through Flextronics, and Fujitsu, including sales through Marubun, together accounted for approximately 40% of our revenues in the three months ended March 31, 2005. Nortel and Hua Wei Technologies Co. Ltd. (“Hua Wei”) each accounted for greater than 10% of our revenues for the nine months ended March 31, 2005. Nortel, including sales through Flextronics, and Hua Wei together accounted for approximately 43% of our revenues for the nine months ended March 31, 2005.

     Nortel, Sanmina-SCI Corporation (“Sanmina”) and Marubun each 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 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

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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 revenues for the quarter ended June 30, 2004, March 31, 2004 and December 31, 2003 and the fiscal year ended June 30, 2004, respectively. However, it did not account for greater 10% of our revenues for the quarters ended March 31, 2005, December 31, 2004 and 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 some 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 without an increase in sales from other 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 other 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 public market analysts’ or 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 our products;
	-	cancellations or delays of orders or shipment rescheduling by our customers;
	-	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 or increases in the price of these raw materials;
	-	our ability to successfully improve our manufacturing capabilities and achieve acceptable production yields in our facilities in China;