OPLINK COMMUNICATIONS INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - OPLINK COMMUNICATIONS INC	ex32-2.htm
EX-32.1 - EX-32.1 - OPLINK COMMUNICATIONS INC	ex32-1.htm
EX-31.2 - EX-31.2 - OPLINK COMMUNICATIONS INC	ex31-2.htm
EX-31.1 - EX-31.1 - OPLINK COMMUNICATIONS INC	ex31-1.htm
EX-10.12 - EX-10.12 - OPLINK COMMUNICATIONS INC	ex10-12.htm
EX-10.13 - EX-10.13 - OPLINK COMMUNICATIONS INC	ex10-13.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended January 2, 2011

	or

£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from __________ to __________

Commission file number 000-31581

OPLINK COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

No. 77-0411346

(I.R.S. Employer

Identification No.)

46335 Landing Parkway, Fremont, CA 94538

(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £

Accelerated filer R

Non-accelerated filer £

Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

The number of shares of the Registrant’s common stock outstanding as of January 31, 2011 was 19,922,641 .

Table of Contents

OPLINK COMMUNICATIONS, INC.


TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets – December 31, 2010 and June 30, 2010	3
	Condensed Consolidated Statements of Operations – Three and six months ended December 31, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows – Six months ended December 31, 2010 and 2009	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	(Removed and Reserved)	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
SIGNATURES		35
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-10.12
EX-10.13

NOTE: The registrant’s fiscal year ends on the Sunday closest to June 30 and each of its fiscal quarters ends on the Sunday closest to the calendar quarter end. For ease of presentation, throughout this report the registrant refers to its fiscal years as ending on June 30 and to its fiscal quarters as ending on the calendar quarter end. For example, the registrant’s most recently completed fiscal year ended on Sunday, June 27, 2010 and its most recently completed fiscal quarter ended on Sunday, January 2, 2011, but throughout this report those periods will be referred to as having ended on June 30, 2010 and December 31, 2010, respectively.

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PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	December 31,			June 30,
	2010			2010 (1)
	(In thousands, except share
	and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	68,713		$	40,711
Short-term investments		99,295			109,632
Accounts receivable, net		39,833			29,728
Inventories		26,007			20,902
Prepaid expenses and other current assets		5,983			7,659
Total current assets		239,831			208,632
Long-term investments		-			10,000
Property, plant and equipment, net		35,342			33,363
Goodwill and intangible assets, net		4,900			6,952
Other assets		675			651
Total assets	$	280,748		$	259,598

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	13,774		$	14,369
Accrued liabilities		11,818			11,536
Deferred revenues		1,213			-
Income taxes payable		976			121
Total current liabilities		27,781			26,026
Income taxes payable, non-current		3,999			3,415
Other non-current liabilities		1,625			1,508
Total liabilities		33,405			30,949

Commitments and contingencies (Note 16)

Stockholders' equity:
Common stock, $0.001 par value, 34,000,000 shares authorized; 19,620,129 and 19,582,471 shares
issued and outstanding as of December 31, 2010 and June 30, 2010, respectively		20			20
Additional paid-in capital		445,033			443,825
Treasury stock, at cost (82,514 shares as of June 30, 2010)		-			(1,196	)
Accumulated other comprehensive income		10,465			8,243
Accumulated deficit		(208,175	)		(222,243	)
Total stockholders’ equity		247,343			228,649
Total liabilities and stockholders' equity	$	280,748		$	259,598

(1)	The condensed consolidated balance sheet at June 30, 2010 has been derived from the audited consolidated financial statements at that date.

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

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OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
	(In thousands, except per share data)

Revenues	$	52,025		$	32,743		$	101,665		$	66,308
Cost of revenues:
Cost of revenues		32,814			21,643			66,216			45,277
Stock-based compensation expense		102			88			219			187
Total cost of revenues		32,916			21,731			66,435			45,464

Gross profit		19,109			11,012			35,230			20,844

Operating expenses:
Research and development:
Research and development		3,992			2,268			7,391			4,493
Stock-based compensation expense		315			245			649			514
Total research and development		4,307			2,513			8,040			5,007

Sales and marketing:
Sales and marketing		2,482			1,923			4,940			4,009
Stock-based compensation expense		442			361			871			689
Total sales and marketing		2,924			2,284			5,811			4,698

General and administrative:
General and administrative		1,895			1,810			3,763			3,531
Stock-based compensation expense		370			914			1,148			1,864
Total general and administrative		2,265			2,724			4,911			5,395

Amortization of intangible assets		451			403			902			807
Total operating expenses		9,947			7,924			19,664			15,907

Income from operations		9,162			3,088			15,566			4,937
Interest and other income, net		54			193			111			467
Gain on sale or disposal of assets		83			214			83			338
Income before provision for income taxes		9,299			3,495			15,760			5,742
Provision for income taxes		(811	)		(358	)		(1,692	)		(796	)
Net income	$	8,488		$	3,137		$	14,068		$	4,946

Net income per share:
Basic	$	0.43		$	0.15		$	0.72		$	0.24
Diluted	$	0.41		$	0.14		$	0.69		$	0.23

Shares used in per share calculation:
Basic		19,556			20,797			19,441			20,686
Diluted		20,602			21,694			20,463			21,452

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

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OPLINK COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	December 31,
	2010			2009
	(In thousands)
Cash flows from operating activities:
Net income	$	14,068		$	4,946
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment		2,709			3,341
Amortization of intangible assets		2,052			1,891
Stock-based compensation expense		2,887			3,254
Amortization of premium on investments		236			131
Gain on sale or disposal of assets		(83	)		(338	)
Other		239			(18	)
Change in assets and liabilities:
Accounts receivable, net		(9,767	)		3,654
Inventories		(4,346	)		(286	)
Prepaid expenses and other current assets		1,788			(1,333	)
Other assets		4			14
Accounts payable		(58	)		2,037
Accrued liabilities and other liabilities		3,240			317
Net cash provided by operating activities		12,969			17,610

Cash flows from investing activities:
Purchases of available-for-sale investments		(70,370	)		(106,834	)
Maturities of available-for-sale investments		80,678			99,762
Purchases of held-to-maturity investments		-			(10,000	)
Maturities of held-to-maturity investments		10,000			5,000
Proceeds from sales of property, plant and equipment		183			278
Purchases of property, plant and equipment		(3,985	)		(1,129	)
Net cash provided by (used in) investing activities		16,506			(12,923	)

Cash flows from financing activities:
Proceeds from issuance of common stock		4,855			3,406
Repurchases of common stock		(6,534	)		-
Net cash (used in) provided by financing activities		(1,679	)		3,406

Effect of exchange rate changes on cash and cash equivalents		206			20
Net increase in cash and cash equivalents		28,002			8,113
Cash and cash equivalents, beginning of period		40,711			49,702
Cash and cash equivalents, end of period	$	68,713		$	57,815

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

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OPLINK COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business. Oplink Communications, Inc. (“Oplink” or the “Company”) was incorporated in California in September 1995 and was later reincorporated in Delaware in September 2000. The Company is headquartered in Fremont, California and has manufacturing, design and research and development facilities in Zhuhai, Shanghai and Wuhan, China, in Taiwan and in Woodland Hills, California.

Oplink designs, manufactures and sells optical networking components and subsystems. Its products expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, ensure signal connectivity and provide signal transmission and reception within an optical network. Its products enable greater and higher quality bandwidth over longer distances, which reduces network congestion and transmission cost per bit. Its products also enable optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks.

Oplink offers its customers design, integration and optical manufacturing solutions (“OMS”) for the production and packaging of highly-integrated optical subsystems and turnkey solutions, based upon a customer’s specific product design and specifications. Oplink also offers solutions with lower levels of component integration for customers that place more value on flexibility than would be provided with turnkey solutions.

Oplink’s product portfolio also includes optical transmission products that broaden the addressable markets as well as the range of solutions that Oplink can now offer its customers. Oplink’s transmission products consist of a comprehensive line of high-performance fiber optic modules, including fiber optic transmitters, receivers, transceivers, and transponders, primarily for use in metropolitan area network (“MAN”), local area network (“LAN”), and fiber-to-the-home (“FTTH”) applications. Fiber optic modules are pre-assembled components that are used to build network equipment. Oplink’s transmission products convert electronic signals into optical signals and back into electronic signals, thereby facilitating the transmission of information over fiber optic communication networks.

Oplink also offers communications system equipment makers a broadened suite of precision-made, cost-effective, and reliable optical connectivity products to establish multiple-use, quick pluggable fiber links among network devices for bandwidth deployment, as well as in a test and measurement environment for a wide range of system design and service applications.

2. Basis of Presentation. The unaudited condensed consolidated financial statements included herein have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America and 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. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at December 31, 2010, the results of its operations for the three and six months ended December 31, 2010 and 2009 and its cash flows for the six months ended December 31, 2010 and 2009. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year. The condensed consolidated financial statements presented herein have been prepared by management, without audit by independent auditors who do not express an opinion thereon, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2010 included in the Company’s Annual Report on Form 10-K.

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The Company operates and reports using a fiscal year, which ends on the Sunday closest to June 30. Interim fiscal quarters end on the Sundays closest to each calendar quarter end. For presentation purposes, the Company presents each fiscal year as if it ended on June 30. The Company presents each of the fiscal quarters as if it ended on the last day of each calendar quarter. January 2, 2011 represents the Sunday closest to the period ended December 31, 2010. The quarter ended December 31, 2009 consists of 14 weeks. The quarter ended December 31, 2010 is a 13-week fiscal period. Fiscal 2011 is comprised of 53 weeks, one week more than a typical fiscal year.

The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. With the exception of the Company’s Optical Communication Products, Inc. (“OCP”) subsidiaries, the Company presents the financial information of its consolidated foreign operating subsidiaries in its consolidated financial statements utilizing accounts as of a date one month earlier than the accounts of its parent company, U.S. subsidiary and its non-operating non-U.S. subsidiaries to ensure timely reporting of consolidated results.

The Company conducts its business within one business segment and has no organizational structure dictated by product, service lines, geography or customer type.

There have been no significant changes to the Company’s significant accounting policies that were disclosed in its Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

3. Risks and Uncertainties. There are a number of risks and uncertainties facing the Company that could have a material adverse effect on the Company’s financial condition, operating results or cash flows. These risks and uncertainties include, but are not limited to, the Company’s reliance on a small number of customers for a substantial portion of its revenues, possible reductions in customer orders, intense competition in the Company’s target markets and potential pricing pressure that may arise from changing supply or demand conditions and a downturn in the telecommunications industry or the overall global economy. In addition, the Company obtains most of its critical materials from a single or limited number of suppliers and generally does not have long-term supply contracts with them. The Company could experience discontinuation of key components, price increases and late deliveries from its suppliers. Also, substantially all of the Company’s manufacturing operations are located in China and are subject to laws and regulations of China. These and other risks and uncertainties facing the Company are described from time to time in the Company’s periodic reports filed with SEC.

4. Net Income Per Share. Basic net income per share is computed by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are composed of the incremental common shares issuable upon the exercise of stock options, the vesting of restricted stock units (“RSUs”) and purchases under the employee stock purchase plan. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations and the antidilutive common stock equivalents excluded from the computations for the periods presented (in thousands, except per share data):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2010		2009		2010		2009
Numerator:
Net income	$	8,488	$	3,137	$	14,068	$	4,946

Denominator:
Weighted average shares outstanding - basic		19,556		20,797		19,441		20,686
Effect of dilutive potential common shares		1,046		897		1,022		766
Weighted average shares outstanding - diluted		20,602		21,694		20,463		21,452

Net income per share - basic	$	0.43	$	0.15	$	0.72	$	0.24
Net income per share - diluted	$	0.41	$	0.14	$	0.69	$	0.23

Antidilutive stock options and restricted stock units
not included in income per share calculation		1,127		1,637		1,320		2,042

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5. Comprehensive Income. Comprehensive income 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. The components of comprehensive income consist of foreign currency translation adjustments, foreign currency transaction gains and losses from intercompany transactions and balances for which settlement is not planned or anticipated in the foreseeable future, and changes in unrealized gains and losses on investments. For presentation purposes, cumulative translation adjustment includes foreign currency transaction gains and losses from intercompany transactions and balances for which settlement is not planned or anticipated in the foreseeable future. The balance of accumulated other comprehensive income is as follows (in thousands):

	December 31,		June 30,
	2010		2010
Accumulated other comprehensive income:
Cumulative translation adjustment	$	10,444	$	8,241
Unrealized gain on investments, net		21		2
	$	10,465	$	8,243

The reconciliation of net income to comprehensive income for the three and six months ended December 31, 2010 and 2009 is as follows (in thousands):

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010		2009
Net income	$	8,488		$	3,137		$	14,068	$	4,946
Change in cumulative translation adjustment		1,707			(27	)		2,203		(65	)
Change in unrealized gain on investments, net		(3	)		(63	)		19		83
Total comprehensive income	$	10,192		$	3,047		$	16,290	$	4,964

6. Cash and Cash Equivalents. The Company’s cash equivalents at December 31, 2010 consist primarily of money market funds, unrestricted deposits and commercial paper. Cash includes amounts restricted for letters of credit for purchases and deposits for equipment maintenance of $285,000 and $322,000 at December 31, 2010 and June 30, 2010, respectively.

7. Short-Term and Long-Term Investments. The Company generally invests its excess cash in certificates of deposit, debt instruments of the U.S. Treasury, government agencies and corporations with strong credit ratings. Such investments are made in accordance with the Company’s investment policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Available-for-sale investments are reported at their fair value. Unrealized gains and losses on these securities are reported as a separate component of accumulated other comprehensive income until realized. Held-to-maturity investments are reported at amortized costs.

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Short-term and long-term investments at December 31, 2010 and June 30, 2010 consist of the following (in thousands):

	December 31, 2010
					Gross		Gross
	Carrying		Amortized		Unrealized		Unrealized			Estimated
	Value		Cost		Gains		Losses			Fair Value
Short-term investments:
Certificates of deposit	$	8,058	$	8,058	$	-	$	-		$	8,058
United States Treasury		52,948		52,926		22		-			52,948
Corporate securities		38,289		38,290		3		(4	)		38,289
Total short-term investments	$	99,295	$	99,274	$	25	$	(4	)	$	99,295

	June 30, 2010
					Gross		Gross
	Carrying		Amortized		Unrealized		Unrealized			Estimated
	Value		Cost		Gains		Losses			Fair Value
Short-term investments:
Certificates of deposit	$	6,823	$	6,823	$	-	$	-		$	6,823
United States government agencies		14,994		14,993		4		-			14,997
United States Treasury		41,946		41,912		34		-			41,946
Corporate securities		45,869		45,902		-		(33	)		45,869
Total short-term investments		109,632		109,630		38		(33	)		109,635

Long-term investments:
United States government agencies		10,000		10,000		2		-			10,002
Total long-term investments		10,000		10,000		2		-			10,002

Total investments	$	119,632	$	119,630	$	40	$	(33	)	$	119,637

The amortized cost and fair value of available-for-sale and held-to-maturity investments at December 31, 2010 and June 30, 2010 are presented in the following tables (in thousands):

	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Available-for-sale investments:
Certificates of deposit	$	8,058	$	-	$	-		$	8,058
United States Treasury		52,926		22		-			52,948
Corporate securities		38,290		3		(4	)		38,289
Total available-for-sale investments	$	99,274	$	25	$	(4	)	$	99,295

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	June 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Available-for-sale investments:
Certificates of deposit	$	6,823	$	-	$	-		$	6,823
United States government agencies		9,993		1		-			9,994
United States Treasury		41,912		34		-			41,946
Corporate securities		42,801		-		(33	)		42,768
Total available-for-sale investments		101,529		35		(33	)		101,531

Held-to-maturity investments:
Corporate securities		3,101		-		-			3,101
United States government agencies		15,000		5		-			15,005
Total held-to-maturity investments		18,101		5		-			18,106

Total investments	$	119,630	$	40	$	(33	)	$	119,637

There were no gross realized gains (losses) on sales of available-for-sale or held-to-maturity securities for the three and six months ended December 31, 2010 or 2009. The unrealized losses on available-for-sale securities are primarily due to decreases in the fair value of debt securities as a result of changes in market interest rates. The Company has the intent and the ability to hold these securities for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investment. The Company expects to realize the full value of all of these investments upon maturity. In addition, the Company does not believe that it will be required to sell these securities to meet its cash or working capital requirements or contractual or regulatory obligations. Therefore, the Company has determined that the gross unrealized losses on its available-for-sale securities at December 31, 2010 are temporary in nature. The following table provides a breakdown of the Company’s available-for-sale securities with unrealized losses as of December 31, 2010 (in thousands):

	December 31, 2010
	In Loss Position
	< 12 months
			Gross
	Fair		Unrealized
	Value		Losses
Available-for-sale investments:
Corporate securities	$	9,739	$	(4	)
Total available-for-sale investments		9,739		(4	)

Total investments in loss position	$	9,739	$	(4	)

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The amortized cost and estimated fair value of debt securities at December 31, 2010 and June 30, 2010 by contractual maturities are shown below (in thousands):

	December 31, 2010				June 30, 2010
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale investments:
Due in one year or less	$	99,274	$	99,295	$	101,529	$	101,531
Total available-for-sale investments		99,274		99,295		101,529		101,531

Held-to-maturity investments:
Due in one year or less		-		-		8,101		8,101
Due in one year to five years		-		-		10,000		10,005
Total held-to-maturity investments		-		-		18,101		18,106

Total investments	$	99,274	$	99,295	$	119,630	$	119,637

8. Fair Value Accounting. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. The Company applies the fair value hierarchy which has the following three levels of inputs to measure fair value:

·	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

·	Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·	Level 3 inputs are unobservable inputs for the asset or liability.

The Company’s Level 1 financial assets generally include money market funds. The Company’s Level 2 financial assets generally include United States Treasury securities, United States government agency debt securities, certificates of deposit, commercial paper, and corporate bonds.

The Company bases the fair value of its financial assets on pricing from third party sources of market information obtained through the Company’s investment brokers. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from brokers. The Company’s investment brokers obtain pricing data from a variety of industry standard data providers (e.g., Bloomberg), and rely on comparable pricing of other securities because the Level 2 securities that the Company holds are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities. There were no changes in valuation techniques or related inputs during the three and six months ended December 31, 2010.

Items Measured at Fair Value on a Recurring Basis

The Company did not have any financial liabilities that are measured at fair value at December 31 and June 30, 2010. The following table presents the Company’s financial assets, excluding accrued interest components, which are measured at fair value on a recurring basis at December 31, 2010 and June 30, 2010, consistent with the fair value hierarchy (in thousands):

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	December 31, 2010
	Level 1		Level 2		Level 3		Total
Financial assets
Cash equivalent:
Money market funds	$	10,771	$	-	$	-	$	10,771
Corporate securities		-		29,447		-		29,447
Short-term investments:
Certificates of deposit		-		8,058		-		8,058
United States Treasury		-		52,948		-		52,948
Corporate securities		-		38,289		-		38,289
Total financial assets	$	10,771	$	128,742	$	-	$	139,513

Financial liabilities	$	-	$	-	$	-	$	-

	June 30, 2010
	Level 1		Level 2		Level 3		Total
Financial assets
Cash equivalents:
Money market funds	$	10,182	$	-	$	-	$	10,182
Corporate securities		-		8,000		-		8,000
Short-term investments:
Certificates of deposit		-		6,823		-		6,823
United States government agencies		-		9,994		-		9,994
United States Treasury		-		41,946		-		41,946
Corporate securities		-		42,768		-		42,768
Total financial assets	$	10,182	$	109,531	$	-	$	119,713

Financial liabilities	$	-	$	-	$	-	$	-

As of December 31 and June 30, 2010, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the three and six months ended December 31, 2010.

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets that are subject to nonrecurring fair value measurement are not included in the table above. These assets include cost method investments in private companies. The Company did not record any other-than-temporary impairment charges for these investments during the three and six months ended December 31, 2010 or 2009.

9. Inventories. Inventories are stated at the lower of cost or market. Inventory cost is determined using standard costs, which approximates actual cost on a first-in, first-out basis. Inventories consist of (in thousands):

	December 31,		June 30,
	2010		2010
Inventories:
Raw materials	$	14,533	$	13,744
Work-in-process		8,109		7,158
Finished goods		3,365		-
Total	$	26,007	$	20,902

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10. Goodwill and Intangible Assets, Net. The following table presents details of the intangible assets acquired as a result of acquisitions as of December 31, 2010 and June 30, 2010 (in thousands):

	Estimated
	Useful Life		Gross		Accumulated
December 31, 2010	(in Years)		Amount		Amortization		Net
Technology		4-6	$	9,592	$	7,257	$	2,335
Customer relationships		3-7		5,671		4,568		1,103
Trade name		3-6		1,775		923		852
Backlog		1		188		150		38
Total			$	17,226	$	12,898	$	4,328

	Estimated
	Useful Life		Gross		Accumulated
June 30, 2010	(in Years)		Amount		Amortization		Net
Technology		4-6	$	9,592	$	6,099	$	3,493
Customer relationships		3-7		5,671		3,882		1,789
Trade name		3-6		1,775		760		1,015
Backlog		1		188		105		83
Total			$	17,226	$	10,846	$	6,380

The following table presents details of the amortization expense of intangible assets as reported in the condensed consolidated statements of operations (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
Reported as:	2010		2009		2010		2009
Cost of revenues	$	575	$	542	$	1,150	$	1,084
Operating expenses		451		403		902		807
Total	$	1,026	$	945	$	2,052	$	1,891

The future amortization of intangible assets is as follows (in thousands):

Fiscal years ending June 30,	Amount
2011	$	1,951
2012		1,309
2013		484
2014		247
2015		177
After 2015		160
	$	4,328

The Company had goodwill of $572,000 on its condensed consolidated balance sheets at December 31, 2010 and June 30, 2010 as a result of the acquisitions of Emit Technology Co., Ltd and Oridus, Inc. in fiscal 2010. During the three and six months ended December 31, 2010, there were no indicators of impairment for the goodwill.

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

	December 31,		June 30,
	2010		2010
Accrued liabilities:
Payroll and related expenses	$	5,565	$	3,792
Accrued professional fees		820		1,168
Accrued sales commission		555		486
Accrued sales return		525		541
Accrued warranty		500		421
Employee withholdings and related expenses		402		531
Advance deposits from customers		349		480
Other		3,102		4,117
	$	11,818	$	11,536

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

Changes in the warranty liability, which is included as a component of “Accrued liabilities” on the condensed consolidated balance sheets as disclosed in Note 11, is as follows (in thousands):

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
Balance at the beginning of the period	$	500		$	371		$	421		$	371
Accruals for warranties issued during the period		110			29			243			88
Adjustments related to pre-existing warranties
including expirations and changes in estimates		9			64			68			78
Cost of warranty repair		(119	)		(93	)		(232	)		(166	)
Balance at the end of the period	$	500		$	371		$	500		$	371

13. Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the employee requisite service period. The Company’s stock-based compensation is generally accounted for as an equity instrument. The effect of recording stock-based compensation expense for the three and six months ended December 31, 2010 and 2009 was as follows (in thousands, except per share data):

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	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
Stock-based compensation expense by type of award:
Employee stock options	$	521		$	1,114		$	1,134		$	2,129
Restricted stock awards		611			419			1,523			817
Employee stock purchase plan		97			75			230			308
Total stock-based compensation		1,229			1,608			2,887			3,254
Tax effect on stock-based compensation		-			-			-			-
Net effect on net income	$	1,229		$	1,608		$	2,887		$	3,254

Effect on net income per share:
Basic	$	(0.06	)	$	(0.08	)	$	(0.15	)	$	(0.16	)
Diluted	$	(0.06	)	$	(0.07	)	$	(0.14	)	$	(0.15	)

Forfeitures are estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

During the three months ended December 31, 2010 and 2009, the Company granted 30,000 and 61,500 stock options, respectively, with an estimated total grant-date fair value of $224,000 and $420,000, respectively. In addition, the Company granted 3,000 and 3,080 restricted stock units (“RSUs”) with a total grant-date fair value of $53,000 and $48,000 for the three months ended December 31, 2010 and 2009, respectively. The Company estimated that the stock compensation expense for the equity awards granted in the three months ended December 31, 2010 and 2009 not expected to vest was $34,000 and $59,000, respectively.

During the six months ended December 31, 2010 and 2009, the Company granted 74,000 and 87,500 stock options, respectively, with an estimated total grant-date fair value of $571,000 and $589,000, respectively. In addition, the Company granted 224,800 and 483,000 restricted stock awards (“RSAs”) and RSUs, with a total grant-date fair value of $4.2 million and $6.7 million during the six months ended December 31, 2010 and 2009, respectively. The Company estimated that the stock compensation expense for the equity awards granted in the six months ended December 31, 2010 and 2009 not expected to vest was $654,000 and $1.2 million, respectively.

As of December 31, 2010, the unrecognized stock compensation expense related to stock options to purchase Oplink common stock was $3.2 million which will be recognized over an estimated weighted average amortization period of 2.0 years. The unrecognized stock compensation expense related to RSUs was $6.6 million which will be recognized over an estimated weighted average amortization period of 2.9 years. Approximately $8,000 of stock compensation was capitalized as inventory at December 31, 2010 and June 30, 2010.

Valuation Assumptions

The Company estimates the fair value of stock options and purchase rights under the Company’s employee stock purchase plan using a Black-Scholes valuation model. The fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model and the straight-line attribution approach with the following weighted-average assumptions:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
Risk-free interest rate		0.91	%		2.18	%		1.19	%		2.27	%
Expected term	4.6 years			4.6 years			4.6 years			4.6 years
Expected dividends		0	%		0	%		0	%		0	%
Volatility		51	%		50	%		50	%		51	%

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The estimated fair value of purchase rights under the Company’s employee stock purchase plan is determined using the Black-Scholes valuation model with the following weighted-average assumptions:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
Risk-free interest rate		0.25	%		0.53	%		0.25	%		0.53	%
Expected term	1.3 years			1.3 years			1.3 years			1.3 years
Expected dividends		0	%		0	%		0	%		0	%
Volatility		47	%		50	%		47	%		50	%

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options or purchase rights. The expected term calculation for stock options is based on the observed historical option exercise behavior and post-vesting forfeitures of options by the Company’s employees. The expected term assumption for purchase rights is based on the average exercise date for the four purchase periods in each 24-month offering period.

The weighted-average grant date fair value for options to purchase Oplink common stock granted under the Company’s stock option plans was $7.46 and $6.83 per share for the three months ended December 31, 2010 and 2009, respectively, and $7.71 and $6.73 per share for the six months ended December 31, 2010 and 2009.

Equity Incentive Program

Oplink adopted the 2000 Equity Incentive Plan (the “2000 Plan”) in July 2000. The 2000 Plan was terminated in November 2009 immediately upon the effectiveness of the Company’s new 2009 Equity Incentive Plan (the “2009 Plan”). No further awards will be granted under the 2000 Plan. However, the 2000 Plan will continue to govern awards previously granted under that plan.

The 2009 Plan was adopted by the Company in September 2009 and became effective upon approval by the Company’s stockholders at the annual meeting held in November 2009. The 2009 Plan provides for the grant of equity awards to employees, directors and consultants. These equity awards include stock options, RSAs, RSUs, stock appreciation rights, performance units, and performance shares. The maximum aggregate number of shares of common stock that may be issued under the 2009 Plan is 2,500,000 shares, plus any shares subject to equity awards granted under 2000 Plan that expire or otherwise terminate without having been exercised in full, or that are forfeited to or repurchased by the Company. Shares subject to “full value” awards (RSUs, RSAs, performance shares and performance units) will count against the 2009 Plan’s share reserve as 1.3 shares for every one share subject to such awards. Accordingly, if such awards are forfeited or repurchased by the Company, 1.3 times the number of shares forfeited or repurchased will return to the 2009 Plan. The maximum term of stock options and stock appreciation rights under the 2009 Plan is 7 years.

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The following table summarizes activity under the equity incentive plans for the indicated periods:

				Options					Awards
							Weighted		Restricted			Weighted
	Shares			Number of			Average		Stock			Average
	Available			Options			Exercise		Awards/Units			Grant Date
	for Grant			Outstanding			Price		Outstanding			Fair Value
Balance, June 30, 2010		2,413,434			3,458,602		$	14.02		478,733		$	13.96
Granted		(366,240	)		74,000			18.33		224,800			18.81
Exercised or vested		-			(304,612	)		13.86		(20,000	)		18.43
Canceled (1)		28,503			(87,660	)		43.25		(4,500	)		18.87
Balance, December 31, 2010		2,075,697			3,140,330		$	13.33		679,033		$	15.40

(1)

The number of shares subject to option and stock awards canceled during the six months ended December 31, 2010 include 65,007 shares subject to option awards granted under the Company’s 1998 Stock Option Plan and the OCP stock option plan, which shares were not eligible to be re-granted under the 2009 Plan.

The options outstanding and exercisable at December 31, 2010 were in the following exercise price ranges:

		Options Outstanding								Options Vested and Exercisable
		at December 31, 2010								at December 31, 2010
Range of Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Average Intrinsic Value (in thousands)		Number Outstanding		Weighted Average Remaining Contractual Life (in Years)		Weighted Average Exercise Price		Average Intrinsic Value (in thousands)
$	1.00 - $5.00		406,904		1.8	$	4.62	$	5,636		406,904		1.8	$	4.62	$	5,636
$	5.01 - $8.00		378,234		2.4		5.70		4,828		353,993		2.1		5.57		4,565
$	8.01 - $10.00		23,981		0.9		8.76		233		23,981		0.9		8.76		233
$	10.01 - $11.00		375,186		7.0		10.10		3,142		229,670		6.8		10.10		1,922
$	11.01 - $13.00		187,061		6.5		12.15		1,183		122,763		6.0		12.27		761
$	13.01 - $15.00		521,034		6.5		13.78		2,443		325,134		6.2		13.59		1,587
$	15.01 - $18.00		278,184		6.3		16.85		452		174,753		5.6		17.20		221
$	18.01 - $20.00		214,387		3.8		18.90		7		172,387		3.1		18.91		7
$	20.01 - $27.00		746,500		5.4		20.24		-		746,500		5.4		20.24		-
$	28.00 - $158.00		8,859		0.7		57.76		-		8,859		0.7		57.76		-
			3,140,330		4.9	$	13.33	$	17,923		2,564,944		4.4	$	13.33	$	14,932

Vested and expected to vest			3,116,422		4.9	$	13.32	$	17,829

As of December 31, 2010 and June 30, 2010, options to purchase 2,564,944 and 2,742,536 shares at weighted average exercise prices of $13.33 and $14.35 per share, respectively, were vested and exercisable.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $18.47 as of December 31, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of December 31, 2010 was 2,262,048. The total intrinsic value of options exercised during the three months ended December 31, 2010 and 2009 was $718,000 and $824,000, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2010 and 2009 was $1.6 million and $1.6 million, respectively.

The total cash received by the Company from employees as a result of employee stock option exercises during the three months ended December 31, 2010 and 2009 was approximately $1.4 million and $1.8 million, respectively, and for the six months ended December 31, 2010 and 2009 was $4.2 million and $2.9 million, respectively.

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The aggregate intrinsic value and weighted average remaining contractual term of RSUs outstanding as of December 31, 2010 was $12.5 million and 1.6 years, respectively. There were no RSUs vested as of December 31, 2010.

The aggregate intrinsic value and weighted average remaining contractual term of RSUs expected to vest as of December 31, 2010 was $11.3 million and 1.6 years, respectively. The number of RSUs that are expected to vest is 614,448 shares.

The Company settles employee stock option exercises and RSUs with newly issued common shares.

Employee Stock Purchase Plan

The Company’s employee stock purchase plan (“ESPP”) authorizes the granting of stock purchase rights to eligible employees during an offering period not more than 27 months with exercise dates approximately every six months. Shares are purchased through employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of each offering period or the date of purchase. As of December 31, 2010, 1,592,044 shares were available for issuance under the Company’s employee stock purchase plan.

The total cash received by the Company from employees as a result of purchases under the ESPP during the three and six months ended December 31, 2010 was $632,000, and was $535,000 for the three and six months ended December 31, 2009.

14. Repurchase of Common Stock. On June 1, 2010, the Company announced a program to repurchase up to $40 million of the Company’s common stock. Repurchases under the program will be made in open market or privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. $5.3 million of its common stock was repurchased under this repurchase plan during the three months ended September 30, 2010. No repurchases were made in the three months ended December 31, 2010. As of December 31, 2010, repurchases of $10.8 million have been made under this repurchase program and approximately $29.2 million is remaining under this repurchase program.

15. Recent Accounting Pronouncements. In January 2010, the FASB issued additional disclosure requirements for fair value measurements. The guidance requires an entity to disclose significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers. The additional requirements became effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this new guidance did not have an impact on the Company’s consolidated financial position, results of operations or cash flows as this guidance relates only to additional disclosures. In addition, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The changes are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not believe that the adoption will have an impact on the Company’s consolidated financial position, results of operations or cash flows as this guidance relates only to additional disclosures.

In various areas, including revenue recognition, stock option and purchase accounting, accounting standards and practices continue to evolve. The Company believes that it is in compliance with all of the rules and related guidance as they currently exist. However, any changes to accounting principles generally accepted in the United States of America in these areas could impact the future accounting of its operations.

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16. Commitments and Contingencies.

Contractual Obligations

Contractual obligations as of December 31, 2010 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
Purchase obligations	$	17,505	$	17,468	$	37	$	-	$	-
Operating leases		254		204		50		-		-
Capital expenditure		5,420		5,398		22		-		-
Total	$	23,179	$	23,070	$	109	$	-	$	-

Litigation

Finisar Corporation v. Source Photonics, Inc., et al.

On January 5, 2010, Finisar Corporation, or Finisar, filed a complaint in the United States District Court for the Northern District of California against Source Photonics, Inc., MRV Communications, Inc., NeoPhotonics Corporation and the Company, or collectively, the co-defendants. In the complaint, Finisar alleged infringement of certain of its U.S. patents arising from the co-defendants’ respective manufacture, importation, use, sale of or offer to sell certain optical transceiver products in the United States. Finisar sought to recover unspecified damages, up to treble the amount of actual damages, together with attorneys’ fees, interest and costs. Finisar alleged that at least some of the patents asserted are a part of certain digital diagnostic standards for optoelectronics transceivers and, therefore, are being utilized in such digital diagnostic standards. On May 5, 2010, the court dismissed without prejudice all co-defendants (including the Company) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each co-defendant. On May 20, 2010, the Company and Finisar entered into a standstill agreement, agreeing not to refile any claims against each other until at least 90 days after a resolution of the litigation between Source Photonics and Finisar. On September 10, 2010, Source Photonics, Inc., and its parent company MRV Communications, Inc., entered into a Settlement and Cross License Agreement with Finisar. MRV Communications filed a Form 8-K with SEC on September 13, 2010 disclosing the settlement terms and furnishing a copy of the settlement agreement.

On December 20, 2010, Finisar filed a new complaint against the Company in the United States District Court for the Northern District of California. The new complaint is substantially similar to the complaint filed by Finisar in January 2010. On January 24, 2011 the Company filed an answer to the complaint, denying all material allegations and asserting numerous affirmative defenses.

Although the Company believes that it has meritorious defenses to the infringement allegations and intends to defend the lawsuit vigorously, there can be no assurance that it will be successful in its defense. Even if the Company is successful, it may incur substantial legal fees and other costs in defending the lawsuit. Further, a new lawsuit, if brought, would be likely to divert the efforts and attention of the Company’s management and technical personnel, which could harm its business.

IPO Securities Litigation

In November 2001, Oplink 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. In the amended complaint, the plaintiffs alleged that Oplink, certain of Oplink’s officers and directors and the underwriters of Oplink’s initial public offering (“IPO”) violated Section 11 of the Securities Act of 1933 based on allegations that Oplink’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. Similar complaints were filed by plaintiffs against hundreds of other public companies that went public in the late 1990s and early 2000s and their IPO underwriters (collectively, the “IPO Lawsuits”). During the summer of 2008, the parties engaged in a formal mediation process to discuss a global resolution of the IPO Lawsuits. Ultimately, the parties reached an agreement to settle all 309 cases against all defendants, and entered into a

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settlement agreement in April 2009. The settlement provides for a $586 million recovery in total, divided among the 309 cases. Oplink’s share of the settlement is roughly $327,458, which is the amount Oplink will be required to pay if the settlement is finally approved. In October 2009, the Court certified the settlement class in each case and granted final approval to the settlement. A number of appeals have been filed with the Second Circuit Court of Appeals, challenging the fairness of the settlement. A number of shareholder plaintiffs have also filed petitions for leave to appeal the class certification portion of Judge Scheindlin’s ruling. These appeals and petitions are pending.

IPO 16(b) Claim

In October 2007, Vanessa Simmonds filed in the United States District Court for the Western District of Washington a Complaint for Recovery of Short Swing Profits Under Section 16(b) of the Securities Exchange Act of 1934 against Bank of America and JP Morgan Chase & Company as defendants, and against Oplink as a nominal defendant. The complaint did not seek recovery of damages or other relief against Oplink. The Complaint alleged that in the years 2000 and 2001 the underwriters and unnamed officers, directors and principal shareholders of Oplink acted as a “group” by coordinating their efforts to undervalue the IPO price of Oplink and to thereafter inflate the aftermarket price throughout the six month lock-up period. The Complaint further alleges that the underwriters profited by (a) sharing in profits of customers to whom they had made IPO allocations, (b) allocating shares of Oplink to insiders at other companies from whom the underwriters expected to receive additional work in return; and (c) by creating the opportunity (through the alleged laddering practices) for Oplink’s directors, officers and other insiders to profit through their sale of stock after the lock-up period in return for future business for the underwriter.

The complaint against Oplink and its underwriters was one of a total of 54 nearly identical lawsuits filed by Ms. Simmonds in October 2007 against companies and underwriters that had completed IPOs in the early 2000s. All of these cases were transferred to one judge at the U.S.District Court. In March 2009, the judge dismissed the complaints, ruling that the plaintiff made an insufficient demand on the issuers and that the cases did not merit tolling the statute of limitations. The plaintiff filed notices of appeal in each of the 54 cases in April 2009, and the appeals were consolidated in June 2009 in the Ninth Circuit Court of Appeals. Each of Ms. Simmonds and the issuer and underwriter defendants has submitted their appeal briefs to the court. Oral arguments on the appeals were held on October 5, 2010.

On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriter’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.

On December 16, 2010, underwriters filed a petition for panel rehearing and a petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days pending Appellant’s filing of a petition for writ of certiorari in the United States Supreme Court.

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Other Matters

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

17. Segment Reporting. The Company has determined that it has one reportable segment: fiber optic component and subsystem product sales. This segment consists of organizations located in the United States and China, which develop, manufacture, and/or market fiber optic networking components.

The geographic breakdown of revenues by customers’ bill-to location is as follows (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2010		2009		2010		2009
Revenues:
United States	$	18,941	$	11,311	$	36,907	$	24,728
China		11,622		8,587		22,680		16,433
Europe		9,431		4,675		19,445		9,650
Japan		5,426		4,544		9,976		8,205
Canada		2,368		745		4,307		1,555
Asia-Pacific (excluding China and Japan)		4,237		2,881		8,350		5,737
Totals	$	52,025	$	32,743	$	101,665	$	66,308

Top five customers, although not the same five customers for each period, together accounted for 53% and 56% of revenues for the three months ended December 31, 2010 and 2009, respectively, and 53% and 56% of revenues for the six months ended December 31, 2010 and 2009, respectively.

The breakdown of property, plant and equipment, net by geographical location is as follows (in thousands):

	December 31,		June 30,
	2010		2010

United States	$	5,908	$	5,959
China		25,133		23,325
Asia-Pacific (excluding China)		4,301		4,079
Totals	$	35,342	$	33,363

18. Income Taxes. The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the authoritative guidance on income taxes under which the Company may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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As of December 31, 2010, the Company’s total unrecognized tax benefits were $5,644,000 of which $3,244,000, if recognized, would affect the Company’s effective tax rate. The Company had accrued interest and penalties related to unrecognized tax benefits of approximately $755,000 at December 31, 2010.

Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California, and China. The tax years 2004 to 2009 remain open in several jurisdictions.

19. Subsequent Event. The Company has reviewed and evaluated events subsequent to December 31, 2010 through the date that the condensed consolidated financial statements were issued.

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

Forward-looking statements

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes in this report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, related financial information and audited consolidated financial statements contained in our Form 10-K for the fiscal year ended June 30, 2010 as filed with the Securities and Exchange Commission on September 10, 2010.

Overview

We design, manufacture and sell optical networking components and subsystems. Our products expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, ensure bandwidth distribution connectivity and provide signal transmission and reception within an optical network. Our products enable greater and higher quality bandwidth over longer distances, which reduces network congestion and transmission cost per bit. Our products also enable optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks.

We offer our customers design, integration and optical manufacturing solutions (“OMS”) for the production and packaging of highly-integrated optical subsystems and turnkey solutions, based upon a customer’s specific product design and specifications. We also offer solutions with lower levels of component integration for customers that place more value on flexibility than would be provided with turnkey solutions.

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Use of Estimates and Critical Accounting Policies

The preparation of our condensed 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 accruals, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies and our procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

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

·	revenue recognition and product returns;

·	depreciation and amortization;

·	warranty obligations;

·	allowance for doubtful accounts;

·	excess and obsolete inventory;

·	impairment of investments;

·	impairment of long-lived asset;

·	impairment of goodwill and other intangible assets;

·	fair value accounting;

·	business combination;

·	income taxes;

·	stock compensation; and

·	loss contingencies.

This is not a comprehensive list of all of our accounting policies.

As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the three and six months ended December 31, 2010 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 as filed with the SEC on September 10, 2010. Additional information about these critical accounting policies may be found in the “Management’s Discussion & Analysis of Financial Condition and Results of Operations” section included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

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Results of Operations

Revenues

	Three Months Ended						Percentage			Six Months Ended						Percentage
	December 31,				Change		Change			December 31,				Change		Change
	2010		2009							2010		2009
	(In thousands, except percentages)

Revenues	$	52,025	$	32,743	$	19,282		58.9	%	$	101,665	$	66,308	$	35,357		53.3	%

The increase in revenues for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009 was mainly due to increased unit shipments in all our major product categories, in particular our all-optical dense and coarse wave-length division multiplexing products, optical switching and routing products, and optical amplification products, partially offset by a decline in average selling prices, which is characteristic of the industry. We acquired Emit Technology Co., Ltd (“Emit”) in the third quarter of fiscal 2010. As a result, the acquisition of Emit contributed approximately $2.9 million and $5.6 million of the increase in revenues for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009, respectively. We believe that the increase in shipments was largely due to a general increase in spending activities in the telecommunications industry.

Historically, a relatively small number of customers have accounted for a significant portion of our revenues. Top five customers, although not the same five customers for each period, together accounted for 53% and 56% of revenues for the three months ended December 31, 2010 and 2009, respectively, and 53% and 56% of revenues for the six months ended December 31, 2010 and 2009, respectively. We expect that the majority of our revenues will continue to depend on sales to a relatively small number of customers. In addition, we expect that sales to Tellabs, in particular, may increase as a percentage of our total sales in the coming quarter.

For the third quarter of fiscal 2011, we expect our revenues to be in the range of $52 million to $56 million.

Gross Profit

	Three Months Ended								Percentage			Six Months Ended								Percentage
	December 31,						Change		Change			December 31,						Change		Change
	2010			2009								2010			2009
	(In thousands, except percentages)

Gross profit	$	19,109		$	11,012		$	8,097		73.5	%	$	35,230		$	20,844		$	14,386		69.0	%
Gross profit margin		36.7	%		33.6	%							34.7	%		31.4	%

Gross profit increased for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009 primarily reflecting higher revenues and higher utilization of previously reserved inventory, partially offset by higher material costs driven by increased revenues, higher labor costs as a result of an increase in employee headcount and employee compensation expenses in China, and higher manufacturing overhead expenses.

Our gross profit margin increased for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009 mainly due to lower manufacturing overhead expenses as a percentage of revenues and lower material costs as a percentage of revenues, partially offset by higher direct labor costs as a percentage of revenues and lower utilization of previously reserved inventory as a percentage of revenues.

We expect our gross profit margin in the third quarter of fiscal 2011 to decrease compared to the second quarter of fiscal 2011 as a result of less favorable product mix. In addition, due to government-mandated increases in minimum wage levels, we expect our labor costs at our China facility to increase significantly in the fourth quarter of fiscal 2011.

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Research and Development

	Three Months Ended						Percentage			Six Months Ended						Percentage
	December 31,				Change		Change			December 31,				Change		Change
	2010		2009							2010		2009
	(In thousands, except percentages)

Research and
development	$	4,307	$	2,513	$	1,794		71.4	%	$	8,040	$	5,007	$	3,033		60.6	%

Research and development expenses increased $1.8 million and $3.0 million for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009, respectively. The increase was primarily due to higher salary expenses and employee related compensation expenses associated with an increase in headcount and higher costs of materials associated with new product development, partially offset by lower depreciation expenses.

We believe that developing customer solutions at the prototype stage is critical to our strategic product development objectives. In order to meet the changing requirements of our customers, we will need to fund investments in several concurrent product development projects. We expect our research and development expenses, excluding stock compensation expense, to increase slightly in the third quarter of fiscal 2011 compared to the second quarter of fiscal 2011. The research and development process can be expensive and prolonged and entails considerable uncertainty. As such, we can make no assurances that any of the products we plan to develop will be commercially successful, and there is a substantial risk that our research and development expenditures will fail to generate any meaningful return of the investment of such resources.

Sales and Marketing

	Three Months Ended						Percentage			Six Months Ended						Percentage
	December 31,				Change		Change			December 31,				Change		Change
	2010		2009							2010		2009
	(In thousands, except percentages)

Sales and
marketing	$	2,924	$	2,284	$	640		28.0	%	$	5,811	$	4,698	$	1,113		23.7	%

Sales and marketing expenses increased $640,000 for the three months ended December 31, 2010 compared to the three months ended December 31, 2009, and increased $1.1 million for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. The increase primarily reflected higher salary expenses driven by an increase in headcount and higher sales commission expenses as a result of increased revenues. Our acquisition of Emit in the third quarter of fiscal 2010 further contributed to the increase in sales and marketing expenses for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. We expect our sales and marketing expenses, excluding stock compensation expense, to remain at a similar level in the third quarter of fiscal 2011 as the second quarter of fiscal 2011.

General and Administrative

	Three Months Ended							Percentage			Six Months Ended							Percentage
	December 31,				Change			Change			December 31,				Change			Change
	2010		2009								2010		2009
	(In thousands, except percentages)

General and
administrative	$	2,265	$	2,724	$	(459	)		-16.9	%	$	4,911	$	5,395	$	(484	)		-9.0	%

Excluding the impact of stock compensation expense, general and administrative expenses remained largely unchanged for the three months ended December 31, 2010 compared to the three months ended December 31, 2009, and increased $232,000 for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. The increase was mainly due to our acquisition of Emit in the third quarter of fiscal 2010. We expect our general and administrative expenses, excluding stock compensation expense, to increase in the third quarter of fiscal 2011 compared to the second quarter of fiscal 2011.

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Stock-Based Compensation Expense

	Three Months Ended							Percentage			Six Months Ended							Percentage
	December 31,				Change			Change			December 31,				Change			Change
	2010		2009								2010		2009
	(In thousands, except percentages)

Stock-based
compensation expense	$	1,229	$	1,608	$	(379	)		-23.6	%	$	2,887	$	3,254	$	(367	)		-11.3	%

Stock-based compensation expense recorded in cost of revenues, research and development, sales and marketing, and general and administrative is the amortization of the fair value of share-based payments made to employees and members of our board of directors, primarily in the form of stock options, restricted stock awards and units (“RSAs” and “RSUs”) and purchases under the employee stock purchase plan (see Note 13 – Stock-Based Compensation). The fair value of stock options and purchase rights granted to purchase our common stock under the employee stock purchase plan is estimated using a Black-Scholes valuation model and is recognized as expense over the employee requisite service period. The compensation expense incurred for RSAs and RSUs is based on the closing market price of Oplink’s common stock on the date of grant and is amortized on a straight-line basis over the requisite service period.

Stock-based compensation expense for the three and six months ended December 31, 2010 includes the continued amortization of previously-granted stock options and RSUs and amortization of equity awards granted in the first and second quarters of fiscal 2011. The decrease in stock-based compensation expense was primarily due to canceled or fully vested equity awards. We expect our stock compensation expense in the third quarter of fiscal 2011 to decrease slightly compared to the second quarter of fiscal 2011.

Amortization of Intangible Assets

Amortization of intangible and other assets was approximately $1.0 million and $945,000 for the three months ended December 31, 2010 and 2009, respectively, and was approximately $2.1 million and $1.9 million for the six months ended December 31, 2010 and 2009, respectively.

Interest and Other Income, Net

	Three Months Ended							Percentage			Six Months Ended							Percentage
	December 31,				Change			Change			December 31,				Change			Change
	2010		2009								2010		2009
	(In thousands, except percentages)

Interest and other
income, net	$	54	$	193	$	(139	)		-72.0	%	$	111	$	467	$	(356	)		-76.2	%

Interest and other income for the six months ended December 31, 2010 included foreign currency losses of $125,000. Excluding the impact of the foreign currency losses, the decrease in interest and other income for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009 was primarily due to lower yields on our investments and a lower average balance of cash and cash equivalents, short-term and long-term investments as a result of cash used for stock repurchases in the last two quarters of fiscal 2010 and first quarter of fiscal 2011.

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Provision for Income Taxes

As a multinational corporation, we are subject to taxation in the United States and in foreign jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, and the availability of tax credits and carryforwards. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.

We are required to make our best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. We recorded a tax provision of $811,000 and $358,000 for the three months ended December 31, 2010 and 2009, respectively. We recorded a tax provision of $1.7 million and $796,000 for the six months ended December 31, 2010 and 2009, respectively. The increase in provision for income taxes for the three and six months ended December 31, 2010 compared to the three and six months ended December 31, 2009 was mainly due to higher taxable income in all jurisdictions.

The effective tax rates for the three and six months ended December 31, 2010 and 2009 differ from the statutory rate. This is primarily due to taxable income being reduced as a result of carrying forward net operating losses from previous years and tax holidays in certain jurisdictions. The effective tax rate could increase in the future due to changes in the taxable income mix between various jurisdictions and the expiration of certain tax holidays.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through issuances of equity, which totaled approximately $319.4 million in aggregate net proceeds, partially offset by $68.7 million in common stock repurchases, net of proceeds from exercise of stock options, employee stock purchase plan and warrants through December 31, 2010. As of December 31, 2010, we had cash, cash equivalents and short-term investments of $168.0 million and working capital of $212.1 million.

We believe that our current cash, cash equivalent and short-term investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. We may use cash and cash equivalents 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.

Six Months Ended December 31, 2010

Our operating activities provided cash of $13.0 million in the six months ended December 31, 2010 primarily as a result of a net income of $14.1 million for the period adjusted by $4.8 million in non-cash depreciation and amortization charges, $2.9 million in non-cash stock-based compensation expense and $392,000 in other non-cash expenses, partially offset by a decrease of cash of $9.2 million as a result of a net change in assets and liabilities.

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For the six months ended December 31, 2010, the change in net assets and liabilities was primarily the result of an increase in accounts receivables and inventory of $9.8 million and $4.3 million, respectively, partially offset by an increase in accrued liabilities and other liabilities of $3.2 million and a decrease in prepaid expenses and other current assets of $1.8 million.

Accounts receivable used $9.8 million of cash primarily due to higher shipments in the six months ended December 31, 2010 compared to the six months ended December 31, 2009. Days sales outstanding (“DSO”) was 67 days and 70 days for the first and second quarters of fiscal 2011 compared to 70 days for the fourth quarter of fiscal 2010. We typically bill customers on an open account basis with net thirty to ninety day payment terms. We would generally expect the level of accounts receivable at the end of any quarter to reflect the level of sales in that quarter and to change from one period to another in a direct relationship to the change in the level of sales. Our level of accounts receivable would also increase if shipments are made closer to the end of the quarter, if customers delayed their payments or if we offered extended payment terms to our customers.

Inventories used $4.3 million of cash in the six months ended December 31, 2010 primarily due to increased volumes of unit sales and increased purchases of inventory required to meet customer demand. In order to maintain an adequate supply of product for our customers, we must carry a certain level of inventory. Our inventory level may vary based primarily upon orders received from our customers, our forecast of demand for these products and lead-time for materials. These considerations are balanced against risk of obsolescence or potentially excess inventory levels. We generally expect the level of inventory to vary from one period to another as a result of changes in the level of sales.

Prepaid expenses and other current assets provided $1.8 million of cash in the six months ended December 31, 2010 mainly reflecting the decreased balance of bankers’ acceptance notes.

Accrued liabilities and other liabilities generated $3.2 million of cash in the six months ended December 31, 2010 primarily due to increases in deferred revenues, income taxes payable and other payables.

Our investing activities provided cash of $16.5 million in the six months ended December 31, 2010 primarily due to maturities of investments of $90.7 million, partially offset by purchases of investments of $70.4 million and purchases of property, plant and equipment of $3.8 million. During the remaining six months of fiscal 2011, we anticipate that cash outlays in capital expenditures will be approximately $6.0 million.

Our financing activities used cash of $1.7 million in the six months ended December 31, 2010 due to $6.5 million of cash spent on the repurchase of our common stock, partially offset by $4.9 million in proceeds from issuance of common stock in connection with the exercise of stock options and the employee stock purchase plan.

Six Months Ended December 31, 2009

Our operating activities provided cash of $17.6 million in the six months ended December 31, 2009 as a result of a net income of $4.9 million for the period adjusted by $5.2 million in non-cash charges of depreciation and amortization, $3.3 million in non-cash stock-based compensation expenses and an increase of cash of $4.4 million as a result of change in assets and liabilities, partially offset by other non-cash items of $225,000.

For the six months ended December 31, 2009, cash provided as a result of the net change in assets and liabilities was primarily the result of a decrease in accounts receivables of $3.7 million, an increase in accounts payable of $2.0 million, partially offset by an increase in prepaid expenses and other current assets of $1.3 million.

Accounts receivable provided $3.7 million of cash driven by improved collections of receivables in the six months ended December 31, 2009 compared to the fourth quarter of fiscal 2009. DSO was 74 days and 71 days for the first and second quarters of fiscal 2010, respectively, compared to 82 days for the fourth quarter of fiscal 2009.

Prepaid expenses and other current assets used $1.3 million of cash during the six months ended December 31, 2009 primarily reflecting increased balance of bankers’ acceptance notes.

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Accounts payable provided cash of $2.0 million in the six months ended December 31, 2009 primarily due to a change in the level of inventory purchases and as a result of the timing of payments to our vendors.

Our investing activities used cash of $12.9 million in the six months ended December 31, 2009 as a result of purchases of investments of $116.8 million and purchases of equipment of $1.1 million, partially offset by sales and maturities of investments of $104.8 million.

Our financing activities provided $3.4 million of cash in the six months ended December 31, 2009 due to proceeds from issuance of common stock in connection with the exercise of stock options and the employee stock purchase plan.

Off-Balance Sheet Arrangements

As of December 31, 2010, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities.

Contractual Obligations

Our contractual obligations as of December 31, 2010 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
Purchase obligations	$	17,505	$	17,468	$	37	$	-	$	-
Operating leases		254		204		50		-		-
Capital expenditure		5,420		5,398		22		-		-
Total	$	23,179	$	23,070	$	109	$	-	$	-

Recent Accounting Pronouncements

In January 2010, the FASB issued additional disclosure requirements for fair value measurements. The guidance requires an entity to disclose significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers. The additional requirements became effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this new guidance did not have an impact on our consolidated financial position, results of operations or cash flows as this guidance relates only to additional disclosures. In addition, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The changes are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We do not believe that the adoption will have an impact on our consolidated financial position, results of operations or cash flows as this guidance relates only to additional disclosures.

In various areas, including revenue recognition, stock option and purchase accounting, accounting standards and practices continue to evolve. We believe that we are in compliance with all of the rules and related guidance as they currently exist. However, any changes to accounting principles generally accepted in the United States of America in these areas could impact the future accounting of our operations.

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Interest Rate Exposure

The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in are subject to market risk. To minimize this risk, we maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate bonds.

As of December 31, 2010, all of our short-term investments were in certificates of deposit, high quality commercial paper, corporate securities, and government debt securities. We invest our excess cash in short-term and long-term investments to take advantage of higher yields generated by these investments. We do not hold any instruments for trading purposes. As of December 31, 2010, the gross unrealized losses on our investments classified as available-for-sale were immaterial which were primarily due to decreases in the fair value of debt securities as a result of changes in market interest rates. We have the intent and the ability to hold these securities for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investment. We expect to realize the full value of all of these investments upon maturity. In addition, we do not believe that we will be required to sell these securities to meet its cash or working capital requirements or contractual or regulatory obligations. Therefore, we have determined that the gross unrealized losses on the available-for-sale securities at December 31, 2010 are temporary in nature. The following table summarizes our investment securities (in thousands, except percentages):

	Carrying		Average Rate			Carrying		Average Rate
	Value at		of Return at			Value at		of Return at
	December 31,		December 31,			June 30,		June 30,
	2010		2010			2010		2010
			(Annualized)					(Annualized)
Investment Securities:
Cash equivalents - variable rate	$	-		-		$	8,423		0.1	%
Cash equivalents - fixed rate		40,218		0.2	%		9,759		0.2	%
Short-term investments - fixed rate		99,295		0.5	%		109,632		1.0	%
Long-term investments - fixed rate		-		-			10,000		1.4	%
Total	$	139,513				$	137,814

Foreign Currency Exchange Rate Exposure

We operate in the United States, primarily manufacture in China, and the majority of our sales to date have been made in U.S. dollars. The majority of expenses from our China operations are incurred in the Chinese Renminbi (“RMB”). As a result, currency fluctuations between the U.S. dollar and the RMB could cause foreign currency transaction gains or losses that we would recognize in the period incurred.

We use the U.S. dollar as the reporting currency for our consolidated financial statements. Any significant revaluation of the RMB may materially and adversely affect our results of operations upon translation of our Chinese subsidiaries’ financial statements into U.S. dollars. We generate a significant amount of our revenue in RMB and the majority of our labor and manufacturing overhead expenses are in RMB. Additionally, a significant portion of our operating expenses are in RMB. Therefore, a significant fluctuation in RMB against the U.S. dollar could affect our business and results of operations upon translation to U.S. dollars. A 10% appreciation or depreciation in RMB against the U.S. dollar would have an immaterial impact on our results of operations for the three or six months ended December 31, 2010.

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

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the quarterly period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The material set forth under the caption “Litigation” in Note 16 of the Notes to Condensed Consolidated Financial Statements appearing in Part I, Item I of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A - RISK FACTORS

Other than with respect to the risk factors set forth below, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

We expect volatility in our stock price, which could cause you to lose all or part of your investment.

We expect the market price of our common stock to fluctuate significantly. For example, the market price of our common stock has fluctuated from an intra-day low of $5.05 in November 2008 to a recent intra-day high of $25.63 on January 31, 2011. These fluctuations may occur in response to a number of factors, some of which are beyond our control, including:

·	quarterly variations in our operating results;

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

·	changes in market values of comparable companies;

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

·	any loss by us of a major customer;

·	economic fluctuations in the market for optical communications products, or in the telecommunications industry generally;

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

·	departures of key management or engineering personnel; and

·	future sales of our common stock.

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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 dependence on orders from a relatively small number of customers makes our relationship with each customer critical to our business.

Our top five customers, although not the same five customers for each period, together accounted for 53%, 60% and 60% of our revenues in the fiscal years ended June 30, 2010, 2009 and 2008, respectively, and 53% of our revenues for the six month period ended December 31, 2010. Tellabs Operations, Inc. (“Tellabs”) and Hua Wei Technologies Co. Ltd. (“Huawei”) each accounted for greater than 10% of our revenues for the fiscal years ended June 30, 2010, 2009 and 2008, as well as for the six month period ended December 31, 2010. We expect that the majority of our revenues will continue to depend on sales to a relatively small number of customers. We expect that sales to Tellabs, in particular, may increase as a percentage of our total sales in the coming quarters.

We may not be the sole source of supply to our customers, and they may choose to purchase products from other vendors. The loss of one or more of our significant customers, our inability to successfully develop relationships with additional customers or future price reductions could cause our revenue to decline significantly. Our dependence on a small number of customers may increase if the fiber optic components and subsystems industry and our other target markets continue to consolidate.

Our cost advantage from having our manufacturing and most of our R&D in China may diminish over time due to increasing labor costs.

The labor market in China, particularly in the manufacturing-heavy Southeast region of China where our manufacturing facilities are located, has become more challenging for employers, and many companies are facing higher costs due to increased wages. We increased our wage rates at our Zhuhai facility by more than 30% during our 2010 fiscal year due to government-mandated increases in minimum wage levels. We expect another government-mandated increase in the fourth quarter of fiscal 2011, and we may be required to increase wages even more in the future due to market conditions and/or additional government mandates. If labor costs in China continue to increase, our gross margins and profit margins and results of operations may be adversely affected. In addition, our competitive advantage against competitors with manufacturing in traditionally higher cost countries would be diminished.

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

Participants in the communications and fiber optic components and subsystems markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors. In addition, from time to time, we have become aware of the possibility or have been notified that we may be infringing certain patents or other intellectual property rights of others. Regardless of their merit, responding to such claims can be time consuming, divert management’s attention and resources and may cause us to incur significant expenses. In addition, intellectual property claims against us 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 monetary damages; or

·	redesign the products that use the technology.

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

On January 5, 2010, Finisar Corporation, or Finisar, filed a complaint in the United States District Court for the Northern District of California against Source Photonics, Inc., MRV Communications, Inc., NeoPhotonics Corporation and us, or collectively, the co-defendants. In the complaint, Finisar alleged infringement of certain of its U.S. patents arising from the co-defendants’ respective manufacture, importation, use, sale of or offer to sell certain optical transceiver products in the United States. Finisar sought to recover unspecified damages, up to treble the amount of actual damages, together with attorneys’ fees, interest and costs. Finisar alleged that at least some of the patents asserted are a part of certain digital diagnostic standards for optoelectronics transceivers and, therefore, are being utilized in such digital diagnostic standards. On May 5, 2010, the court dismissed without prejudice all co-defendants (including us) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each co-defendant. On May 20, 2010, we and Finisar entered into a standstill agreement, agreeing not to refile any claims against each other until at least 90 days after a resolution of the litigation between Source Photonics and Finisar. On September 10, 2010, Source Photonics, Inc., and its parent company MRV Communications, Inc., entered into a Settlement and Cross License Agreement with Finisar. MRV Communications filed a Form 8-K with SEC on September 13, 2010 disclosing the settlement terms and furnishing a copy of the settlement agreement.

On December 20, 2010, Finisar filed a new complaint against us in the United States District Court for the Northern District of California. The new complaint is substantially similar to the complaint filed by Finisar in January 2010. On January 24, 2011 we filed an answer to the complaint, denying all material allegations and asserting numerous affirmative defenses.

Although we believe that we would have meritorious defenses to the infringement allegations and intend to defend any new similar lawsuit vigorously, there can be no assurance that we will be successful in our defense. Even if we are successful, we may incur substantial legal fees and other costs in defending the lawsuit. Further, a new lawsuit, if brought, would be likely to divert the efforts and attention of our management and technical personnel, which could harm our business.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – (Removed and Reserved)

ITEM 5 - OTHER INFORMATION

None.

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ITEM 6 - EXHIBITS

Exhibit Index

Exhibit No.		Description
3.1(1)		Amended and Restated Certificate of Incorporation of the Registrant.
3.2(2)		Bylaws of the Registrant.
3.3(3)		Certificate of Designation of Series A Junior Participating Preferred Stock.
3.4(4)		Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant.
3.5(5)		Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant.
3.6(6)		Amendment to Bylaws of the Registrant
10.12		Amendment to Executive Corporate Event Agreement between the Registrant and Joseph Y. Liu
10.13		Form of Amendment to Executive Corporate Event Agreement for Executive Officers
31.1		Certification of Chief Executive Officer Required under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer Required under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	*	Certification of Chief Executive Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).
32.2	*	Certification of Chief Financial Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

(1)	Previously filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1/A filed on August 29, 2000 and incorporated herein by reference.
(2)	Previously filed as Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1/A filed on August 1, 2000 and incorporated herein by reference.
(3)	Previously filed as Exhibit 4.1 to the Registrant’s Report on Form 8-K filed on March 22, 2002 and incorporated herein by reference.
(4)	Previously filed as Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005 and incorporated herein by reference.
(5)	Previously filed as Exhibit 3.5 to the Registrant’s Quarterly Report on Form 10-Q filed on February 9, 2007 and incorporated herein by reference.
(6)	Previously filed as Exhibit 3.1 to the Registrant’s Report on Form 8-K filed on December 20, 2007 and incorporated herein by reference.

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

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SIGNATURES

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

	OPLINK COMMUNICATIONS, INC.

Date: February 11, 2011	By:	/s/ Shirley Yin
		Shirley Yin
		Chief Financial Officer
		(Principal Financial Officer)

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