OPLINK COMMUNICATIONS INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 or
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-31581

OPLINK COMMUNICATIONS , INC.

(Exact name of registrant as specified in its charter)

Delaware		No. 77-0411346
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3469 North First Street, San Jose, CA 95134

(Address of principal executive offices) (Zip Code)

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

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

The number of shares of the Registrant’s Common Stock outstanding as of November 6, 2002 was 162,678,738.

OPLINK COMMUNICATIONS, INC.

FORM 10-Q

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets— September 30, 2002 and June 30, 2002		3
Condensed Consolidated Statements of Operations— Three months ended September 30, 2002 and 2001		4
Condensed Consolidated Statements of Cash Flows— Three months ended September 30, 2002 and 2001		5
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		46
Item 4. Evaluation of Disclosure Controls and Procedures		46

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		47
Item 2. Changes in Securities and Use of Proceeds		47
Item 3. Defaults Upon Senior Securities		48
Item 4. Submission of Matters to a Vote of Security Holders		48
Item 5. Other Information		48
Item 6. Exhibits and Reports on Form 8-K		49

SIGNATURES		50

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30,			June 30,
	2002			2002
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	203,986		$	219,033
Short-term investments		16,938			5,716
Accounts receivable, net		4,670			6,831
Inventories		5,985			6,551
Prepaid expenses and other assets		2,828			3,571

Total current assets		234,407			241,702
Property, plant and equipment, net		56,946			59,732
Intangible assets		473			500
Other assets		1,260			1,260

Total assets	$	293,086		$	303,194

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,193		$	5,412
Accrued liabilities		11,739			13,316
Current portion of capital lease obligations		3,947			4,291

Total current liabilities		22,879			23,019
Capital lease obligations, non current		875			1,570
Accrued restructuring, non current		4,875			5,324

		28,629			29,913

Commitments and contingencies (Note 9)
Stockholders’ equity:
Common Stock		164			165
Additional paid-in capital		471,651			472,393
Treasury stock		(2,557	)		(1,895	)
Notes receivable from stockholders		(10,947	)		(10,771	)
Deferred stock compensation		(3,941	)		(5,425	)
Accumulated other comprehensive income		14			26
Accumulated deficit		(189,927	)		(181,212	)

Total stockholders’ equity		264,457			273,281

Total liabilities and stockholders’ equity	$	293,086		$	303,194

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

OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,
	2002			2001
Revenues	$	6,033		$	10,016
Cost of revenues:
Cost of revenues		7,516			22,415
Non-cash compensation expense (recovery)		102			(426	)

Total cost of revenues		7,618			21,989

Gross loss		(1,585	)		(11,973	)

Operating expenses:
Research and development:
Research and development		3,070			3,754
Non-cash compensation (recovery) expense		(121	)		92

Total research and development		2,949			3,846

Sales and marketing:
Sales and marketing		1,672			1,952
Non-cash compensation expense		85			111

Total sales and marketing		1,757			2,063

General and administrative:
General and administrative		1,642			2,196
Non-cash compensation expense		666			847

Total general and administrative		2,308			3,043

Restructuring costs and other special charges		—			25,643
Merger fees		1,110			—
Amortization of intangible and other assets		26			42

Total other operating expenses		1,136			25,685

Total operating expenses		8,150			34,637

Loss from operations		(9,735	)		(46,610	)
Interest and other income (expense), net		1,020			1,569

Net loss	$	(8,715	)	$	(45,041	)

Basic and diluted net loss per share	$	(0.05	)	$	(0.28	)

Basic and diluted weighted average shares outstanding		164,767			161,343

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

OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended September 30,
	2002			2001
Cash flows from operating activities:
Net loss	$	(8,715	)	$	(45,041	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash restructuring costs and other special charges		—			16,260
Depreciation and amortization of property and equipment		3,319			3,505
Amortization of goodwill and intangible assets		26			42
Amortization of deferred stock compensation		732			624
Provision for excess and obsolete inventory		—			10,407
Loss on disposal of assets		133			—
Interest income related to stockholder notes		(176	)		—
Other		(16	)		5
Change in assets and liabilities:
Accounts receivable		2,161			5,300
Inventories		566			2,128
Prepaid expenses and other asssets		707			4,904
Accounts payable		1,369			(7,165	)
Accrued liabilities and accrued restructuring		(2,026	)		3,164

Net cash used in operating activities		(1,920	)		(5,867	)

Cash flows from investing activities:
Purchases of short-term investments		(16,917	)		(26,074	)
Maturities of short-term investments		5,700			—
Proceeds from sales of assets		36			—
Purchase of property and equipment		(254	)		(1,608	)

Net cash used in investing activities		(11,435	)		(27,682	)

Cash flows from financing activities:
Proceeds from issuance of common stock		9			53
Repurchase of common stock		(662	)		—
Proceeds from borrowings under line of credit		—			1,268
Repayment of capital lease obligations		(1,039	)		(915	)

Net cash (used in) provided by financing activities		(1,692	)		406

Net decrease in cash and cash equivalents		(15,047	)		(33,143	)
Cash and cash equivalents, beginning of period		219,033			246,473

Cash and cash equivalents, end of period	$	203,986		$	213,330

(CONTINUED ON NEXT PAGE)

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

OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

(CONTINUED FROM PREVIOUS PAGE)

Supplemental disclosures of cash flow information:
Cash paid during the period for interest expense	$	110		$	222

Supplemental non-cash investing and financing activities:
Property and equipment acquired under capital lease	$	—		$	541

Return (acquisition) of property and equipment	$	(412	)	$	5,370

Forfeiture of common stock option grants	$	(126	)	$	(1,789	)

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

OPLINK COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business. Oplink Communications, Inc. (“Oplink” or the “Company”) designs, manufactures and markets fiber optic subsystems, integrated modules and components that expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance and redirect light signals within an optical network. The Company offers a broad line of products that increase the performance of optical networks and enable service providers and 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 markets its products worldwide to communications equipment providers. The Company’s bandwidth creation products increase the performance and capacity of fiber optic networks. The Company’s bandwidth management products provide communications service providers with the ability to monitor and manage optical signals to enhance network performance. The Company produces optical subsystems, integrated modules and fiber optic components for next-generation, all-optical dense wavelength division multiplexing, or DWDM, optical amplification, switching and routing, and monitoring and conditioning applications. Additionally, the Company plans to expand its operations to include an integrated Optical Manufacturing Service (“OMS”). This OMS will be offered to its global customers for the production of optical subsystems and turn-key solutions.

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

2. Basis of Presentation. The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. The financial statements presented herein have been prepared by management, without audit by independent accountants who do not express an opinion thereon, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2002 included in the Company’s Annual Report on Form 10-K.

The Company operates and reports using a fiscal year, which ends on the Sunday closest to June 30. Interim fiscal quarters end on the Sunday closest to each calendar quarter end. For presentation purposes, the Company presents each fiscal year as if it ended on June 30. The Company presents each of the fiscal quarters as if it ended on the last day of each calendar quarter. Fiscal year 2003 will consist of 52 weeks.

In the opinion of the management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at September 30, 2002, the results of its operations for the three-month periods ended September 30, 2002 and 2001 and its cash flows for the three-month periods ended September 30, 2002 and 2001. 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 Statement of Financial Accounting Standards (“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 preference shares, warrants and the incremental common shares issuable upon the exercise of stock options. The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations for the periods presented (in thousands, except per share data):

	Three Months Ended September 30,
	2002			2001
Numerator:
Net loss	$	(8,715	)	$	(45,041	)

Denominator:
Weighted average shares outstanding		164,767			161,343

Net loss per share:
Basic and diluted	$	(0.05	)	$	(0.28	)

Antidilutive securities including options, warrants and preferred shares not included in net loss per share calculation		26,093			26,358

4. Comprehensive Loss. SFAS No. 130 requires disclosure of non-stockholder changes in equity, which include unrealized gains and losses on securities classified as available-for-sale under SFAS No. 115 and foreign currency translation adjustments accounted for under SFAS No. 52.

The reconciliation of net loss to comprehensive loss for the three months ended September 30, 2002 and 2001 is as follows (in thousands):

	Three Months Ended September 30,
	2002			2001
Net loss	$	(8,715	)	$	(45,041	)
Unrealized gain (loss) on investments		(16	)		52
Change in cumulative translation adjustments		4			1

Total comprehensive loss	$	(8,727	)	$	(44,988	)

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

	September 30,			June 30,
	2002			2002
Inventories:
Raw materials	$	21,501		$	22,849
Work-in-process		7,556			7,732
Finished goods		7,027			6,560

		36,084			37,141
Less: Reserves for excess and obsolete inventory		(30,099	)		(30,590	)

	$	5,985		$	6,551

6. Restructuring Costs and Other Special Charges. The Company, like many of its peers in the communications industry, continues to be affected by the slowdown in telecommunications equipment spending. The Company’s revenues have been generally decreasing in sequential quarters from $43.2 million in the fiscal quarter ended December 31, 2000 to $36.0 million, $20.3 million, $10.0 million, $10.6 million, $9.6 million, $7.7 million and ending with $6.0 million in the fiscal quarter ended September 30, 2002. Due to the continued weakness in the general economy, and the telecom sector in particular, year-over-year revenue growth is expected to decline further, thereby putting further downward pressure on margins and profits. Due to this decline in current business conditions, the Company continued to restructure its business and realigned resources to focus on monitoring costs, preserving cash, accelerating the planned move of manufacturing operations to China and focusing on core opportunities. For the year ended June 30, 2002, $28.9 million of restructuring costs and other special charges were incurred and classified as operating expenses. In addition a $10.4 million and $30.6 million excess and obsolete inventory charge was recorded to cost of sales for the fiscal years ended June 30, 2002 and 2001, respectively. For the year ended June 30, 2001, the Company’s restructuring efforts included a charge of $5.7 million for worldwide workforce reduction and consolidation of excess facilities. Additionally, a $12.4 million charge was recorded based upon an impairment analysis of the carrying amount of the goodwill and purchased intangible assets related to the Company’s acquisition of Telelight, which it completed in April 2000. The following paragraphs provide detailed information relating to the restructuring costs, other special charges and excess and obsolete inventory charge during the period from the fourth quarter of fiscal 2001 to the first quarter of fiscal 2003. The Company is currently planning to incur additional restructuring costs and other special charges beginning in the second quarter of fiscal 2003.

Worldwide workforce reduction

The worldwide workforce reductions in connection with the Company’s initial plans of restructuring started in the fourth quarter of fiscal 2001. During the fiscal year ended June 30, 2002, the Company recorded a charge of approximately $2.9 million primarily related to severance and fringe benefits associated with the planned reduction of approximately 2,700 employees. Of the planned reduction of approximately 2,700 employees, approximately 2,400 were engaged in manufacturing activities and approximately 800 and 1,900 were from sites located in San Jose, California and China, respectively. As of September 30, 2002, approximately 2,672 employees had been terminated. The Company expects that the planned worldwide workforce reductions in connection with the Company’s initial plans will be substantially completed by the end of the second quarter of fiscal 2003. The Company is currently planning to incur additional restructuring costs and other special charges beginning in the second quarter of fiscal 2003.

Excess fixed assets, facilities and other special charges

The Company recorded a restructuring charge of $16.6 million relating to excess fixed assets during the fiscal year ended June 30, 2002. Property and equipment disposed of or removed from operations were related to the manufacture of fiber optic subsystems, integrated modules and components. The excess fixed assets charge represented the charge required to re-measure such assets at the lower of carrying amount or fair value less cost to sell. The carrying amount of the remaining fixed assets to be disposed of was $1.2 million as of June 30, 2002, and has been included in prepaid expenses and other current assets. While the remaining assets with an original cost of $12.0 million removed from operations as of September 30, 2002, are being actively marketed, the Company expects the period of disposal to be an additional nine months for most of the assets. The property and equipment disposed of or removed from operations consisted primarily of production and engineering equipment, but also included leasehold improvements, computer equipment, office equipment and furniture and fixtures. In addition, the Company incurred a charge of $7.5 million for leases primarily related to excess or closed facilities with planned exit dates. The Company estimated the cost of the facility leases based on the contractual terms of the agreements and then current real estate market conditions. The Company determined that it would take approximately two years to sublease the various properties that will be vacated, and then subleased at lower values then we are contractually obligated to pay. Amounts related to the lease expense (net of anticipated sublease proceeds) will be paid over the respective lease terms through 2009. The consolidation of excess facilities includes the closure of certain manufacturing and research and development facilities located in San Jose, California and Beijing, Chengdu and Fuzhou, China. The total number of sites closed under the restructuring plan is six. The Company also recorded other restructuring costs and special charges of $1.9 million relating primarily to payments due to suppliers and vendors to terminate agreements for the purchase of capital equipment and inventory. The Company is currently planning to incur additional restructuring costs and other special charges beginning in the second quarter of fiscal 2003.

Summary

A summary of the restructuring costs and other special charges is outlined as follows (in thousands):

	Workforce Reduction			Excess Fixed Assets			Consolidation of Excess Facilities and Other Charges			Impairment of Goodwill and Purchased Intangible Assets			Total
Initial restructuring charge in the fourth quarter of fiscal 2001	$	250		$	—		$	5,485		$	12,442		$	18,177
Non-cash charge		—			—			—			(12,442	)		(12,442	)
Cash payments		—			—			(1,191	)		—			(1,191	)

Balance at June 30, 2001		250			—			4,294			—			4,544

Accrued restructuring, current														2,820

Accrued restructuring, non current													$	1,724

Additional restructuring charge in the fourth quarter of fiscal 2002		2,899			16,635			9,374			—			28,908
Non-cash charge		—			(16,260	)		—			—			(16,260	)
Cash payments		(2,269	)		(375	)		(4,869	)		—			(7,513	)

Balance at June 30, 2002	$	880		$	—		$	8,799		$	—		$	9,679

Accrued restructuring, current														4,355

Accrued restructuring, non current													$	5,324

Cash payments		(470	)		—			(768	)		—			(1,238	)

Balance at September 30, 2002	$	410		$	—		$	8,031		$	—		$	8,441

Accrued restructuring, current														3,566

Accrued restructuring, non current													$	4,875

Provision for inventory

The Company recorded provisions for excess and obsolete inventory totaling $10.4 million and $30.6 million, which was charged to cost of sales during the fiscal years ended June 30, 2002 and June 30, 2001, respectively. These excess inventory charges were due to sudden and material declines in backlog and forecasted revenue. There were no inventory provision charges during the three months ended September 30, 2002. The Company evaluates the need to provide write downs for excess and obsolete inventory on an individual part analysis based on estimated future sales of the Company’s products compared to quantities on hand at each balance sheet date. This analysis is based on specific sales forecasts for each of the Company’s products. Information that the Company would consider in determining the forecast would include contractual obligations to deliver products, purchase orders with delivery dates or management’s knowledge of a specific order that would significantly alter the sales forecast.

Return of property and equipment

As of June 30, 2001, the Company had accrued accounts payable of $8.6 million associated with the purchase of certain capital equipment from a vendor. In connection with an evaluation of the Company’s manufacturing capacity needs, it was determined that this new capital equipment was excess based on current anticipated production levels. During the fiscal year ended June 30, 2002, the Company negotiated a settlement with the vendor whereby the vendor accepted the return of equipment over several quarters totaling $8.6 million for a settlement fee of $500,000. Accordingly, the change in accounts payable and fixed assets of $(412,000) and $5.4 million in the three months ended September 30, 2002 and September 30, 2001, respectively, is reflected as a non-cash item in the consolidated statement of cash flows.

7. Repurchase of Common Stock. On September 26, 2001, the Company’s Board of Directors authorized a program to repurchase up to an aggregate of $21.2 million of the Company’s Common Stock. On September 19, 2002, the Company’s Board of Directors approved an increase in the Company’s buyback plan to repurchase up to an aggregate of $40.0 million of the Company’s Common Stock. Such repurchases may be made from time to time on the open market at prevailing market prices, in negotiated transactions off the market or pursuant to a 10b5-1 plan adopted by the Company. The Company adopted a 10b5-1 plan in August 2002, which allows the Company to repurchase its shares during a period in which the Company is in possession of material non-public information, provided the Company communicates share repurchase instructions to the broker at a time when the Company was not in possession of such material non-public information. As of September 30, 2002, repurchases of $2.6 million have been made under this program.

8. Recent Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company on July 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The adoption of SFAS No. 142 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121 and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30’s requirement that discontinued operations be measured at net realizable value or that entities include under “discontinued operations” in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 on July 1, 2002 did not have a material impact on the Company’s financial position, results of operations or cash flows.

9. 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, known as In re Oplink Communications, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the complaint, the plaintiffs allege that the Company, certain of its officers and directors and the underwriters of its initial public offering (“IPO”) violated the federal securities laws because the Company’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same court against numerous public companies that conducted IPOs of their common stock in the late 1990s (the “IPO Cases”). On August 8, 2001, the IPO Cases were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of

New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among other things, that the time for all defendants to respond to any complaint be postponed until further order of the court. Thus, the Company has not been required to answer the complaint, and no discovery has been served on the Company.

In accordance with Judge Scheindlin’s orders at further status conferences in March and April 2002, the appointed lead plaintiff’s counsel filed amended, consolidated complaints in the IPO Cases on April 19, 2002. Defendants then filed a global motion to dismiss the IPO Cases on July 15, 2002, as to which the Company does not expect a decision until late in calendar 2002. On October 9, 2002, the court entered an order dismissing the Company’s named officers and directors from the IPO Cases without prejudice, pursuant to an agreement tolling the statute of limitations with respect to these officers and directors until September 30, 2003. The Company believes that this litigation is without merit and intends to defend against it vigorously. This litigation, however, as well as any other litigation that might be instituted, could result in substantial costs and a diversion of management’s attention and resources.

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

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

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Company’s 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 the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating the Company’s 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. The Company cautions investors that its 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 and related financial information contained in the Company’s Form 10-K as filed with the SEC on September 30, 2002.

Overview

We design, manufacture and market fiber optic subsystems, integrated modules and components that expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance and redirect light signals within an optical network. We offer a broad line of products that increase the performance of optical networks and enable service providers and optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks. Our bandwidth creation products increase the performance and capacity of fiber optic networks. Our bandwidth management products provide communications service providers with the ability to monitor and manage optical signals to enhance network performance. We produce optical subsystems, integrated modules and fiber optic components for next-generation, all-optical dense wavelength division multiplexing, or DWDM, optical amplification, switching and routing, and monitoring and conditioning applications.

Additionally, we plan to expand our operations to include an integrated Optical Manufacturing Service (“OMS”). This OMS will be offered to our global customers for the production of optical subsystems and turn-key solutions.

We generate substantially all of our revenues from the sale of fiber optic subsystems, integrated modules and components. To date, we have developed over 120 standard products that are sold or integrated into customized solutions for our customers. Our products are generally categorized into the following major groups: our bandwidth creation products, which include wavelength expansion and optical amplification products; and our bandwidth management products, which include wavelength performance monitoring and protection, and optical switching products. A majority of our revenues are derived from our bandwidth creation products, which include our wavelength expansion products, in particular, DWDMs and multiplexers.

During the three months ended September 30, 2002 as compared to the prior three months ended June 30, 2002, our revenues decreased by 22% to $6.0 million and our headcount was reduced by 376 people, or 27%. During the three months ended September 30, 2002 as compared to the three months ended September 30, 2001, our revenues decreased by 40% to $6.0 million and our headcount was reduced by 537 people, or 34%. During the fiscal year ended June 30, 2002 as compared to the prior fiscal year ended June 30, 2001, our revenues decreased by 71% to $37.9 million, our headcount was reduced by 1,471 people, or 51% of our workforce, substantially all of our manufacturing operations were moved to China and we further reduced our cost structure to respond to the significantly lower revenues than previously experienced by us due to the severe downturn in the market for fiber optic subsystems, integrated modules and components. The fiber optics industry has been in a significant period of consolidation following a dramatic slowdown in capital spending since late in calendar 2001 by carriers faced with substantial excess bandwidth capacity and high levels of corporate debt. Beginning in late calendar 2001, as the industry entered its downturn and consolidation phase, various customers canceled existing orders with us. We incurred substantial costs associated with excess and obsolete inventory, workforce reduction, canceled orders, excess fixed assets, excess facilities and other special charges.

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

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

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

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

NON-CASH COMPENSATION EXPENSE. Prior to our initial public offering, we granted stock options and issued warrants to employees and consultants at prices below the fair value of the underlying stock on the date of grant or issuance. During the period from July 1, 1998 through September 30, 2002, we recorded aggregate deferred stock compensation, net of cancellations, of approximately $58.7 million, of which $732,000, $4.7 million, $26.6 million and $12.7 million was expensed during the three months ended September 30, 2002, and the fiscal years ended June 30, 2002, 2001 and 2000, respectively. While this expense has increased our net loss, it has had no impact on our cash flows. With respect to employee stock-based compensation, we are amortizing the deferred compensation expense over the vesting period, as set forth in FASB Interpretation No. (“FIN”) 28. Under the FIN 28 method, each vested tranche of options is accounted for as a separate option grant awarded for services. The compensation expenses are recognized over the period during which the services are provided. Accordingly, this method results in higher compensation expenses being recognized in the earlier vesting periods of an option. Non-employee grants are accounted for in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and Emerging Issues Task Force 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”) and valued using the Black-Scholes model. The deferred compensation expense related to non-employees’ stock option grants are amortized over the vesting period as set forth in FIN 28.

In October 2000, we sold 15,755,000 shares of common stock in an underwritten initial public offering, including 2,055,000 shares of common stock issued pursuant to the exercise of the underwriter’s over-allotment option, resulting in net proceeds of approximately $263.7 million, before offering expenses of approximately $2.7 million. Simultaneously with the closing of the public offering, 110,103,344 shares of convertible preferred stock were converted to shares of common stock on a one-for-one basis. In addition, the note payable to Cisco Systems and the related interest expense was converted into 3,298,773 shares of common stock at a conversion price of $15.30 per share, or 85% of the public offering price of $18.00 per share. The discount feature of this convertible note payable resulted in a charge of $8.8 million, recorded as sales and marketing expense in the quarter ended December 31, 2000.

Use of Estimates and Critical Accounting Policies

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

Company’s procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition and Product Returns

We recognize revenue using the guidance from SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” and Statement of Financial Accounting Standards (“SFAS”) No. 48 “Revenue Recognition When Right of Return Exists.” Under these guidelines, revenue from product sales is recognized upon shipment of the product or customer acceptance, which ever is later, provided that persuasive evidence of an arrangement exists, delivery has occurred and no significant obligations remain, the fee is fixed or determinable and collectibility is probable. Revenue associated with contract-related cancellation payments from customers is recognized when a formal agreement is signed or a purchase order issued by the customer covering such payments and the collectibility of the cancellation payments is determined to be probable. In addition, we estimate what future product returns based upon actual historical return rates and reduce our revenue by these estimated future returns. If the historical data we use to calculate these estimates does not properly reflect future returns, future estimates could be revised accordingly.

Warranty Obligations

We provide reserves for the estimated costs of product warranties at the time revenue is recognized based on our historical experience of known product failure rates and expected material and labor costs to provide warranty services. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from estimates, we may be required to record additional warranty reserves. Alternatively, if our estimates are determined to be greater than the actual amounts necessary, we may reverse a portion of such provisions in future periods.

Risk Evaluation

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable. Substantially all of our cash, cash equivalents and short-term investments are managed or held by three financial institutions. Such deposits are in excess of the amount of the insurance provided by the federal government on such deposits. To date, we have not experienced any losses on such deposits.

Allowance for Doubtful Accounts

Our accounts receivable are derived from revenue earned from customers located in the United States, Europe and Asia. We perform ongoing credit evaluations of our customers’ financial condition and currently require no collateral from our customers. Allowance for doubtful accounts for estimated losses are maintained in anticipation of the inability or unwillingness of customers to make required payments. When we become aware that a specific customer is unable to meet its financial obligations, such as the result of bankruptcy or deterioration in the customer’s operating results or financial position, we record a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. We are not able to predict changes in the financial condition of customers, and if the condition or circumstances of our customers deteriorates, estimates of the recoverability of trade receivables could be materially affected and we may be required to record additional allowances. Alternatively, if our estimates are determined to be greater than the actual amounts necessary, we may reverse a portion of such allowance in future periods based on actual collection experience.

Excess and Obsolete Inventory

We regularly assess the valuation of inventories and write down those inventories which are obsolete or in excess of forecasted usage to their estimated realizable value. Estimates of realizable value are based upon our analyses and assumptions including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. If market conditions are less favorable than our forecast or actual demand from customers is lower than our estimates, we may be required to record additional inventory write-downs. If demand is higher than expected, we may sell inventories that had previously been written down. In recent periods we have recorded significant charges related to excess and obsolete inventory. See “Restructuring Costs and Other Special Charges” below.

Property, Plant and Equipment

We evaluate the carrying value of property, plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in our market value, or significant reductions in projected future cash flows. In assessing the recoverability of property, plant and equipment, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows was less than the carrying amount of the assets, we would write down such assets based on the excess of the carrying amount over the fair value of the assets. In the years ended June 30, 2002, 2001 and 2000, we had no such write down. Fair value is generally determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rate and terminal growth rates. Changes in these estimates could have a material adverse effect on the assessment of property, plant and equipment, thereby requiring us to write down the assets. In recent periods we have recorded significant charges related to excess fixed assets and facilities. See “Restructuring Costs and Other Special Charges” below.

Goodwill and Other Identifiable Intangibles

We assess the impairment of goodwill and other identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends.

When we determine that the carrying value of goodwill and other identified intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. A $12.4 million charge was recorded based upon an impairment analysis of the carrying amount of the goodwill and purchased intangible assets related to the Telelight acquisition during the fiscal year ended June 30, 2001. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” on July 1, 2002 we ceased to amortize goodwill arising from acquisitions completed prior to July 1, 2001. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. If we determine through the impairment

review process that goodwill has been impaired, we would record the impairment charge in our statement of operations.

Results of Operations

Revenues. Revenues decreased $4.0 million, or 40%, from $10.0 million for the three months ended September 30, 2001 to $6.0 million for the three months ended September 30, 2002. The decrease was primarily due to decreased shipments of all our products, including our wavelength expansion products, optical amplification products and optical switching products to existing and new customers, and decreases in the average selling prices of our wavelength expansion products, specifically our dense wavelength division multiplexers. The decreases in shipments were primarily due to the slowdown in telecommunications equipment spending. The decreases in the average selling prices were primarily due to declining market demand. Further declines in shipments and average selling prices are anticipated through the remainder of the fiscal year ending June 30, 2003.

During the three months ended September 30, 2002 as compared to the prior three months ended June 30, 2002, we reduced our headcount by 376 people, or 27%. During the three months ended September 30, 2002 as compared to the three months ended September 30, 2001, we reduced our headcount by 537 people, or 34%. During the fiscal year ended June 30, 2002 as compared to the prior fiscal year ended June 30, 2001, we reduced our headcount by 1,471 people, or 51% of our workforce, moved substantially all of our manufacturing operations to China and further reduced our cost structure to respond to the significantly lower revenues than we previously anticipated. We expect to continue to implement programs to improve manufacturing yields and reduce costs. There is no certainty that these programs will be successful to offset the reduced shipments to customers and declining average selling prices. Future additional actions by us in response to reduced shipments to customers and declining average selling prices will include further reductions in headcount, transitioning the majority of our current research and development in the United States to China, which is anticipated to result in lower cost structures, and further consolidation of assets and facilities. Our visibility continues to be limited with respect to telecommunications equipment providers. We will continue to evaluate our business on an ongoing basis in light of current and future revenue trends and adjust our cost structure accordingly.

Gross Loss. The following table summarizes gross margin as a percentage of revenue (in thousands, except percentages):

	Three Months Ended September 30,
	2002					2001
Revenue	$	6,033		100.0	%	$	10,016		100.0	%
Gross loss	$	(1,585	)	-26.3	%	$	(11,973	)	-119.5	%
Calculation of gross loss excluding special items:
Non-cash compensation expense (recovery)		102		1.7	%		(426	)	-4.3	%
Provision for excess inventory		—		0.0	%		10,407		103.9	%

Gross loss excluding special items	$	(1,483	)	-24.6	%	$	(1,992	)	-19.9	%

Gross loss. Gross loss decreased $10.4 million, or 87%, from a gross loss of $12.0 million for the three months ended September 30, 2001 to a gross loss of $1.6 million for the three months ended September 30, 2002. This resulted in a decrease in gross loss from (119.5%) to (26.3%). Our gross margin for the three months ended September 30, 2002, was negatively impacted by $102,000 non-cash compensation expense. Our gross margin for the three months ended September 30, 2001, was negatively impacted by the $10.4 million excess inventory charge, partially offset by a credit of $426,000 in non-cash compensation benefit. Excluding special items of $(426,000) and $102,000 for the three month period ended September 30, 2001 and 2002, respectively, this resulted in an decrease in our gross loss of $509,000, or 25.6%, from a gross loss of $2.0 million for the three months ended September 30, 2001 to a gross loss of $1.5 million for the three months ended September 30, 2002. In addition to the special items, our gross margin increased due to cost savings associated with the worldwide workforce reduction and the consolidation of excess facilities and the cost benefits of operating in China partially offset by higher manufacturing costs relative to our production volume, manufacturing inefficiencies associated with the transfer of our manufacturing capacity to China and lower yields in our manufacturing facilities in China due to the rapid manufacturing transfer. We are continuing to implement programs that we believe will further improve production yields of our products. We cannot assure you, however, that these programs will be successful in increasing our gross margin.

Research and Development. Research and development expenses, including non-cash compensation expense, decreased $897,000, or 23%, from $3.8 million for the three months ended September 30, 2001 to $2.9 million for the three months ended September 30, 2002. Research and development expenses, excluding non-cash compensation expense (recovery) of $92,000 and $(121,000) for the three months ended September 30, 2001 and 2002, respectively, decreased $684,000, or 18%, from $3.8 million for the three months ended September 30, 2001 to $3.1 million for the three months ended September 30, 2002. The decrease in research and development expenses was primarily due to cost savings associated with the worldwide workforce reduction and the consolidation of excess facilities and assets. We expect our research and development expenses to decrease in dollar amount for the next fiscal quarter as we continue to cut costs and transition research and development to China.

Sales and Marketing. Sales and marketing expenses, including non-cash compensation expense, decreased $306,000, or 15%, from $2.1 million for the three months ended September 30, 2001 to $1.8 million for the three months ended September 30, 2002. Sales and marketing expenses, excluding non-cash compensation expense of $111,000 and $85,000 for the three months ended September 30, 2001 and 2002, respectively, decreased $280,000, or 14%, from $2.0 million for the three months ended September 30, 2001 to $1.7 million for the three months ended September 30, 2002. The decrease in sales and marketing expenses was primarily due to cost savings associated with the worldwide workforce reduction and the consolidation of excess facilities and lower commissions paid to our internal and external sales representatives associated with decreased revenues. We expect our sales and marketing expenses to decrease in dollar amount for the next fiscal quarter as we continue to cut costs.

General and Administrative. General and administrative expenses, including non-cash compensation expense, decreased $735,000, or 24%, from $3.0 million for the three months ended September 30, 2001 to $2.3 million for the three months ended September 30, 2002. General and administrative expenses, excluding non-cash compensation expense of $847,000 and $666,000 for the three months ended September 30, 2001 and 2002, respectively, decreased $554,000, or 25%, from $2.2 million for the three months ended September 30, 2001 to $1.6 million for the three months ended September 30, 2002. The decrease in general and administrative expenses was primarily due to cost savings associated with the worldwide workforce reduction and a reduction in our legal fees. We

expect our general and administrative expenses to decrease in dollar amount for the next fiscal quarter as we continue to cut costs.

Non-Cash Compensation Expense. From July 1, 1998 through September 30, 2002, we recorded an aggregate of $58.7 million in deferred non-cash compensation, net of stock option cancellations. Non-cash compensation expense increased $108,000, or 17%, from $624,000 for the three months ended September 30, 2001 to $732,000 for the three months ended September 30, 2002. The increase in deferred non-cash compensation was primarily due to a higher rate of stock option cancellations during the three months ended September 30, 2001 as compared to the three months ended September 30, 2002 .

Restructuring Costs and Other Special Charges. We, like many of our peers in the communications industry, continue to be affected by the slowdown in telecommunications equipment spending. Our revenues have been generally decreasing in sequential quarters from $43.2 million in the fiscal quarter ended December 31, 2000 to $36.0 million, $20.3 million, $10.0 million, $10.6 million, $9.6 million, $7.7 million and ending with $6.0 million in the fiscal quarter ended September 30, 2002. Due to the continued weakness in the general economy, and the telecom sector in particular, year-over-year revenue growth is expected to decline further, thereby putting downward pressure on margins and profits. Due to this decline in current business conditions, we continued to restructure our business and realigned resources to focus on monitoring costs, preserving cash, accelerating the planned move of manufacturing operations to China and focusing on core opportunities. For the year ended June 30, 2002, $28.9 million of restructuring costs and other special charges were incurred and classified as operating expenses. In addition a $10.4 million and $30.6 million excess and obsolete inventory charge was recorded to cost of sales for the fiscal years ended June 30, 2002 and 2001, respectively. For the year ended June 30, 2001 our restructuring efforts included a charge of $5.7 million for worldwide workforce reduction and consolidation of excess facilities. Additionally, a $12.4 million charge was recorded based upon an impairment analysis of the carrying amount of the goodwill and purchased intangible assets related to our acquisition of Telelight, which we completed in April 2000. The following paragraphs provide detailed information relating to the restructuring costs, other special charges and excess and obsolete inventory charge during the period from the fourth quarter of fiscal 2001 to the first quarter of fiscal 2003. We are currently planning to incur additional restructuring costs and other special charges beginning in the second quarter of fiscal 2003.

Worldwide workforce reduction

Our worldwide workforce reductions started in the fourth quarter of fiscal 2001. During the fiscal year ended June 30, 2002, we recorded a charge of approximately $2.9 million primarily related to severance and fringe benefits associated with the planned reduction of approximately 2,700 employees. Of the planned reduction of approximately 2,700 employees, approximately 2,400 were engaged in manufacturing activities and approximately 800 and 1,900 were from sites located in San Jose, California and China, respectively. As of September 30, 2002, approximately 2,672 employees had been terminated. We expect that the planned worldwide workforce reductions in connection with our initial plans will be substantially completed by the end of the second quarter of fiscal 2003. We are currently planning to incur additional restructuring costs and other special charges beginning in the second quarter of fiscal 2003.

Excess fixed assets, facilities and other special charges

We recorded a restructuring charge of $16.6 million relating to excess fixed assets during the fiscal year ended June 30, 2002. Property and equipment disposed of or removed from operations were related to the manufacture of fiber optic subsystems, integrated modules and components. The excess fixed assets charge represented the charge required to re-measure such assets at the lower of carrying amount or fair value less

cost to sell. The carrying amount of the remaining fixed assets to be disposed of was $1.2 million as of June 30, 2002, and has been included in prepaid expenses and other current assets. While the remaining assets with an original cost of $12.0 million removed from operations as of September 30, 2002 are being actively marketed, we expect the period of disposal to be an additional nine months for most of the assets. The property and equipment disposed of or removed from operations consisted primarily of production and engineering equipment, but also included leasehold improvements, computer equipment, office equipment and furniture and fixtures. In addition, we incurred a charge of $7.5 million for leases primarily related to excess or closed facilities with planned exit dates. We estimated the cost of the facility leases based on the contractual terms of the agreements and then current real estate market conditions. We determined that it would take approximately two years to sublease the various properties that will be vacated, and then subleased at lower values than we are contractually obligated to pay. Amounts related to the lease expense (net of anticipated sublease proceeds) will be paid over the respective lease terms through 2009. The consolidation of excess facilities includes the closure of certain manufacturing and research and development facilities located in San Jose, California and Beijing, Chengdu and Fuzhou, China. The total number of sites closed under the restructuring plan is six. We also recorded other restructuring costs and special charges of $1.9 million relating primarily to payments due to suppliers and vendors to terminate agreements for the purchase of capital equipment and inventory. We are currently planning to incur additional restructuring costs and other special charges beginning in the second quarter of fiscal 2003.

Summary

A summary of the restructuring costs and other special charges is outlined as follows (in thousands):

	Workforce Reduction			Excess Fixed Assets			Consolidation of Excess Facilities And Other Charges			Impairment of Goodwill and Purchased Intangible Assets			Total
Initial restructuring charge in the fourth quarter of fiscal 2001	$	250		$	—		$	5,485		$	12,442		$	18,177
Non-cash charge		—			—			—			(12,442	)		(12,442	)
Cash payments		—			—			(1,191	)		—			(1,191	)

Balance at June 30, 2001		250			—			4,294			—			4,544

Accrued restructuring, current														2,820

Accrued restructuring, non current													$	1,724

Additional restructuring charge in the fourth quarter of fiscal 2002		2,899			16,635			9,374			—			28,908
Non-cash charge		—			(16,260	)		—			—			(16,260	)
Cash payments		(2,269	)		(375	)		(4,869	)		—			(7,513	)

Balance at June 30, 2002	$	880		$	—		$	8,799		$	—		$	9,679

Accrued restructuring, current														4,355

Accrued restructuring, non current													$	5,324

Cash payments		(470	)		—			(768	)		—			(1,238	)

Balance at September 30, 2002	$	410		$	—		$	8,031		$	—		$	8,441

Accrued restructuring, current														3,566

Accrued restructuring, non current													$	4,875

Provision for inventory

We recorded provisions for excess and obsolete inventory totaling $10.4 million and $30.6 million, which was charged to cost of sales during the fiscal years ended June 30, 2002 and June 30, 2001, respectively. These excess inventory charges were due to sudden and material declines in backlog and forecasted revenue. There were no inventory provision charges during the three months ended September 30, 2002. We evaluate the need to provide write downs for excess and obsolete inventory on an individual part analysis based on estimated future sales of our products compared to quantities on hand at each balance sheet date. This analysis is based on specific sales forecasts for each of our products. Information that we would consider in determining the forecast would include contractual obligations to deliver products, purchase orders with delivery dates or management’s knowledge of a specific order that would significantly alter the sales forecast.

Return of property and equipment

As of June 30, 2001, we had accrued accounts payable of $8.6 million associated with the purchase of certain capital equipment from a vendor. In connection with an evaluation of our manufacturing capacity needs, it was determined that this new capital equipment was excess based on current anticipated production levels. During the fiscal year ended June 30, 2002, we negotiated a settlement with the vendor whereby the vendor accepted the return of equipment over several quarters totaling $8.6 million for a settlement fee of $500,000. Accordingly, the change in accounts payable and fixed assets of $(412,000) and $5.4 million in the three months ended September 30, 2002 and September 30, 2001, respectively, is reflected as a non-cash item in the consolidated statement of cash flows.

Merger Fees. In connection with the terminated merger between Oplink and Avanex Corporation, which was not approved at the special meeting of our stockholders held on August 15, 2002, we incurred $1.1 million and $1.8 million in merger fees for the three months ended September 30, 2002 and the fiscal year ended June 30, 2002, respectively.

Interest and Other Income, Net. Interest and other income, net, decreased $549,000 from $1.6 million for the three months ended September 30, 2001 to $1.0 million for the three months ended September 30, 2002. The decrease in interest income was primarily due to lower yields on our cash investments, overall decreased cash balances from the use of cash in the fiscal quarter’s loss in operations, investing outlays for capital purchases, financing outlays relating to repurchase of common stock and repayment of capital lease obligations.

Provision for Income Taxes. We have recorded a gross deferred tax asset of $49.6 million as of September 30, 2002, which is net of a valuation allowance that reduces the gross deferred tax asset to zero, an amount that management believes will more likely than not be realized. In assessing the realizability of deferred tax assets, management recorded a valuation allowance to the extent we do not have a carryback right. Based on our history of losses and uncertainty of generating future taxable income, the realizable portion of the deferred tax assets is equal only to the amount of income tax expense expected to be paid during fiscal 2003, which is zero, and represents the amount that we believe will more likely than not be realizable based on current available objective evidence.

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 and proceeds from exercise of stock options, employee stock purchase plan and warrants, partially offset by common stock repurchases, which totaled approximately $806,000 through September 30, 2002. In August 2000, we received $50.0 million in connection with the issuance to Cisco Systems of a convertible promissory note, which along with the

related accrued interest expense automatically converted into 3,298,773 shares of common stock upon the closing of our initial public offering in October 2000. Our initial public offering resulted in net proceeds of approximately $263.7 million, before offering expenses of approximately $2.7 million. As of September 30, 2002, we had cash, cash equivalents and short-term investments of $220.9 million and working capital of $211.5 million.

Our operating activities used cash of $1.9 million in the three months ended September 30, 2002. Cash used in operating activities was primarily attributable to a net loss incurred during the three months ended September 30, 2002 of $8.7 million and decreases in accrued liabilities and accrued restructuring of $2.0 million. These amounts were partially offset by decreases in accounts receivable of $2.2 million, inventories of $566,000 and prepaid expenses of $707,000, an increase in accounts payable of $1.4 million, depreciation and amortization expense of $3.3 million and non-cash compensation expense of $732,000.

Our investing activities used cash of $11.4 million in the three months ended September 30, 2002 primarily due to the purchases of short-term investments of $16.9 million and property and equipment of $254,000 partially offset by maturities of short-term investments of $5.7 million and proceeds from sales of assets of $36,000. During the remaining nine months of fiscal 2003, we expect to use approximately $3.0 million for the purchase of property and equipment worldwide. We expect to use cash generated from our initial public offering for these expenditures.

Our financing activities used cash of $1.7 million in the three months ended September 30, 2002 primarily due to our repurchase of common stock of $662,000 and repayment of capital lease obligations of $1.0 million.

Our principal source of liquidity at September 30, 2002 consisted of $220.9 million in cash, cash equivalents and short-term investments. We believe that our current cash, cash equivalents and short-term investments balance and any cash generated from operations, will be sufficient to meet our operating and capital requirements for at least the next 12 months. We may use cash, cash equivalents and short-term investments from time to time to fund our acquisition of businesses and technologies. We may be required to raise funds through public or private financings, strategic relationships or other arrangements. We cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed could harm our ability to pursue our business strategy and achieve and maintain profitability.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which was adopted by us on July 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The adoption of SFAS No. 142 did not have a material impact on our financial position, results of operations or cash flows.

Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30’s requirement that discontinued operations be measured at net realizable value or that entities include under “discontinued operations” in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 on July 1, 2002, did not have a material impact on our financial position, results of operations or cash flows.

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

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

We have incurred significant losses since our inception in 1995 and expect to incur losses in the future. We incurred net losses of $8.7 million for the fiscal quarter ended September 30, 2002, and $68.4 million, $80.4 million and $24.9 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. We have not achieved profitability on a quarterly basis. As of September 30, 2002, we had an accumulated deficit of $189.9 million. We will need to generate significantly greater revenues while containing costs and operating expenses to achieve profitability. Our revenues may not grow in future quarters, and we may never generate sufficient revenues to achieve profitability.

WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR REVENUES, AND ANY DECREASE IN REVENUES FROM, OR LOSS OF, THESE CUSTOMERS WITHOUT A CORRESPONDING INCREASE IN REVENUES FROM OTHER CUSTOMERS WOULD HARM OUR OPERATING RESULTS.

We depend upon a small number of customers for a substantial portion of our revenues. Our top ten customers together, although not the same ten customers, accounted for 73%, 73% and 83% of our revenues in the three months ended September 30, 2002, and the fiscal years ended June 30, 2002 and 2001, respectively. Nortel Networks Corporation accounted for revenues greater than 10% in the three months ended September 30, 2002. Siemens AG and Marubun Corporation each accounted for revenues greater than 10% for the fiscal year ended June 30, 2002, and Agere Systems, Inc., Lucent Technologies, Nortel Networks Corporation and Sycamore Networks each accounted for revenues greater than 10% for the fiscal year ended June 30, 2001. Lucent Technologies, Inc., Sycamore Networks, Inc., JDS Uniphase Corporation and Agere Systems Inc., each accounted for revenues greater than 10% for the fiscal year ended June 30, 2000. We expect that we will continue to depend upon a small number of customers, although potentially not the same customers, for a substantial portion of our revenues.

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

OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY FROM QUARTER TO

QUARTER, AND THEREFORE, MAY VARY FROM INVESTORS’ EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DROP.

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

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economic downturn and uncertainty of the fiber optic industry;

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

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

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cancellations of orders and shipment rescheduling;

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

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

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

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our ability to achieve acceptable production yields in China;

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

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

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

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

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costs associated with and the outcomes of any intellectual property or other litigation to which we are, or may become, a party.

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

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

We depend on the continued growth and success of the communications industry, including the continued growth of the Internet as a widely-used medium for commerce and communication and the continuing demand for increased bandwidth over communications networks. As a result of recent unfavorable economic conditions and reduced capital spending in the communications industry, our growth rate may be significantly lower than our historical quarterly growth rate. For example, during the first quarter of fiscal 2003 and the first quarter, second quarter, third quarter and fourth quarter of fiscal 2002, our revenues decreased 21.7% and 50.6%, increased 6.1% and decreased 9.6% and 19.7%, respectively, from the immediately preceding quarters primarily due to the economic downturn in the communications industry.

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

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

BECAUSE A HIGH PERCENTAGE OF OUR EXPENSES IS FIXED IN THE SHORT TERM, OUR OPERATING RESULTS ARE LIKELY TO BE HARMED IF WE EXPERIENCE FURTHER DELAYS IN GENERATING AND RECOGNIZING REVENUES.

A high percentage of our expenses, including those related to manufacturing, engineering, research and development, sales and marketing and general and administrative functions, are fixed in the short term. As a result, if we experience further delays in generating and recognizing revenues, our quarterly operating results are likely to be harmed. For example, during the seven quarters ended September 30, 2002, we experienced such delays. In the third and fourth quarter of fiscal 2001, the first, second, third and fourth quarters of fiscal 2002 and the first quarter of fiscal 2003, our loss from operations was $25.2 million, $29.4 million, $45.0 million, $6.7 million, $8.4 million, $8.2 million and $8.7 million respectively.

As we make investments to improve our manufacturing processes in China, we will incur expenses in one quarter that may not result in off-setting benefits until a subsequent quarter.

New product development and introduction can also result in a mismatching of research and development expenses and sales and marketing expenses that are incurred in one quarter with revenues that are not recognized, if at all, until a subsequent quarter when the new product is introduced and

commercially accepted. If growth in our revenues does not exceed the increase in our expenses, our results of operations will be harmed.

IF WE FAIL TO EFFECTIVELY TRANSITION MANUFACTURING RESOURCES BASED IN THE UNITED STATES TO CHINA OR MONITOR OUR MANUFACTURING CAPABILITY IN CHINA, WE MAY NOT BE ABLE TO DELIVER SUFFICIENT QUANTITIES OF PRODUCTS TO OUR CUSTOMERS IN A TIMELY MANNER, WHICH WOULD HARM OUR OPERATING RESULTS.

As a result of the closure of other facilities in connection with our recent restructuring efforts, we manufacture substantially all of our products in our facilities in Zhuhai, China. These restructuring efforts also include transferring expertise and resources relating to manufacturing, such as production control, logistics, planning and management and quality control, from our United States facilities to our facilities in Zhuhai, China. The quality of our products and our ability to ship products on a timely basis may suffer if we cannot effectively transition the necessary expertise and resources from the United States to China in order to adequately develop our manufacturing capability in China. Moreover, our planned improvement of manufacturing will be expensive, will require management’s time and may disrupt our overall operations. Additional risks associated with improving our manufacturing processes and capability in China include:

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a lack of availability of qualified management and manufacturing personnel;

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difficulties in achieving adequate yields from new manufacturing lines;

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

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our inability to procure the necessary raw materials and equipment.

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

IF WE FAIL TO EFFECTIVELY MANAGE OUR OPERATIONS, INCLUDING ANY REDUCTIONS OR INCREASES IN THE NUMBER OF OUR EMPLOYEES, OUR OPERATING RESULTS COULD BE HARMED.

Primarily as a result of the recent economic downturn and slowdown in capital spending, particularly in the communications industry, we have implemented, any may continue to implement in the future, a number of cost-cutting measures, including reductions in our workforce. The impact of these cost-cutting measures, combined with the challenges of managing our geographically-dispersed operations, has placed, and will continue to place, a significant strain on our management systems and resources. Reductions in our workforce, including reductions in research and development and manufacturing personnel, may weaken our research and development efforts or cause us to have difficulty responding

to sudden increases in customer orders. Moreover, we cannot assure you that our cost-cutting measures will achieve the benefits we project. In addition, our ability to effectively manage our operations will be challenged to the extent that we begin expanding our workforce. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to train and manage our workforce worldwide. Any failure to effectively manage our operations could harm our operating results.

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

Because we experience long lead times for raw materials and are often required to purchase significant amounts of raw materials far in advance of product shipments, we may not effectively manage our inventory levels, which could harm our operating results. For example, for the fiscal years ended June 30, 2002, and June 30, 2001 we recorded a $10.4 million and a $30.6 million, respectively, provision for excess and obsolete inventory due to the downturn in the fiber optics industry. Due in part to such inventory write-offs, our gross margin, excluding non-cash compensation expense, decreased to (27.9%) and 8.3% for the fiscal years ended June 30, 2002 and June 30, 2001, respectively.

If we underestimate our requirements, we may have inadequate inventory, which could result in delays in shipments and loss of customers.

If we purchase raw materials in anticipation of orders that do not materialize, we will have to carry or write off excess inventory and our gross margins will decline. Even if we receive these orders, the additional manufacturing capacity that we add to meet customer requirements may be underutilized in a subsequent quarter. In this regard, we experienced significant increases in provisions for excess and obsolete inventory, which harmed our gross margins, through the fiscal years ended June 30, 2002, and June 30, 2001.

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

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

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

Our failure to obtain these materials or other single or limited-source raw materials could delay or reduce our product shipments, which could result in lost orders, increase our costs, reduce our control

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

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

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

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

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

Several of our existing and potential customers are also current and potential competitors of ours. These companies may develop or acquire additional competitive products or technologies in the future and thereby reduce or cease their purchases from us. In light of the consolidation in the optical networking industry, we also believe that the size of the optical component and module suppliers will become increasingly important to our current and potential customers in the future. Current and potential vendors may also consolidate with our competitors and thereby reduce or cease providing materials and equipment to us. Also, we expect to pursue optical contract manufacturing opportunities in the future.

We may not be able to compete successfully with existing or new competitors, and the competitive pressures we face may result in lower prices for our products, loss of market share, the unavailability of materials and equipment used in our products, or reduced gross margins, any of which could harm our business.

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

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

Substantially all of our manufacturing operations are located in China and are subject to the laws and regulations of China. Our operations in China may be adversely affected by changes in the laws and regulations of China, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. China’s central or local governments may impose new, stricter regulations or interpretations of existing regulations, which would require additional expenditures. China’s economy differs from the economies of many countries in terms of structure, government involvement, specificity and enforcement of governmental regulations, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency and rate of inflation, among others. Our results of operations and financial condition may be harmed by changes in the political, economic or social conditions in China.

In addition, events out of our control in China, such as political unrest, terrorism, war, labor strikes and work stoppages, could disrupt our operations. There currently is political tension between the United States and China, which could lead to a breakdown in trade relations. There is also significant tension between China and Taiwan, which could result in hostilities. Additionally, China continues its condemnation of the United States’ pledge of military support to Taiwan, which could lead to hostilities. If hostilities or other events cause a disruption in our operations, it would be difficult for us to establish manufacturing operations at an alternative location on comparable terms.

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

Our operations in the United States and China also expose us to the following general risks associated with international operations:

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

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difficulties and costs of staffing and managing foreign operations with personnel who have expertise in optical network technology;

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unexpected changes in regulatory or certification requirements for optical systems or networks;

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disruptions in the transportation of our products and other risks related to the infrastructure of foreign countries;

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fluctuations in the value of currencies; and

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economic instability.

To the extent that such disruptions interfere with our commercial activities, our results of operations could be harmed.

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

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

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

Moreover, even though the Renminbi is intended to be freely convertible on current accounts, the State Administration of Foreign Exchange, which is responsible for administering China’s foreign currency market, has a significant degree of administrative discretion in interpreting and implementing foreign exchange control regulations. From time to time, the State Administration of Foreign Exchange has used this discretion in ways that effectively limit the convertibility of current account payments and restrict

remittances out of China. Furthermore, in many circumstances the State Administration of Foreign Exchange must approve foreign currency conversions and remittances. Under the current foreign exchange control system, sufficient foreign currency may not always be available in the future at a given exchange rate to satisfy our currency demands.

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

Our subsidiaries located in China enjoy tax benefits in China that are generally available to foreign investment enterprises, including full exemption from national enterprise income tax for two years starting from the first profit-making year and/or a 50% reduction in national income tax rate for the following three years. If our Chinese subsidiaries are unable to extend their tax benefits, our financial condition and results of operations may be adversely impacted. Our tax holiday expired December 31, 2001, and we are in the first year of a 50% reduction in the national income tax rate. In addition, local enterprise income tax is often waived or reduced during this tax holiday/incentive period. Under current regulations in China, foreign investment enterprises that have been accredited as technologically advanced enterprises are entitled to an additional three year reduction in national income tax by 50%, with a provision that the income tax rate as so reduced may not be lower than 10%. We are currently consolidating our manufacturing operations and intend to substantially move such operations to our Zhuhai Free Trade Zone facility. The tax consequences are not known at this time. If such consolidation causes adverse tax treatment, our financial condition and results of operations may be adversely impacted.

One of our subsidiaries in China has been accredited as a technologically advanced enterprise, one other is applying for such accreditation and we expect that one will apply for such accreditation in the near future, which may or may not be granted to it. As a technologically advanced enterprise, the tax holiday applicable to Zhuhai Oplink will expire at the end of 2007. At the time such tax holiday expires, the tax rate will increase from 7.5% to 15% in respect of Zhuhai Oplink. If, after the expiration of the respective tax holidays, our Chinese subsidiaries export at least 70% (by value) of their annual production, they will be entitled to a 50% reduction in their tax rate, but not below a tax rate of 10% in each year in which they achieve such export ratio. If our Chinese subsidiaries are unable to extend their respective tax holidays by qualifying as export oriented enterprises or becoming accredited as technologically advanced enterprises, our financial condition and results of operations may be adversely impacted.

Additionally, the Chinese government is considering the imposition of a “unified” corporate income tax that would phase out, over time, the preferential tax treatment to which foreign-funded enterprises are currently entitled. While it is not certain whether the government will implement such a unified tax structure or whether, if implemented, we will be grandfathered into the new tax structure, if the new tax structure is implemented, it may adversely affect our financial condition.

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

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

broad spectrum of products, sales of our wavelength expansion products accounted for a majority of our revenues in the three months ended September 30, 2002, and the fiscal years ended June 30, 2002 and 2001. These products include, among others, dense wavelength division multiplexers, or DWDMs. These products accounted for 55%, 66% and 57% of our revenues in the three months ended September 30, 2002, and the fiscal years ended June 30, 2002 and 2001, respectively. Any decline in the price of, or demand for, our wavelength expansion products, or their failure to achieve broader market acceptance, could harm our revenues.

THE OPTICAL NETWORKING COMPONENT INDUSTRY IS EXPERIENCING DECLINING AVERAGE SELLING PRICES, WHICH COULD CAUSE OUR GROSS MARGINS TO DECLINE AND HARM OUR OPERATING RESULTS.

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

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

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

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

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

In addition, as part of our restructuring efforts, we are transferring expertise and resources relating to our manufacturing operations from the United States to China. Each of the risks noted above are exacerbated by this transfer. To the extent we cannot effectively transition the requisite expertise and

resources from the United States to China, our ability to achieve acceptable manufacturing yields in a cost-effective manner may be harmed and our business may suffer.

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

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

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loss of customers;

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loss of or delay in revenues;

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loss of market share;

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damage to our brand and reputation;

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inability to attract new customers or achieve market acceptance;

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diversion of development resources;

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increased service and warranty costs;

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legal actions by our customers; and

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increased insurance costs.

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

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

Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology. We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, the steps we have taken may not prevent the misappropriation of our intellectual property, particularly in foreign countries, such as China, where the laws may not protect our proprietary rights as fully as in the United States. To date, we hold 34 issued patents, have 2 allowed applications awaiting issuance and 36 pending patent applications in the United States. We cannot assure you that patents will be issued from pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented. Rights granted under these patents may not provide us with meaningful protection or any commercial advantage. If we are unable to protect our proprietary technology, our ability to succeed will be harmed. We may in the future initiate claims or litigation against third parties for infringement of our

proprietary rights. These claims could result in costly litigation and the diversion of our technical and management personnel.

WE MAY BE INVOLVED IN INTELLECTUAL PROPERTY DISPUTES IN THE FUTURE, WHICH WILL DIVERT MANAGEMENT’S ATTENTION AND COULD CAUSE US TO INCUR SIGNIFICANT COSTS AND PREVENT US FROM SELLING OR USING THE CHALLENGED TECHNOLOGY.

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

In June 2000, Chorum Technologies, Inc. filed a lawsuit against us and our wholly-owned subsidiary, Telelight Communication Inc., in the United States District Court for the Northern District of Texas alleging, among other things, infringement of two U.S. patents allegedly owned by Chorum relating to fiber optical interleaving, based on our manufacture of and offer to sell various fiber optic interleaver products. On May 7, 2001, the Company filed a lawsuit in the United States District Court for the District of Delaware, alleging, among other matters, that Chorum infringes one of our patents relating to fiber optic couplers based on Chorum’s manufacture of and offer to sell various DWDM products.

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

In the past we have been involved in lawsuits as a result of alleged infringement of others’ intellectual property. Both prosecuting or defending such lawsuits in the future will likely be costly and time consuming and will divert the efforts and attention of our management and technical personnel. Patent litigation is highly complex and can extend for a protracted period of time, which can substantially increase the cost of litigation. Accordingly, the expenses and diversion of resources associated with either of these matters, or any other intellectual property litigation to which we may become a party, could seriously harm our business and financial condition. Any intellectual property litigation also could invalidate our proprietary rights and force us to do one or more of the following:

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

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

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pay substantial money damages; or

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redesign the products that use the technology.

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

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

In November 2001, 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, known as In re Oplink Communications, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the complaint, the plaintiffs allege that the Company, certain of its officers and directors and the underwriters of its initial public offering (“IPO”) violated the federal securities laws because the Company’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Although the individual officers and directors were dismissed without prejudice in October 2002, the continuing action against the Company will likely divert the efforts and attention of our management and, if determined adversely to the Company, could have a material impact on our business.

WE ARE SUBJECT TO NUMEROUS RISKS AS A RESULT OF THE TERMINATION OF THE PROPOSED MERGER WITH AVANEX CORPORATION.

On August 15, 2002, at a special meeting of our stockholders, the proposed merger between Oplink and Avanex Corporation was not approved. We are subject to numerous risks and uncertainties in connection with termination of the merger agreement with Avanex. These risks include, but are not limited to:

•

adverse reactions from customers and suppliers;

•

costs incurred by us related to the proposed merger which must be paid even though the merger was not consummated;

•

potential loss of key personnel;

•

distraction of management from our ongoing business;

•

delay in pursuing, or loss of, other strategic opportunities during the pendency of the proposed merger with Avanex;

•

increased volatility of our stock price and trading volume;

•

the possibility of delisting of our common stock from the Nasdaq National Market;

•

adverse reactions from stockholders; and

•

the possibility of litigation by or on behalf of stockholders or other parties arising out of, or in connection with, the termination of the merger agreement with Avanex and our actions relating to the merger.

If any of these or other risks materialize as a result of the termination of the proposed merger with Avanex, our business may be adversely impacted.

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

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

Our failure to predict market needs accurately or to develop new products or product enhancements in a timely manner will harm market acceptance and sales of our products. In this regard, we are currently developing bandwidth creation products as well as bandwidth management products. If the development of these products or any other future products takes longer than we anticipate, or if we are unable to develop and introduce these products to market, our revenues could suffer and we may not gain market share. Even if we are able to develop and commercially introduce these new products, the new products may not achieve widespread market acceptance.

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

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

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

•

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

•

are free to purchase products from our competitors;

•

are not required to make minimum purchases; and

•

may and do cancel orders that they place with us.

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

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

Historically, a substantial portion of our net revenues in any fiscal period has been derived from orders in backlog. Currently, due to the downturn in the fiber optics industry, we are substantially dependent upon orders we receive and fill on a short-term basis. Our customers can generally cancel, reschedule or delay orders in backlog without obligation to us. As a result, we cannot rely on orders in backlog as a reliable and consistent source of future revenue. If any of our customers did in fact cancel or delay these orders, and we were not able to replace them with new orders for product to be supplied on a short-term basis, our results of operations could be harmed. For example, during the first quarter of fiscal 2003 and the first quarter, second quarter, third quarter and fourth quarter of fiscal 2002, our revenues decreased 21.7% and 50.6%, increased 6.1% and decreased 9.6% and 19.7%, respectively, from the immediately preceding quarters primarily due to the economic downturn in the communications industry.

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

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

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

WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR KEY EMPLOYEES AND HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.

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

Our ability to continue to attract and retain highly-skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly-skilled personnel is intense, especially in the San Francisco Bay area. We may not be successful in attracting, assimilating

or retaining qualified personnel to fulfill our current or future needs. In addition, our management team has experienced significant personnel changes over the past year. A number of members of our management team, including Frederick R. Fromm, formerly Chief Executive Officer and President, Christian A. Lepiane, former Vice President, Worldwide Sales, and Zeynep Hakimoglu, Vice President, Product Line Management, have recently resigned or been terminated in connection with our restructuring efforts. Joseph Y. Liu has recently resumed the position of President and Chief Executive Officer and several other members of our team have assumed expanded roles. If our management team continues to experience high attrition or does not work effectively together, it could seriously harm our business.

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

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

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

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

OUR FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD SUBJECT US TO LIABILITY.

Our failure to comply with a variety of federal, state and local laws and regulations in the United States and China could subject us to criminal, civil and administrative penalties. Our products are subject to U.S. export control laws and regulations that regulate the export of products and disclosure of technical information to foreign countries and citizens. In some instances, these laws and regulations may require licenses for the export of products to, and disclosure of technology in, some countries, including China, and disclosure of technology to foreign citizens. While we have received commodity classifications from the United States Department of Commerce that allow us to export our current products and disclose our current technologies without export licenses, as we develop and commercialize new products and technologies, and as the list of products and technologies subject to U.S. export controls changes, we may be required to obtain export licenses or other approvals with respect to those products and technologies. We cannot predict whether these licenses and approvals will be required and, if so, whether they will be granted. The failure to obtain any required license or approval could harm our business.

We employ a number of foreign nationals in our U.S. operations and as a result we are subject to various laws related to the status of those employees with the Immigration and Naturalization Service. We also ship inventory and other materials to and from our facilities in China and as a result we are subject to various Chinese and U.S. customs-related laws. Given the geographic distance and changing regulations and governmental standards, it can be difficult to monitor and enforce compliance with these Chinese customs laws. In fact, there has been inventory and other materials shipped to and from our facilities in China, which upon arrival of the goods, there was not sufficient documentation to demonstrate the items comply with all local customs regulations. We also send our U.S. employees to China from time to time and for varying durations of time to assist with our Chinese operations. Depending on the durations of such arrangements, we may be required to withhold and pay personal income taxes in respect of the affected U.S. employees directly to the Chinese tax authorities, and the affected U.S. employees may be required to register with various Chinese governmental authorities. Our failure to comply with the forgoing laws or any other laws and regulations could subject us to liability.

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

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

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

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

The optical subsystems, integrated modules and components industry is evolving rapidly and is highly competitive. Accordingly, we have pursued and expect to continue to pursue acquisitions of businesses and technologies, or the establishment of joint venture arrangements, that could expand our business. The negotiation of potential acquisitions or joint ventures, as well as the integration of an acquired or

jointly developed business or technology, could cause diversion of management’s time and other resources or disrupt our operations. Future acquisitions could result in:

•

additional operating expenses without additional revenues;

•

potential dilutive issuances of equity securities;

•

the incurrence of debt and contingent liabilities;

•

amortization of other intangibles;

•

research and development write-offs; and

•

other acquisition-related expenses.

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

RISKS RELATED TO OUR COMMON STOCK

IF WE ARE UNABLE TO MAINTAIN OUR NASDAQ NATIONAL MARKET LISTING, THE LIQUIDITY OF OUR COMMON STOCK WOULD BE SERIOUSLY IMPAIRED AND WE WOULD BECOME SUBJECT TO VARIOUS STATUTORY REQUIREMENTS, WHICH WOULD LIKELY HARM OUR BUSINESS.

On October 17, 2002, we received a determination letter from Nasdaq advising us that our common stock no longer meets the requirements for the continued listing on the Nasdaq National Market. The notification is based on the failure by the Company to maintain a minimum bid price of $1.00 as required by Nasdaq listing maintenance standards set forth in Marketplace Rule 4450(a)(5). The Company has requested a hearing before a Nasdaq Listing Qualifications Panel to review Nasdaq’s determination; however, there can be no assurance that the Listing Qualifications Panel will grant the Company’s request for continued listing.

If our request for continued listing on the Nasdaq National Market is denied by the Listing Qualifications Panel, our common stock may be transferred to the Nasdaq SmallCap Market. Transferring to the Nasdaq SmallCap Market would provide the Company with an additional grace period to satisfy the minimum bid price requirement; however, the Company would nevertheless be subject to certain adverse consequences described below. In addition, in such event we would still be required to satisfy various listing maintenance standards for our common stock to be quoted on the Nasdaq SmallCap Market, including the minimum bid price requirement after expiration of any grace periods. If we fail to meet such standards, our common stock would likely be delisted from the Nasdaq SmallCap Market and trade on the over-the-counter bulletin board, commonly referred to as the “pink sheets.” Such alternatives are generally considered as less efficient markets and could seriously impair the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could materially harm our business.

If we are delisted from the Nasdaq National Market, we will face a variety of legal and other consequences that will likely negatively affect the Company including, without limitation, the following:

•

the state securities law exemptions available to us would be more limited and, as a result, future issuances of our securities may require time-consuming and costly registration statements;

•

due to the application of different securities law exemptions and provisions, we may be required to amend out stock option and stock purchase plans and comply with time-consuming and costly administrative procedures;

•

the coverage of the Company by securities analysts may decrease or cease entirely;

•

we may lose current or potential investors and customers;

•

we may be unable to regain or maintain compliance with the listing requirements of either the Nasdaq SmallCap Market or the Nasdaq National Market; and

•

we may lose our exemption from the provisions of Section 2115 of the California Corporations Code which imposes aspects of California corporate law on certain non-California corporations operating within California. As a result, (i) our Board of Directors would no longer be classified and our stockholders would elect all of our directors at each annual meeting, (ii) our stockholders would be entitled to cumulative voting, and (iii) we would be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters’ rights in connection with certain strategic transactions.

In addition, many companies that face delisting as a result of bid prices below the Nasdaq’s maintenance standards seek to maintain their listings by effecting reverse stock splits. We have filed a definitive proxy statement with the SEC seeking, among other matters, stockholder approval of a proposal that would permit the Board of Directors to effect, at its sole discretion, a reverse split of our Common Stock. However, reverse stock splits do not always result in a sustained share price. We are currently considering the merits of implementing a reverse split (subject to stockholder approval) and will continue to evaluate this option as well as other courses of action in the future.

INSIDERS CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US, WHICH MAY NEGATIVELY AFFECT YOUR INVESTMENT.

Our current executive officers, directors and their affiliates own, in the aggregate, as of November 6, 2002, approximately 27.3% of our outstanding shares. As a result, these persons and/or entities acting together will be able to substantially influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This ability may have the effect of delaying a change in control, which may be favored by our other stockholders.

BECAUSE OF THE EARLY STAGE OF OUR BUSINESS AND THE RAPID CHANGES TAKING PLACE IN THE FIBER OPTICS INDUSTRY, WE EXPECT TO EXPERIENCE SIGNIFICANT VOLATILITY IN OUR STOCK PRICE, WHICH COULD CAUSE YOU TO LOSE ALL OR PART OF YOUR INVESTMENT.

Because of the early stage of our business and the rapid changes taking place in the fiber optics industry, we expect the market price of our common stock to fluctuate significantly. For example, the market price of our common stock has fluctuated from a high sales price of $40.81 to a low sales price of $.57 during the period from October 3, 2000, the date of our initial public offering to September 30,

2002. These fluctuations may occur in response to a number of factors, some of which are beyond our control, including:

•

economic downturn in the fiber optics industry;

•

preannouncement of financial results;

•

quarterly variations in our operating results;

•

changes in financial estimates by securities analysts and our failure to meet any estimates;

•

changes in market values of comparable companies;

•

announcements by us or our competitors of new products or of significant acquisitions, strategic partnerships or joint ventures;

•

any loss by us of a major customer;

•

the outcome of, and costs associated with, any litigation to which we are or may become a party;

•

additions or departures of key management or engineering personnel; and

•

future sales of our common stock.

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

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT ANY CHANGE IN CONTROL, WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT.

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

•

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

•

provide for a classified board of directors;

•

eliminate the right of the stockholders to call a special meeting of stockholders;

•

eliminate the right of stockholders to act by written consent; and

•

impose various procedural and other requirements, which could make it difficult for stockholders to effect certain corporate actions.

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

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

Interest Rate Exposure. The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. As of September 30, 2002, all of our investments were in money market funds, certificates of deposits, municipal bonds or high quality commercial paper with maturities of less than five months from September 30, 2002. Declines in interest rates could have a material impact on interest earnings for our investment portfolio. The following table summarizes our current investment securities:

	Carrying Value at September 30, 2002		Average Rate of Return at September 30, 2002		Carrying Value at June 30, 2002		Average Rate of Return at June 30, 2002
	In thousands				In thousands
Investment Securities:
Cash Equivalents—variable rate		—	—		$	215,208	1.8	%
Cash Equivalents—fixed rate	$	200,993	1.8	%		—	—
Short-term investments—fixed rate		16,938	1.8	%		5,700	1.9	%

	$	217,931			$	220,908

Foreign Currency Exchange Rate Exposure. We operate in the United States, manufacture in China, and substantially all sales to date have been made in U.S. dollars. Accordingly, we currently have no material exposure to foreign currency rate fluctuations.

We expect our international revenues and expenses to be denominated predominately in U.S. dollars. Certain expenses from our Chinese operations are incurred in the Chinese Renminbi. Our Chinese operations will expand in the future and account for a larger portion of our worldwide manufacturing and revenue. We anticipate that we will experience the risks of fluctuating currencies due to this expansion and may choose to engage in currency hedging activities to reduce these risks.

Item 4. Evaluation of Disclosure Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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, known as In re Oplink Communications, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-9904. In the complaint, the plaintiffs allege that the Company, certain of its officers and directors and the underwriters of its initial public offering (“IPO”) violated the federal securities laws because the Company’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same Court against numerous public companies that conducted IPOs of their common stock in the late 1990s (the “IPO Cases”).

On August 8, 2001, the IPO Cases were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among other things, that the time for all defendants to respond to any complaint be postponed until further order of the Court. Thus, we have not been required to answer the complaint, and no discovery has been served on us.

In accordance with Judge Scheindlin’s orders at further status conferences in March and April 2002, the appointed lead plaintiff’s counsel filed amended, consolidated complaints in the IPO Cases on April 19, 2002. Defendants then filed a global motion to dismiss the IPO Cases on July 15, 2002, as to which the Company does not expect a decision until late in calendar 2002. On October 9, 2002, the Court entered an order dismissing the Company’s named officers and directors from the IPO Cases without prejudice, pursuant to an agreement tolling the statute of limitations with respect to these officers and directors until September 30, 2003. The Company believes that this litigation is without merit and intends to defend against it vigorously. This litigation, however, as well as any other litigation that might be instituted, could result in substantial costs and a diversion of management’s attention and resources.

We may be involved in intellectual property disputes in the future, which will divert management’s attention and could cause us to incur significant costs and prevent us from selling or using the challenged technology. Participants in the communications and optical components markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors and academic institutions. We have no means of knowing that a patent application has been filed in the United States until the patent is issued.

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

Item 2. Changes in Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

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

As of September 30, 2002, we had $220.9 million in cash, cash equivalents and short-term investments. All remaining proceeds are invested in cash, cash equivalents, or short-term investments consisting of highly liquid commercial paper, money market funds, government and non-governmental debt securities and certificates of deposit. Consistent with the use of proceeds as discussed in our Registration Statement on Form S-1, the Company has approved a program to repurchase up to an aggregate of $40.0 million of its Common Stock. Such repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. As of September 30, 2002, there were repurchases of $2.6 million under this program. The use of these proceeds does not represent a material change in the use of proceeds described in our public offering prospectus.

Item 3. Defaults Upon Senior Securities

None

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

The Company held a Special Meeting of the Stockholders on August 15, 2002 (the “Special Meeting”). At the Special Meeting, stockholders voted on a proposal to approve and adopt the Agreement and Plan of Reorganization, dated as of March 18, 2002, among Avanex Corporation, Pearl Acquisition Corp., a wholly-owned subsidiary of Avanex Corporation, and Oplink, and to approve the merger of Pearl Acquisition Corp. with and into Oplink, with Oplink surviving the merger and becoming a wholly-owned subsidiary of Avanex (the “Merger”).

A total of 164,877,460 shares were entitled to vote at the Special Meeting, of which 101,387,718 votes were cast. A total of 82,438,731 votes were needed to approve the Merger proposal. The votes were as follows:

For		Against		Abstain
75,723,684		25,500,445		163,589

As a result, the proposal was not approved.

Item 5. Other Information

In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the “Act”), we are required to disclose the non-audit services approved by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. Other than certain information technology consulting projects

currently in progress and related tax services, the Audit Committee has not approved the engagement of PricewaterhouseCoopers LLP for any non-audit services.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1 Separation Agreement dated October 17, 2002, by and between the Company and Frederick Fromm.

99.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On July 25, 2002, the Company filed a Form 8-K under Item 5 announcing a conference call to discuss the proposed merger between the Company and Avanex Corporation.

On August 16, 2002, the Company filed a Form 8-K under Items 5 and 7 announcing the results of its stockholder vote with respect to the proposed merger between the Company and Avanex Corporation.

On August 29, 2002, the Company filed a Form 8-K under Item 5 announcing that the Company had adopted a 10b5-1 plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OPLINK COMMUNICATIONS, INC. (Registrant)

By:		/s/ BRUCE D. HORN
		Bruce D. Horn Chief Financial Officer (Principal Financial and Accounting Officer)

DATE: November 13, 2002

CERTIFICATIONS

I, Joseph Y. Liu, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Oplink Communications, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/S/ JOSEPH Y. LIU

Joseph Y. Liu

Chief Executive Officer

(Principal Executive Officer)

CERTIFICATIONS

(CONTINUED)

I, Bruce D. Horn, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Oplink Communications, Inc.;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 13, 2002

/S/ BRUCE D. HORN

Bruce D. Horn

Chief Financial Officer

(Principal Financial Officer)