OPLINK COMMUNICATIONS INC - 10-Q Quarterly Report

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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 March 31, 2003

¨ 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

incorporation or organization)

(I.R.S. Employer

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 ¨

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

The number of shares of the Registrant’s common stock outstanding as of April 30, 2003 was 156,438,976.

OPLINK COMMUNICATIONS, INC.

FORM 10-Q

INDEX

		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets—March 31, 2003 and June 30, 2002		3

Condensed Consolidated Statements of Operations—Three and nine months ended March 31, 2003 and 2002		4

Condensed Consolidated Statements of Cash Flows—Nine months ended March 31, 2003 and 2002		5

Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures About Market Risk		52

Item 4. Controls and Procedures		52

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		53

Item 2. Changes in Securities and Use of Proceeds		54

Item 3. Defaults Upon Senior Securities		54

Item 4. Submission of Matters to a Vote of Security Holders		54

Item 5. Other Information		54

Item 6. Exhibits and Reports on Form 8-K		55

SIGNATURES		56

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31, 2003			June 30, 2002
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	115,812		$	219,033
Short-term investments		86,650			5,716
Accounts receivable, net		4,764			6,831
Inventories		5,037			6,551
Prepaid expenses and other current assets		2,655			3,571

Total current assets		214,918			241,702
Property, plant and equipment, net		44,787			59,732
Intangible assets		135			500
Other assets		1,085			1,260

Total assets	$	260,925		$	303,194

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,076		$	5,412
Accrued liabilities		10,676			13,316
Current portion of capital lease obligations		2,462			4,291

Total current liabilities		20,214			23,019

Capital lease obligations, non current		209			1,570
Accrued restructuring, non current		1,764			5,324

Total liabilities		22,187			29,913

Commitments and contingencies (Note 14)

Stockholders’ equity:
Common stock		156			165
Additional paid-in capital		459,738			472,393
Treasury stock		(713	)		(1,895	)
Notes receivable from stockholders		(11,286	)		(10,771	)
Deferred stock compensation		(1,803	)		(5,425	)
Accumulated other comprehensive (loss) income		(17	)		26
Accumulated deficit		(207,337	)		(181,212	)

Total stockholders’ equity		238,738			273,281

Total liabilities and stockholders’ equity	$	260,925		$	303,194

(1) The Condensed Consolidated Balance Sheet at June 30, 2002 has been derived from the audited financial statements at that date.

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 March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Revenues	$	5,622		$	9,598		$	16,742		$	30,236
Cost of revenues:
Cost of revenues		5,063			9,244			18,234			41,760
Non-cash compensation (recovery) expense		(39	)		200			(653	)		47

Total cost of revenues		5,024			9,444			17,581			41,807

Gross profit (loss)		598			154			(839	)		(11,571	)

Operating expenses:
Research and development:
Research and development		1,725			3,204			7,380			10,595
Non-cash compensation (recovery) expense		(5	)		352			(178	)		675

Total research and development		1,720			3,556			7,202			11,270

Sales and marketing:
Sales and marketing		595			2,304			3,518			6,394
Non-cash compensation expense (recovery)		84			186			106			(499	)

Total sales and marketing		679			2,490			3,624			5,895

General and administrative:
General and administrative		1,828			1,713			5,387			5,611
Non-cash compensation expense		254			1,035			1,396			2,960

Total general and administrative		2,082			2,748			6,783			8,571

Restructuring costs and other special charges		—			—			9,280			25,643
Merger fees		—			1,425			1,300			1,425
Amortization of intangible assets		15			42			63			126

Total other operating expenses		15			1,467			10,643			27,194

Total operating expenses		4,496			10,261			28,252			52,930

Loss from operations		(3,898	)		(10,107	)		(29,091	)		(64,501	)
Gain on sale or disposal of property and equipment		—			671			—			671
Interest and other income, net		864			1,032			2,966			3,680

Net loss	$	(3,034	)	$	(8,404	)	$	(26,125	)	$	(60,150	)

Basic and diluted net loss per share	$	(0.02	)	$	(0.05	)	$	(0.16	)	$	(0.37	)

Basic and diluted weighted average shares outstanding		158,556			163,735			161,844			162,055

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)

	Nine Months Ended March 31,
	2003			2002
Cash flows from operating activities:
Net loss	$	(26,125	)	$	(60,150	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash restructuring costs and other special charges		6,215			16,260
Depreciation and amortization of property, plant and equipment		9,016			9,702
Amortization of intangible assets		63			126
Amortization of deferred stock compensation		671			3,183
Provision for excess and obsolete inventory		—			10,407
Gain on disposal of property and equipment		—			(671	)
Interest income related to stockholder notes		(540	)		—
Other		(116	)		(723	)
Change in assets and liabilities:
Accounts receivable		2,067			11,121
Inventories		1,514			4,418
Prepaid expenses and other current assets		406			4,665
Other assets		175			—
Accounts payable		1,252			(4,592	)
Accrued liabilities and accrued restructuring		(5,459	)		747

Net cash used in operating activities		(10,861	)		(5,507	)

Cash flows from investing activities:
Purchases of short-term investments		(133,562	)		(70,152	)
Maturities of short-term investments		52,700			64,900
Proceeds from sale of property and equipment		720			2,644
Purchase of property, plant and equipment		(522	)		(7,426	)

Net cash used in investing activities		(80,664	)		(10,034	)

Cash flows from financing activities:
Proceeds from issuance of common stock		173			636
Repurchase of common stock		(8,704	)		(1,895	)
Repayment of notes receivable from stockholders		25			—
Proceeds from borrowings under line of credit		—			1,268
Repayment of borrowings under line of credit		—			(2,416	)
Repayment of capital lease obligations		(3,190	)		(2,894	)

Net cash used in financing activities		(11,696	)		(5,301	)

Net decrease in cash and cash equivalents		(103,221	)		(20,842	)
Cash and cash equivalents, beginning of period		219,033			246,473

Cash and cash equivalents, end of period	$	115,812		$	225,631

(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)

	Nine Months Ended March 31,
	2003			2002
Supplemental disclosures of cash flow information:
Cash paid during the period for interest expense	$	259		$	547

Supplemental non-cash investing and financing activities:
Property and equipment acquired under capital lease	$	—		$	1,252

Forfeiture of common stock option grants	$	(362	)	$	(2,921	)

Recovery/return of property and equipment	$	(412	)	$	9,087

Issuance of common stock in connection with note	$	—		$	6,411

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’s product portfolio includes solutions for next-generation, all-optical Dense Wavelength Division Multiplexing, or DWDM, optical amplification, switching and routing, and monitoring and conditioning applications. Oplink also offers its customers expert Optical Manufacturing Services (OMS) for the production and packaging of highly integrated optical subsystems and turnkey solutions based upon a customer’s specific product design and specification. The Company’s broad line of products and services increases the performance of optical networks and enables optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks. The Company markets its products and services to telecommunications equipment manufacturers worldwide.

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

2. Basis of Presentation. The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. The financial statements presented herein have been prepared by management, without audit by independent accountants who do not express an opinion thereon, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 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 management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at March 31, 2003, the results of its operations for the three and nine-month periods ended March 31, 2003 and 2002 and its cash flows for the nine-month periods ended March 31, 2003 and 2002. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year.

3. Net Loss Per Share. The Company computes net loss per share in accordance with 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 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 March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Numerator:
Net loss	$	(3,034	)	$	(8,404	)	$	(26,125	)	$	(60,150	)

Denominator:
Weighted average shares outstanding		158,556			163,735			161,844			162,055

Net loss per share:
Basic and diluted	$	(0.02	)	$	(0.05	)	$	(0.16	)	$	(0.37	)

Antidilutive securities, including options and warrants, not included in net loss per share calculation		25,446			29,009			25,446			29,009

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

The reconciliation of net loss to comprehensive loss for the three and nine months ended March 31, 2003 and 2002 is as follows (in thousands):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Net loss	$	(3,034	)	$	(8,404	)	$	(26,125	)	$	(60,150	)
Unrealized gain (loss) on investments		22			6			(27	)		43
Change in cumulative translation adjustments		(23	)		(7	)		(16	)		(12	)

Total comprehensive loss	$	(3,035	)	$	(8,405	)	$	(26,168	)	$	(60,119	)

5. Short-Term Investments. The Company’s short-term investments are primarily comprised of money market funds, government and non-government debt securities and commercial paper. Short-term investments represent securities with original maturity of greater than three months and less than one year. Investments are custodied with major financial institutions. Realized gains and losses are recorded using the specific identification method. As of March 31, 2003 and June 30, 2002, all of the Company’s short-term investments were classified as available-for-sale and were recorded on the condensed consolidated balance sheets at fair value. Unrealized gains and losses on these short-term investments are included as a separate component of accumulated other comprehensive income (loss). As of March 31, 2003 and June 30, 2002, unrealized gains and losses were immaterial. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income.

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

	March 31, 2003			June 30, 2002
Inventories:
Raw materials	$	14,939		$	22,849
Work-in-process		6,054			7,732
Finished goods		4,409			6,560

Sub-total		25,402			37,141
Less: Reserves for excess and obsolete inventory		(20,365	)		(30,590	)

Total	$	5,037		$	6,551

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

	March 31, 2003			June 30, 2002
Property, plant and equipment:
Computer equipment and software	$	54,808		$	64,994
Building and leasehold improvements		12,577			14,613
Construction in progress		975			1,955

Sub-total		68,360			81,562
Less: Accumulated depreciation and amortization		(23,573	)		(21,830	)

Total	$	44,787		$	59,732

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

	March 31, 2003		June 30, 2002
Accrued liabilities:
Payroll and related expenses	$	751	$	1,579
Accrued sales commission		1,000		2,002
Accrued warranty		700		1,200
Accrued restructuring costs		5,829		4,355
Other		2,396		4,180

Total	$	10,676	$	13,316

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

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Balance at the beginning of the period	$	800		$	1,709		$	1,200		$	2,045
Accruals for warranties issued during the period		155			296			474			698
Accruals related to pre-existing warranties (including changes in estimates)		(227	)		(218	)		(710	)		(345	)
Settlements made (in cash or in kind) during the period		(28	)		(228	)		(264	)		(839	)

Balance at the end of the period	$	700		$	1,559		$	700		$	1,559

10. Restructuring Costs and Other Special Charges.

Summary of the restructuring charges in fiscal 2001, 2002 and 2003

A summary of the restructuring charges accrued in fiscal 2001, 2002 and 2003 is as follows (in thousands):

	Workforce Reduction			Excess Property and Equipment			Consolidation of Excess Facilities and Other Special 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

Less: 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

Less: 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

Less: accrued restructuring, current														3,566

Accrued restructuring, non current													$	4,875

Additional restructuring charge in the second quarter of fiscal 2003		1,488			6,374			1,117			301			9,280
Non-cash charge		—			(6,374	)		460			(301	)		(6,215	)
Cash payments		(852	)		—			(945	)		—			(1,797	)

Balance at December 31, 2002	$	1,046		$	—		$	8,663		$	—		$	9,709

Less: accrued restructuring, current														7,611

Accrued restructuring, non current													$	2,098

Cash payments		(957	)		—			(1,159	)		—			(2,116	)

Balance at March 31, 2003	$	89		$	—		$	7,504		$	—		$	7,593

Less: accrued restructuring, current														5,829

Accrued restructuring, non current													$	1,764

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 beginning 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, $6.0 million, $5.1 million and ending with $5.6 million in the fiscal quarter ended March 31, 2003. 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, during the nine months ended March 31, 2003, the Company continued to restructure its business and realigned resources to focus on monitoring costs, preserving cash, completing the move of manufacturing operations to China and focusing on core opportunities.

Restructuring costs and other special charges incurred during the nine months ended March 31, 2003

For the nine months ended March 31, 2003, $9.3 million of restructuring costs and other special charges were recorded as operating expenses for worldwide workforce reduction, consolidation of excess property and equipment and facilities and other special charges, all of which were incurred in the quarter ended December 31, 2002. The following paragraphs provide detailed information relating to the restructuring costs and other special charges for the nine months ended March 31, 2003.

Worldwide workforce reduction

During the three months ended December 31, 2002, the Company recorded a charge of approximately $1.5 million primarily related to severance and fringe benefits associated with the planned reduction of approximately 460 employees and voluntary resignation of the Company’s former Chief Executive Officer. Of the $1.5 million charge, approximately $753,000 was severance and fringe benefits associated with the resignation of the Company’s former Chief Executive Officer. Of the planned reduction of approximately 460 employees, approximately 360 employees were engaged in manufacturing activities and approximately 110 employees and 350 employees were from sites located in San Jose, California and China, respectively. As of March 31, 2003, approximately 426 employees have been terminated. The Company expects that the planned worldwide workforce reductions will be substantially completed by the end of the fourth quarter of fiscal 2003.

Excess property and equipment, facilities and other special charges

The Company recorded a restructuring charge of $6.4 million relating to excess property and equipment during the three months ended December 31, 2002. Property and equipment disposed of or removed from operations of $3.0 million were related to the manufacture of fiber optic subsystems, integrated modules and components. The excess property and equipment 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 these property and equipment to be disposed of was $210,000 as of March 31, 2003, and has been included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. Additionally, property and equipment removed from operations of $3.6 million consisted primarily of leasehold improvements associated with the consolidation of excess facilities.

In addition, the Company incurred a charge of $1.6 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 than the Company is contractually obligated to pay. Amounts related to the lease expense (net of anticipated sublease proceeds) as well as projected costs to terminate the lease will be paid over the respective lease terms through 2005. The consolidation of excess facilities includes the closure of certain manufacturing facilities located in San Jose, California and Zhuhai, China. The total number of sites closed under the restructuring plan is three. The Company also recorded a benefit to restructuring costs and other special charges of $486,000 relating primarily to payments due to suppliers and vendors to terminate agreements for the purchase of capital equipment and inventory.

Impairment of goodwill and purchased intangible assets

Due to the decline in current business conditions, the Company abandoned one of its technologies. As a result, the Company recorded a charge of $301,000 during the quarter ended December 31, 2002.

Restructuring costs and other special charges incurred during the years ended June 30, 2002 and 2001

For the year ended June 30, 2002, $28.9 million of restructuring costs and other special charges were recorded 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 the Company completed in April 2000.

The following paragraphs provide detailed information relating to the restructuring costs, other special charges and excess and obsolete inventory charges during the years ended June 30, 2002 and 2001.

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 employees and 1,900 employees were from sites located in San Jose, California and China, respectively. As of March 31, 2003, the planned worldwide workforce reductions in connection with the Company’s initial plans have been substantially completed.

Excess property and equipment, facilities and other special charges

The Company recorded a restructuring charge of $16.6 million relating to excess property and equipment 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 property and equipment 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 property and equipment to be disposed of was $480,000 as of March 31, 2003, and has been included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. While the remaining assets with an original cost of $12.7 million removed from operations as of March 31, 2003 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 than the Company is contractually obligated to pay. Amounts related to the lease expense (net of anticipated sublease proceeds) will be paid over the respective lease

terms through 2005. 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.

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 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 and nine months ended March 31, 2003. 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 $8.6 million of accounts payable 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 property and equipment is reflected as a non-cash item in the Condensed Consolidated Statement of Cash Flows.

11. Pro Forma Disclosure of the Effect of Stock-Based Compensation. The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, in accounting for its employees and director stock options. Under APB No. 25, if the exercise price of a stock option equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company accounts for stock-based compensation for non-employees under the fair value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”.

Although SFAS No. 123 allows APB No. 25 guidelines to be applied in accounting for stock options, the Company is required to disclose pro forma net income (loss) and net income (loss) per share as if they had adopted SFAS No. 123. The following table sets forth the pro forma information as if the provisions of SFAS No. 123 had been applied to account for stock-based compensation (in thousands, except per share data):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Net loss, as reported	$	(3,034	)	$	(8,404	)	$	(26,125	)	$	(60,150	)
Pro forma stock compensation expense computed under the fair value method		(1,066	)		(4,068	)		(5,132	)		(16,416	)

Pro forma net loss	$	(4,100	)	$	(12,472	)	$	(31,257	)	$	(76,566	)

Basic and diluted net loss per share, as reported	$	(0.02	)	$	(0.05	)	$	(0.16	)	$	(0.37	)

Pro forma basic and diluted net loss per share	$	(0.03	)	$	(0.08	)	$	(0.19	)	$	(0.47	)

12. Repurchase of Common Stock. On September 26, 2001, the Company’s Board of Directors authorized a program to repurchase up to an aggregate of $21.2 million of the Company’s common stock. On September 19, 2002, the Company’s Board of Directors approved an increase in the Company’s buyback plan to repurchase up to an aggregate of $40.0 million of the Company’s common stock. Such repurchases may be made from time to time on the open market at prevailing market prices, in negotiated transactions off the market or pursuant to a 10b5-1 plan adopted by the Company. The Company adopted a 10b5-1 plan in August 2002, which allows the Company to repurchase its shares during a period in which the Company is in possession of material non-public information, provided the Company communicated share repurchase instructions to the broker at a time when the Company was not in possession of such material non-public information. As of March 31, 2003, repurchases of an aggregate of $10.6 million have been made under the Company’s repurchase program.

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

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that the adoption of this standard will not have a material impact on its financial statements.

employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods ending after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company’s financial position, results of operations or cash flows.

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

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

In October 2002, the parties agreed to toll the statute of limitations with respect to the Company’s officers and directors until September 30, 2003, and on the basis of this agreement, the Company’s officers and directors were dismissed from the lawsuit without prejudice. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 claims against the Company and almost all of the other Issuers, and granting the motion to dismiss the Section 10(b) claims against the Company without leave to amend. 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.

On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively, “OZ”) sued four individuals and the Company in California Superior Court for the County of Alameda. One of the four individual defendants is Zeynep Hakimoglu, who joined the Company on November 1, 2001 as Vice President of Product Line Management. The other three are unrelated to the Company. Zeynep Hakimoglu’s employment with the Company terminated on December 17, 2002. The complaint alleges trade secret misappropriation and related claims against the four individuals and the Company concerning OZ’s alleged polarization mode dispersion technology. The plaintiffs seek actual damages against the four individuals and the Company in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. The plaintiffs sought a

temporary restraining order in December 2001, which the court denied, and withdrew their preliminary injunction motion against the Company. The Company answered the complaint on January 22, 2002, denying plaintiffs’ claims. The case is in the early stages of discovery and no trial date has been set. The Company believes that this litigation with respect to the Company is without merit and intends to defend itself vigorously.

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

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

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes in this report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, related financial information and audited consolidated financial statements contained in our Form 10-K for the fiscal year ended June 30, 2002 as filed with the Securities and Exchange Commission 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. Our product portfolio includes solutions for next-generation, all-optical Dense Wavelength Division Multiplexing, or DWDM, optical amplification, switching and routing, and monitoring and conditioning applications. We also offer our customers expert Optical Manufacturing Services (OMS) for the production and packaging of highly integrated optical subsystems and turnkey solutions based upon a customer’s specific product design and specification. Our broad line of products and services increases the performance of optical networks and enables optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks. We market our products and services to telecommunications equipment manufacturers worldwide.

REVENUES. 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.

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 trade shows and promotional 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 March 31, 2003, we recorded aggregate deferred stock compensation, net of cancellations due to terminations of employment, of approximately $58.5 million, of which $671,000, $4.7 million, $26.6 million and $12.7 million was expensed during the nine months ended March 31, 2003, and the fiscal years ended June 30, 2002, 2001 and 2000, respectively. This expense has an impact on our net loss, but not on our cash flows. With respect to employee stock-based compensation, we are amortizing the deferred compensation expense over the vesting period, as set forth in FASB Interpretation (“FIN”) No. 28. Under the FIN No. 28 method, each vested tranche of options is accounted for as a separate option grant awarded for services. The compensation expenses are recognized over the period during which the services are provided. Accordingly, this method results in higher compensation expenses being recognized in the earlier vesting periods of an option. Non-employee grants are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and valued using the Black-Scholes model. The deferred compensation expense related to non-employees’ stock option grants is amortized over the vesting period as set forth in FIN No. 28.

Use of Estimates and Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure. On an ongoing basis, we evaluate our estimates, including those related to product returns, accounts receivable, inventories, intangible assets, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other

sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis, and by our Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies, and our procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition and Product Returns

We recognize revenue using the guidance from SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” and 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, whichever 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 reasonably assured. 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 reasonably assured. In addition, we estimate 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. An allowance for doubtful accounts for estimated losses is 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 actualamounts 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 as was the case in the quarters ended June 30, 2002, December 31, 2002 and March 31, 2003. 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 is 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 nine months ended March 31, 2003 and 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 property and equipment and facilities. See “Restructuring Costs and Other Special Charges” below.

Goodwill and Other Identifiable Intangibles

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 performed an initial impairment review of our goodwill in fiscal 2002 and we will perform an annual impairment review thereafter. We did not record any impairment charge due to the adoption of SFAS No. 142. If we determine through the impairment review process that goodwill has been impaired, we would record the impairment charge in our statement of operations.

In addition to the annual impairment review, 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.

Prior to the adoption of SFAS No. 142, when we determined that the carrying value of goodwill and other identified intangibles was not recoverable based upon the existence of one or more of the above indicators of impairment, we measured 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. We recorded a charge of $301,000 during the three months ended December 31, 2002 related to the abandonment of one of our technologies. 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 Telelight acquisition during the fiscal year ended June 30, 2001.

Results of Operations

Revenues. Revenues decreased by $4.0 million, or 41%, from $9.6 million for the three months ended March 31, 2002 to $5.6 million for the three months ended March 31, 2003. Revenues decreased by $13.5 million, or 45%, from $30.2 million for the nine months ended March 31, 2002 to $16.7 million for the nine months ended March 31, 2003. The decreases were primarily due to decreased unit shipments of all our products, including our wavelength expansion products, optical amplification products and optical switching products to 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 in the fourth fiscal quarter ending June 30, 2003.

Gross Profit (Loss). Gross profit increased by $444,000 or 288%, from a gross profit of $154,000 for the three months ended March 31, 2002 to a gross profit of $598,000 for the three months ended March 31, 2003. Gross profit margins were 10.6% and 1.6% for the three months ended March 31, 2003 and 2002, respectively. Gross loss decreased by $10.7 million, or 93%, from a gross loss of $11.6 million for the nine months ended March 31, 2002 to a gross loss of $839,000 for the nine months ended March 31, 2003. Gross loss margins were (5.0%) and (38.3%) for the nine months ended March 31, 2003 and 2002, respectively.

Our gross profit and margin for the three months ended March 31, 2003 was positively impacted by a $39,000 recovery of non-cash compensation expense and the unexpected sale of inventory that had been previously fully reserved of $469,000. Our gross profit and margin for the three months ended March 31, 2002 was negatively impacted by $200,000 of non-cash compensation expense. Our gross loss for the nine months ended March 31, 2003, was positively impacted by a $653,000 recovery of non-cash compensation expense and the unexpected sale of inventory that had been previously fully reserved of $999,000. Our gross loss for the nine months ended March 31, 2002, was negatively impacted by the $10.4 million of excess inventory charge and $47,000 of non-cash compensation expense, partially offset by $2.5 million in revenues for cancellation fees from significant customers.

Our gross margin decreased for the three and nine months ended March 31, 2003 compared to the three and nine months ended March 31, 2002, due to 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, partially offset by cost savings associated with the worldwide workforce reduction and the consolidation of excess facilities and the cost benefits of operating in China. 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 (recovery), decreased $1.8 million, or 52%, from $3.6 million for the three months ended March 31, 2002 to $1.7 million for the three months ended March 31, 2003. Research and development expenses, including non-cash compensation expense (recovery), decreased $4.1 million, or 36%, from $11.3 million for the nine months ended March 31, 2002 to $7.2 million for the nine months ended March 31, 2003. The decreases in research and development expenses were primarily due to cost savings associated with the transition of the research and development function to China, worldwide workforce reduction including the benefit of lower non-cash compensation (recovery) expense 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 finalize the transition of research and development to China. However, the decrease may be smaller in magnitude compared to the prior two quarters of fiscal 2003.

Sales and Marketing. Sales and marketing expenses, including non-cash compensation expense (recovery), decreased $1.8 million, or 73%, from $2.5 million for the three months ended March 31, 2002 to $679,000 for the three months ended March 31, 2003. Sales and marketing expenses, including non-cash compensation expense (recovery), decreased $2.3 million, or 39%, from $5.9 million for the nine months ended March 31, 2002 to $3.6 million for the nine months ended March 31, 2003. The decreases in sales and marketing expenses were primarily due to cost savings associated with the worldwide workforce reduction, lower commissions paid to our internal and external sales representatives associated with decreased revenues, a one time benefit from a change in the estimate of commissions due to external sales representatives in the amount of $297,000 in the quarter ended March 31, 2003 and the consolidation of excess facilities. We expect our sales and marketing expenses to increase in dollar amount for the next fiscal quarter as a result of the one time benefit of $297,000 in the quarter ended March 31, 2003 resulting from a change in the estimate of commissions due to external sales representatives.

General and Administrative. General and administrative expenses, including non-cash compensation expense, decreased $666,000, or 24%, from $2.7 million for the three months ended March 31, 2002 to $2.1 million for the three months ended March 31, 2003. General and administrative expenses, including non-cash compensation expense, decreased $1.8 million, or 21%, from $8.6 million for the nine months ended March 31, 2002 to $6.8 million for the nine months ended March 31, 2003. The decrease in general and administrative expenses was primarily due to cost savings associated with the worldwide workforce reduction including the benefit of lower non-cash compensation expense, partially offset by increased legal costs. 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 March 31, 2003, we recorded an aggregate of $58.5 million in deferred non-cash compensation, net of stock option cancellations. Non-cash compensation expense decreased $1.5 million, or 83%, from $1.8 million for the three months ended March 31, 2002 to $294,000 for the three months ended March 31, 2003. Non-cash compensation expense decreased $2.5 million, or 79%, from $3.2 million for the nine months ended March 31, 2002 to $671,000 for the nine months ended March 31, 2003. The decreases in deferred non-cash compensation were primarily due to a higher rate of stock option cancellations during the three months ended March 31, 2003 as compared to the three months ended March 31, 2002.

Employees. During the three months ended March 31, 2003 we increased our headcount by 21 people, or 3%, as compared to December 31, 2002. During the nine months ended March 31, 2003, we reduced our headcount by 760 people, or 54% of our work force, moved substantially all of our manufacturing operations to China and further reduced our cost structure to respond to significantly lower revenues than we previously anticipated. Additionally, during the three months ended December 31, 2002, we substantially completed our move of a majority of our research and development activities in the United States to China, which is anticipated to result in a lower cost structure. There is no certainty that these programs will be successful to offset the reduced shipments to customers and declining average selling prices. Our visibility continues to be limited with respect to the demand for products and services from telecommunications equipment providers. We expect to continue to evaluate our business on an ongoing basis in light of current and future revenue trends and adjust our cost structure accordingly.

Restructuring Costs and Other Special Charges

Summary of the restructuring charges in fiscal 2001, 2002 and 2003

A summary of the restructuring charges accrued in fiscal 2001, 2002 and 2003 is as follows (in thousands):

	Workforce Reduction			Excess Property and Equipment			Consolidation of Excess Facilities and Other Special 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

Less: 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

Less: 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

Less: accrued restructuring, current														3,566

Accrued restructuring, non current													$	4,875

Additional restructuring charge in the second quarter of fiscal 2003		1,488			6,374			1,117			301			9,280
Non-cash charge		—			(6,374	)		460			(301	)		(6,215	)
Cash payments		(852	)		—			(945	)		—			(1,797	)

Balance at December 31, 2002	$	1,046		$	—		$	8,663		$	—		$	9,709

Less: accrued restructuring, current														7,611

Accrued restructuring, non current													$	2,098

Cash payments		(957	)		—			(1,159	)		—			(2,116	)

Balance at March 31, 2003	$	89		$	—		$	7,504		$	—		$	7,593

Less: accrued restructuring, current														5,829

Accrued restructuring, non current													$	1,764

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 beginning 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, $6.0 million, $5.1 million and ending with $5.6 million in the fiscal quarter ended March 31, 2003. 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, during the quarter ended March 31, 2003, we continued to restructure our business and realigned resources to focus on monitoring costs, preserving cash, completing the move of manufacturing operations to China and focusing on core opportunities.

Restructuring costs and other special charges incurred during the nine months ended March 31, 2003

Worldwide workforce reduction

During the three months ended December 31, 2002, we recorded a charge of approximately $1.5 million primarily related to severance and fringe benefits associated with the planned reduction of approximately 460 employees and voluntary termination of our former Chief Executive Officer. Of the $1.5 million charge, approximately $753,000 was severance and fringe benefits associated with the resignation of our former Chief Executive Officer. Of the planned reduction of approximately 460 employees, approximately 360 employees were engaged in manufacturing activities and approximately 110 employees and 350 employees were from sites located in San Jose, California and China, respectively. As of March 31, 2003, approximately 426 employees have been terminated. We expect that the planned worldwide workforce reductions will be substantially completed by the end of the fourth quarter of fiscal 2003.

Excess property and equipment, facilities and other special charges

We recorded a restructuring charge of $6.4 million relating to excess property and equipment during the three months ended December 31, 2002. Property and equipment disposed of or removed from operations of $3.0 million were related to the manufacture of fiber optic subsystems, integrated modules and components. The excess property and equipment 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 these property and equipment to be disposed of was $210,000 as of March 31, 2003, and has been included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. Additionally, property and equipment removed from operations of $3.6 million consisted primarily of leasehold improvements associated with the consolidation of excess facilities.

In addition, we incurred a charge of $1.6 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) as well as projected costs to terminate the lease will be paid over the respective lease terms through 2005. The consolidation of excess facilities includes the closure of certain manufacturing facilities located in San Jose, California and Zhuhai, China. The total number of sites closed under the restructuring plan is three. We also recorded a benefit to restructuring costs and special charges of $486,000 relating primarily to payments due to suppliers and vendors to terminate agreements for the purchase of capital equipment and inventory.

Impairment of goodwill and purchased intangible assets

Due to the decline in current business conditions, we abandoned one of our technologies. As a result, we recorded a charge of $301,000 during the quarter ended December 31, 2002.

Restructuring costs and other special charges incurred during the years ended June 30, 2002 and 2001

For the year ended June 30, 2002, $28.9 million of restructuring costs and other special charges were recorded 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 years ended June 30, 2002 and 2001.

Worldwide workforce reduction

The worldwide workforce reductions in connection with our initial plans of restructuring 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 March 31, 2003, the planned worldwide workforce reductions in connection with our initial plans have been substantially completed.

Excess property and equipment, facilities and other special charges

We recorded a restructuring charge of $16.6 million relating to excess property and equipment 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 property and equipment 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 property and equipment to be disposed of was $480,000 as of March 31, 2003, and has been included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. While the remaining assets with an original cost of $12.7 million removed from operations as of March 31, 2003 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 2005. 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.

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 and nine months ended March 31, 2003. 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 $8.6 million of accounts payable 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 property and equipment is reflected as a non-cash item in the Condensed Consolidated Statement of Cash Flows.

Merger Fees. In connection with the terminated merger between us and Avanex Corporation, which was not approved at the special meeting of our stockholders held on August 15, 2002, we incurred $1.3 million and $1.8 million in merger fees for the nine months ended March 31, 2003 and the fiscal year ended June 30, 2002, respectively.

Interest and Other Income, Net. Interest and other income, net, declined to $864,000 for the three months ended March 31, 2003 from $1.0 million for the three months ended March 31, 2002. Interest and other income, net, decreased $714,000 from $3.7 million for the nine months ended March 31, 2002 to $3.0 million for the nine months ended March 31, 2003. The decrease in interest income was primarily due to lower yields on our cash investments, overall decreased cash balances from the use of cash in the fiscal quarters’ loss from operations, investing outlays for capital purchases and 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 March 31, 2003, which net of a valuation allowance reduces the net deferred tax asset to zero, an amount that management believes will more likely than not be realized. In assessing the realizability of deferred tax assets, management recorded a valuation allowance to the extent we do not have a carryback right. Based on our history of losses and uncertainty of generating future taxable income, the realizable portion of the deferred tax assets is equal only to the amount of income tax expense expected to be paid during fiscal 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, offset by $7.1 million common stock repurchases, net of proceeds from exercise of stock options, employee stock purchase plan and warrants through March 31, 2003. In August 2000, we received $50.0 million in connection with the issuance to Cisco Systems of a convertible promissory note, which along with the related accrued interest expense automatically converted into 3,298,773 shares of common stock upon the closing of our initial public offering in October 2000. Our initial public offering resulted in net proceeds of approximately $263.7 million, before offering expenses of approximately $2.7 million. As of March 31, 2003, we had cash, cash equivalents and short-term investments of $202.5 million and working capital of $194.7 million.

Our operating activities used cash of $10.9 million in the nine months ended March 31, 2003. Cash used in operating activities was primarily attributable to a net loss incurred during the nine months ended March 31, 2003 of $26.1 million, decreases in accrued liabilities and accrued restructuring of $5.5 million and an increase in other of $75,000. These amounts were partially offset by decreases in accounts receivable of $2.1 million and inventories of $1.5 million, an increase in accounts payable of $1.3 million, non-cash restructuring costs and other special charges of $6.2 million, depreciation and amortization expense of $9.1 million and non-cash compensation expense of $671,000.

Our investing activities used cash of $80.7 million in the nine months ended March 31, 2003 primarily due to the purchases of short-term investments of $133.6 million and property and equipment of $522,000 partially offset by maturities of short-term investments of $52.7 million and proceeds from sales of property and equipment of $720,000. During the remaining three months of fiscal 2003, we expect to use approximately $200,000 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 $11.7 million in the nine months ended March 31, 2003 primarily due to our repurchase of common stock of $8.7 million and repayment of capital lease obligations of $3.2 million. These amounts were partially offset by proceeds from issuance of common stock of $173,000 and repayment of notes receivable from stockholders of $25,000.

Our principal source of liquidity at March 31, 2003 consisted of $202.5 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.

Contractual Obligations

Our contractual obligations as of March 31, 2003 have been summarized below (in thousands):

	Contractual Obligations Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years	After 5 years
Capital lease obligations	$	2,770	$	2,556	$	214	$ —	$	—
Operating leases		8,167		5,741		2,426	—		—
Purchase obligations		1,059		1,059		—	—		—

Total	$	11,996	$	9,356	$	2,640	$ —	$	—

Recent Accounting Pronouncements

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

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of this standard will not have a material impact on our financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods ending after December 15, 2002. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.

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

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 $3.0 million, $14.4 million and $8.7 million for the quarters ended March 31, 2003, December 31, 2002 and September 30, 2002, respectively, 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 or annual basis. As of March 31, 2003, we had an accumulated deficit of $207.3 million. We will need to generate significantly greater revenues while containing costs and operating expenses to achieve profitability. Our revenues may not grow in future quarters, and we may never generate sufficient revenues to achieve profitability.

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

We depend upon a small number of customers for a substantial portion of our revenues. Our top ten customers together, although not the same ten customers, accounted for 75%, 73% and 83% of our revenues in the nine months ended March 31, 2003 and the fiscal years ended June 30, 2002 and 2001, respectively. Adva AG Optical Networking, Nortel Networks Corporation and Marubun Corporation each accounted for revenues greater than 10% in the three months ended March 31, 2003. Nortel Networks Corporation and Adva AG Optical Networking each accounted for revenues greater than 10% in the nine months ended March 31, 2003. 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. 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:

economic downturn and uncertainty of the fiber optic industry;

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

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

cancellations of orders and shipment rescheduling;

our ability to achieve acceptable production yields in China;

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

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

our ability to achieve acceptable production yields in China;

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

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

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

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

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

Due to the factors noted above and other risks discussed in this section, we believe that quarter-to-quarter comparisons of our operating results will not be meaningful. Moreover, if we experience

difficulties in any of these areas, our operating results could be significantly and adversely affected and our stock price could decline. Also, it is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors, which could cause our stock price to fall.

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

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

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

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

BECAUSE A HIGH PERCENTAGE OF OUR EXPENSES IS FIXED IN THE SHORT TERM, OUR OPERATING RESULTS ARE LIKELY TO BE HARMED IF WE 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, is 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 five quarters ended March 31, 2003, we experienced such delays. In the third and fourth quarters of fiscal 2002 and the first, second and third quarters of fiscal 2003, our loss from operations was $8.4 million, $8.2 million, $8.7 million, $14.4 million and $3.0 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.

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, Chorum Technologies, Inc., 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.

IF WE FAIL TO EFFECTIVELY TRANSITION MANUFACTURING RESOURCES CURRENTLY 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:

a lack of availability of qualified management and manufacturing personnel;

difficulties in achieving adequate yields from new manufacturing lines;

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

our inability to procure the necessary raw materials and equipment.

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

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

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

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

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. If we underestimate our requirements, we may have inadequate inventory, which could result in delays in shipments and loss of customers. On the other hand, if we purchase raw materials in anticipation of orders that do not materialize, we will have to carry or write off excess inventory and our gross margins will decline. For example, for the fiscal years ended June 30, 2002 and June 30, 2001, our gross margin was negatively impacted by a provision of $10.4 million and $30.6 million, respectively, for excess and obsolete inventory due to the downturn in the fiber optics industry. In addition, any difficulty managing our inventory levels may cause us to poorly utilize our manufacturing capacity and further harm our operating efficiency

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

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

Substantially all of our manufacturing operations are located in China and are subject to the laws and regulations of China. Our operations in China may be adversely affected by changes in the laws and regulations of China, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. China’s central or local governments may impose new, stricter regulations or interpretations of existing regulations, which would require

additional expenditures. China’s economy differs from the economies of many countries in terms of structure, government involvement, specificity and enforcement of governmental regulations, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency and rate of inflation, among others. Our results of operations and financial condition may be harmed by changes in the political, economic or social conditions in China.

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

The recent outbreak of severe acute respiratory syndrome, or SARS, that began in China, Hong Kong, Singapore and Vietnam may have a negative impact on our operations. Risks related to the outbreak of SARS include, but are not limited to, temporary closure of one or more of our facilities in China which would reduce our manufacturing capability and disrupt our research and development efforts located at our China facilities. The outbreak of SARS has increased political and social tension which may affect the China economy and international economy more generally and result in reduced sales in our international retail channels and increase our supply chain costs. If the number of cases continues to rise or spread to other areas such as the locations of our facilities in China, or if any of our employees possibly becomes infected with SARS, our operating results could be harmed.

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

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

Our failure to obtain these materials or other single or limited-source raw materials could delay or reduce our product shipments, which could result in lost orders, increase our costs, reduce our control over quality and delivery schedules and require us to redesign our products. Some of our raw material suppliers are single sources, and finding alternative sources may involve significant expense and delay, if these sources can be found at all. For example, all of our GRIN lenses, which are incorporated into substantially all of our products, are obtained from Nippon Sheet Glass, the dominant supplier worldwide of GRIN lenses. If a significant supplier became unable or unwilling to continue to manufacture or ship materials in required volumes, we would have to identify and qualify an acceptable replacement. A material delay or reduction in shipments, any need to identify and qualify replacement

suppliers or any significant increase in our need for raw materials that cannot be met on acceptable terms could harm our business. In addition, due to the severe downturn in the optical and communications industries, manufacturers and vendors that we rely upon for raw materials may scale back their operations or cease to do business entirely as a result of financial hardship or other reasons. Delays in the delivery of raw materials, increases in the cost of the raw materials or the unavailability of the raw materials could harm our operating results.

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

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

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

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

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

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

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

fluctuations in the value of currencies; and

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 Chinese subsidiaries to obtain and remit sufficient foreign currency to pay dividends to us, or otherwise satisfy their foreign currency denominated obligations, such as payments to us for components which we export to them and for technology licensing fees. Such

shortages may also cause us to experience difficulties in completing the administrative procedures necessary to obtain and remit needed foreign currency. Under the current foreign exchange control system sufficient foreign currency is presently available for our Chinese subsidiaries to purchase imported components or to repatriate profits to us, but as demands on China’s foreign currency reserves increase over time to meet its commitments, sufficient foreign currency may not be available to satisfy China’s currency needs.

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

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

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

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

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 nine months ended March 31, 2003 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 67%, 66% and 57% of our revenues in the nine months ended March 31, 2003 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 have transferred expertise and resources relating to our manufacturing operations from the United States to China. Each of the risks noted above is exacerbated by this transfer. To the extent we cannot effectively transition the requisite expertise and resources from the United States to China and effective utilize such expertise and resources in 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:

loss of customers;

loss of or delay in revenues;

loss of market share;

damage to our brand and reputation;

inability to attract new customers or achieve market acceptance;

diversion of development resources;

increased service and warranty costs;

legal actions by our customers; and

increased insurance costs.

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

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

Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology. We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, the steps we have taken may not prevent the misappropriation of our intellectual property, particularly in foreign countries, such as China, where the laws may not protect our proprietary rights as fully as in the United States. To date, we hold 38 issued patents, have 8 allowed applications awaiting issuance and 28 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, we filed a lawsuit in the United States District Court for the District of Delaware, alleging, among other matters, that Chorum infringes one of our patents relating to fiber optic couplers based on Chorum’s manufacture of and offer to sell various DWDM products.

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

From time to time we may be involved in lawsuits as a result of alleged infringement of others’ intellectual property. For example, we are currently subject to a lawsuit filed by Oz Optics Limited et al. alleging trade secret misappropriation and other related claims. The plaintiffs seek actual damages against four individuals, including our former Vice President of Product Line Management, Zeynep Hakimoglu, and three other unrelated individuals, and us in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief. Although we believe the claims against us are without merit and we intend to defend

ourselves against such claims vigorously, we cannot assure you that this litigation will be resolved in our favor or without substantial cost or diversion of the attention of our management and key technical personnel.

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

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

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

pay substantial money damages; or

redesign the products that use the technology.

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

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

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

In October 2002, the parties agreed to toll the statute of limitations with respect to our officers and directors until September 30, 2003, and on the basis of this agreement, our officers and directors were dismissed from the lawsuit without prejudice. In February 2003, the court issued a decision denying the motion to dismiss the Section 11 claims against us and almost all of the other Issuers, and granting the motion to dismiss the Section 10(b) claims against us without leave to amend. We believe 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, and, if determined adversely to us, could have a material impact on our business.

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

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

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

In addition, we 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.

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

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

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

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 and may continue to experience changes in the future. A number of members of our management team, including Frederick R. Fromm, formerly Chief Executive Officer and President, Christian A. Lepiane, formerly Vice President, Worldwide Sales, Zeynep Hakimoglu, formerly Vice President, Product Line Management, and Linda Reddick, formerly Vice President and Controller, have recently resigned or been terminated in connection with our restructuring efforts. Joseph Y. Liu has recently resumed the position of President and Chief Executive Officer and several other members of our team have assumed expanded roles. If our management team continues to experience high attrition or does not work effectively together, it could substantially harm our business.

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

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

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

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 Bureau of Citizenship and Immigration Services. 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 Chinese customs laws. In fact, there has been inventory and other materials shipped to and from our facilities in China for which, upon arrival of the goods, there was not sufficient documentation to demonstrate the items comply with all local customs regulations. 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 COMPONENTS 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 has required and will continue to require a significant commitment of resources. Furthermore, we may continue to incur significant operating losses if the market for optical 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 IS HIGHLY COMPETITIVE, OUR STRATEGY INVOLVES ACQUIRING OTHER BUSINESSES AND TECHNOLOGIES TO GROW OUR BUSINESS. IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES OR TECHNOLOGIES, OUR OPERATING RESULTS MAY BE HARMED.

The optical 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 us to maintain a minimum bid price of $1.00 as required by Nasdaq listing maintenance standards set forth in Marketplace Rule 4450(a)(5). On December 5, 2002, we had a hearing before a Nasdaq Listing Qualifications Panel to review Nasdaq’s determination. On February 7, 2003, we received a letter from the Listing Qualifications Panel informing us that the panel extended the grace period for compliance with the minimum bid price requirement until April 7, 2003. We received an additional letter from the Listing Qualifications Panel on March 27, 2003, informing us that the panel has further extended our grace period until June 25, 2003.

If we are unable to meet the applicable listing maintenance standards, which include a minimum bid price of at least $1.00 per share for at least 10 consecutive trading days, by June 25, 2003, our common stock may be transferred to The Nasdaq SmallCap Market. Transferring to The Nasdaq SmallCap Market would provide us with an additional grace period to satisfy the minimum bid price requirement; however, we 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 Stock 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 us including, without limitation, the following:

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

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

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

we may lose current or potential investors and customers;

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

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

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. Our stockholders approved a proposal to permit the Board of Directors to effect, at its sole discretion, a reverse split of our common stock at any time prior to our next annual stockholders’ meeting. Reverse stock splits, however, do not always result in a sustained share price increase. We are currently considering the merits of implementing a reverse split 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 April 30, 2003, approximately 29.0% of our outstanding shares. As a result, these persons and/or entities acting together will be able to substantially influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This ability may have the effect of delaying a change in control, which may be favored by our other stockholders.

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

Because of the early stage of our business and the rapid changes taking place in the fiber optics industry, we expect the market price of our common stock to fluctuate significantly. For example, the market price of our common stock has fluctuated from a high sales price of $40.81 to a low sales price of $0.53 during the period from October 3, 2000, the date of our initial public offering to March 31, 2003. These fluctuations may occur in response to a number of factors, some of which are beyond our control, including:

economic downturn in the fiber optics industry;

preannouncement of financial results;

quarterly variations in our operating results;

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

changes in market values of comparable companies;

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

any loss by us of a major customer;

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

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 March 31, 2003, all of our investments were in money market funds, certificates of deposits, municipal bonds or high quality commercial paper with maturities of less than six months from March 31, 2003. Declines in interest rates could have a material impact on interest earnings for our investment portfolio. The following table summarizes our current investment securities:

	Carrying Value at March 31, 2003		Average Rate of Return at March 31, 2003		Carrying Value at June 30, 2002		Average Rate of Return at June 30, 2002
	In thousands				In thousands
Investment Securities:
Cash Equivalents—variable rate		93,661	1.3	%		215,208	1.8	%
Cash Equivalents—fixed rate		18,812	1.3	%		—	—
Short-term investments—variable rate		63,901	1.3	%		—	—
Short-term investments—fixed rate		22,749	1.4	%		5,700	1.9	%

	$	199,123			$	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. 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, subject to the limitations on the effectiveness of the controls as described below, 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. Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls, internal controls and related procedures will necessarily prevent all error and all fraud. A control system, no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the control system are met. Any control system will reflect inevitable limitations, such as resource constraints, a cost-benefit analysis based on the level of benefit of additional controls relative to their costs, assumptions about the likelihood of future events and human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On December 17, 2001, OZ Optics Limited, OZ Optics, Inc. and Bitmath, Inc. (collectively, “OZ”) sued four individuals and us in California Superior Court for the County of Alameda. One of the four individual defendants is Zeynep Hakimoglu, who joined us on November 1, 2001 as Vice President of Product Line Management. The other three are unrelated to us. Zeynep Hakimoglu’s employment with us terminated on December 17, 2002. The complaint alleges trade secret misappropriation and related claims against the four individuals and us concerning OZ’s alleged polarization mode dispersion technology. The plaintiffs seek actual damages against the four individuals and us in the amounts of approximately $17,550,000 and $1,500,000, respectively, and enhanced damages, injunctive relief, costs and attorney fees, and other relief.

The plaintiffs sought a temporary restraining order in December 2001, which the court denied, and withdrew their preliminary injunction motion against us. We answered the complaint on January 22, 2002, denying plaintiffs’ claims. The case is in the early stages of discovery and no trial date has been set. We believe that this litigation with respect to us is without merit and intend to defend ourselves against it vigorously.

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

Item 2. Changes in Securities and Use of Proceeds

(a)

Not applicable

(b)

Not applicable

(c)

Not applicable

(d)

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

As of March 31, 2003, we had $202.5 million in cash, cash equivalents and short-term investments. All remaining proceeds are invested in cash, cash equivalents, or short-term investments consisting of highly liquid commercial paper, money market funds, government and non-governmental debt securities and certificates of deposit. Consistent with the use of proceeds as discussed in our Registration Statement on Form S-1, we have approved a program to repurchase up to an aggregate of $40.0 million of our common stock. Such repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market or pursuant to a 10b5-1 plan adopted by us. As of March 31, 2003, there were repurchases of an aggregate of $10.6 million under our repurchase program. The use of these proceeds does not represent a material change in the use of proceeds described in our public offering prospectus.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the “Act”), we are required to disclose the non-audit services approved

by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. Other than certain tax services, our Audit Committee has not approved the engagement of PricewaterhouseCoopers LLP for any non-audit services.

On February 7, 2003, we received a letter from the Nasdaq Listing Qualifications Panel informing us that the panel had extended the grace period for compliance with the minimum bid price requirement until April 7, 2003. We received an additional letter from the Listing Qualifications Panel on March 27, 2003, informing us that the panel has further extended our grace period until June 25, 2003. If we are unable to meet the applicable listing maintenance standards, which include a maintaining a minimum bid price of at least $1.00 per share for at least 10 consecutive trading days, by June 25, 2003, our common stock may be transferred to The Nasdaq SmallCap Market or begin trading on the over-the-counter bulletin board. In addition, on March 18, 2003, Nasdaq announced certain proposed modifications to the continued listing requirements. If such modifications are approved, we may be eligible for an additional extension of the grace period for compliance with the minimum bid price requirement.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

Exhibit No.		Description
3.1(1)		Amended and Restated Certificate of Incorporation of the Registrant.
3.2(1)		Bylaws of the Registrant.
10.1		Amended and Restated Executive Corporate Event Agreement, dated February 20, 2003, by and between the Registrant and Bruce Horn.
10.2		Executive Corporate Event Agreement, dated February 20, 2003, by and between the Registrant and Yanfeng Yang.
10.3		Executive Corporate Event Agreement, dated February 24, 2003, by and between the Registrant and River Gong.
10.4		Executive Corporate Event Agreement, dated March 21, 2003, by and between the Registrant and Joseph Y. Liu.
99.1		Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Registrant’s Registration Statement on Form S-1/A, No. 333-41506, as filed on October 3, 2000.

(b)

Reports on Form 8-K

None.

SIGNATURES

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

OPLINK COMMUNICATIONS, INC.

(Registrant)

DATE: May 13, 2003 By: /s/ Bruce D. Horn

Bruce D. Horn

Chief Financial Officer

(Principal Financial and Accounting Officer)

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: May 13, 2003

/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: May 13, 2003

/s/ Bruce D. Horn

Bruce D. Horn

Chief Financial Officer