UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

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

Commission file number 001-33306

 

Opnext, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		22-3761205 (I.R.S. Employer Identification No.)

46429 Landing Parkway, Fremont, California (Address of principal executive office)		94538 (Zip Code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		The NASDAQ Stock Market LLC

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

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

     Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     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):

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

     As of September 30, 2010, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $86,292,148.64, based upon the closing sales price of the registrant’s common stock as reported on the Nasdaq Stock Market on September 30, 2010 of $1.57 per share.

     As of June 9, 2011, 90,283,473 shares of the registrant’s common stock were outstanding.

     Portions of the proxy statement for the registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K Report.

 

 

Table of Contents

PART I
Item 1. Business			3
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			31
Item 2. Properties			31
Item 3. Legal Proceedings			31
Item 4. Reserved			32
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			33
Item 6. Selected Financial Data			36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			52
Item 8. Financial Statements and Supplementary Data			54
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			88
Item 9A Controls and Procedures			88
Item 9B Other Information			90
PART III
Item 10. Directors, Executive Officers and Corporate Governance			91
Item 11. Executive Compensation			91
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters			91
Item 13. Certain Relationships and Related Transactions, and Director Independence			91
Item 14. Principal Accountant Fees and Services			91
PART IV
Item 15. Exhibits and Financial Statement Schedules			91
SIGNATURES			95
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. Business

Business Description

     Opnext, Inc. (which may be referred to in this Form 10-K as the “Company,” “we,” “us,” or “our”) is a designer and manufacturer of optical components, modules and subsystems for communications uses. The majority of our revenue is derived from the sale of high speed optical communications products related to the transmission and reception of high speed optical signals over optical fiber. We sell our products, which enable high speed network connectivity to address the increasing data usage by the global population, to other businesses. Additionally, we sell infrared and visible light optical devices for industrial and commercial use.

     Our optical communications components consist of discrete transmitters and receivers typically consisting of a hermetically packaged compound semiconductor laser or photodetector. These components utilize internally fabricated or externally sourced lasers or photodetectors built from InP (indium phosphide) or GaAs (gallium arsenide) compound semiconductor materials systems. Our optical transceiver modules, which often use our components, convert signals between electrical and optical for transmitting and receiving data over fiber optic networks, providing the physical communications interface for both data communications and telecommunications systems. These optical transceiver modules are used for both client-side interfaces generally consisting of short distance dedicated fiber cables as well as line-side interfaces consisting of long distance transmission with shared fiber cable and amplification media. Our subsystems and custom designs, which utilize our transmission and photonics know-how, optimize performance for high speed transport networks. Our subsystems generally specialize in 40Gbps and 100Gbps long distance optical communications. Our expertise in mixed-signal high frequency transmission, core semiconductor laser technology and other optical communications technologies has enabled us to create a broad portfolio of products that address demands for higher speeds, optimized long-haul links, wider temperature ranges, smaller sizes, lower power consumption and greater reliability.

     Most of our customers are engaged in the design, manufacturing and service of optical communication systems for telecommunications and data communications networks. We view ourselves as a strategic vendor to our customers. Our customers include many of the leading telecommunications and data communications network systems vendors such as Alcatel-Lucent, Cisco Systems, Inc. and subsidiaries (“Cisco”), Huawei Technologies Co., Ltd (“Huawei”) and Nokia Siemens Networks (“NSN”). Through our direct sales force supported by manufacturer representatives and distributors, we sell products to network systems vendors throughout the Americas, Europe, Japan and the rest of the Asia Pacific region. We also supply components to several major transceiver module companies and sell into select industrial and commercial applications where we can apply our core laser capabilities, such as mini projectors, defense products, laser projection, medical systems, display applications, laser printers and barcode scanners.

     We were founded in September 2000 as a subsidiary of Hitachi Ltd. (“Hitachi”) and subsequently spun out of Hitachi’s fiber optic components business. We draw upon a nearly 40-year history of fundamental laser research, manufacturing excellence and product development that has helped create several technological innovations, including the creation of 10Gbps and 40Gbps laser technologies. We work closely with Hitachi’s renowned research laboratories to conduct research and commercialize products based on fundamental laser and photodetector technology. These research efforts have enabled us to develop market leadership in the 10Gbps and 40Gbps transceiver module market and are supporting our development of differentiated products for emerging higher-speed markets, such as the 40GbE and 100Gbps markets.

     Since our founding, we have acquired and integrated three businesses and, in February 2007, we completed our initial public offering and the listing of our common shares on the NASDAQ market. Prior to our IPO, we acquired Pine Photonics Communications, Inc., a transceiver module company that expanded our product line of SFP transceivers with data rates less than 10Gbps, and Hitachi’s opto device business, which is the foundation of our industrial and commercial product line. Our most recent acquisition, StrataLight Communications, Inc. (“StrataLight”), a high-speed data transport company, was completed on January 9, 2009, and complements our core of high speed client technologies.

     The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section of the Company’s website at http://www.opnext.com as soon as practicable after such material is electronically filed with, or furnished to, the SEC. The information contained on the Company’s website or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report.

Industry Background

     Networks are frequently described in terms of the distances they span and the hardware and software protocols used to transport and store data. The physical medium through which signals are best transmitted over these networks depends on the distance involved and the amount of data or bandwidth to be transmitted, often expressed as gigabits per second, or Gbps. Voice-grade copper wire can only support connections of about two kilometers without the use of repeaters to amplify the signal. At speeds of greater than 1 Gbps the ability of copper wire to transmit more than 300 meters is limited due to the degradation of the signal over distance as well as interference from external signal generating equipment. Optical systems, on the other hand, can carry signals in excess of 80 kilometers at speeds of 10 Gbps without further processing. For networks with longer links, such as submarine or inter-continental spans, long haul or coast-to-coast spans, or regional spans, the distances range from a few hundred to thousands of kilometers and the signaling is almost exclusively transmitted optically. These long distances require processing and amplification in order for the signal to be transmitted without errors.

     Telephone networks historically spanned longer distances and demanded higher performance than early computer networks. Early computer networks had relatively limited performance requirements, short connection distances and low transmission speeds and, therefore, relied almost exclusively on copper wire as the medium of choice. Accordingly, telephone network service providers were the first adopters of fiber optic communications technology, especially for links spanning hundreds of kilometers.

     Over the past two decades, the proliferation of electronic commerce, communications and broadband entertainment has resulted in the digitization and accumulation of enormous amounts of data. The growth of computer networks, the Internet, mobile computing and high-bandwidth intensive applications such as video and music downloads and streaming, on-line gaming and peer-to-peer file sharing has placed greater requirements on the former telephone networks to transport an increased amount of data traffic. These applications drive increased network utilization across the core and at the edge of wireline, wireless and cable networks, challenging network service providers to supply increasing bandwidth to their customers. This has caused telecommunications network service providers to install fiber optic cable connections progressively closer to the end user in an effort to transmit more data at a lower operating cost. Thus, while copper continues to be the primary medium used for delivering signals to the desktop, the need to quickly transmit, store and retrieve large blocks of data in a cost-effective manner has increasingly required service providers to add high-speed network access such as Wi-Fi, WiMAX, and 3G/4G and to expand the capacity, or bandwidth, of their networks by using fiber optic technology to transmit data at higher speeds and over greater distances.

     Additionally, in data communications, enterprises and institutions are managing the rapidly escalating demands for data and bandwidth and are upgrading and deploying their own high-speed local, storage and wide-area networks, also called LANs, SANs and WANs, respectively. These deployments increase the ability to utilize high-bandwidth applications that are growing in importance to their organizations and also increase utilization across telecommunications networks as this traffic leaves the LANs, SANs and WANs and travels over the network service providers’ edge and core networks.

     Telecommunications and data communications network service providers are laboring under common objectives of moving an increasing amount of data traffic. As a result, network service providers are converging traditionally separate networks for delivering voice, video and data into IP-based integrated networks. These formerly distinct networks are increasingly using optical networking technologies capable of supporting higher speeds with additional features and greater flexibility to accommodate greater bandwidth requirements.

     Mirroring the convergence of telecommunications and data communications networks, network systems vendors are increasingly addressing both telecommunications and data communications applications. Traditional telecommunications network systems vendors, such as NSN and Alcatel-Lucent, and traditional data communications network systems vendors, such as Cisco, are producing optical systems increasingly based on 10Gbps, 40Gbps and 100Gbps speeds, including multi-service switches, DWDM (Dense Wave Division Multiplexing) transport terminals, access multiplexers, routers, and Ethernet switches.

     Faced with technological and cost challenges, network system vendors are focusing on their core competencies of software and systems integration, and are relying upon established subsystem, module and component suppliers for the design, development and supply of critical hardware components such as products that perform the optical transmit and receive functions. Network system vendors rely upon optical component designers and manufacturers such as us to provide their optical interface technologies.

Standardization in the Optical Communications Industry

     As a subset of the communications industry, the optical component industry typically relies on standard interfaces and form factors for products to insure that point A can communicate with point B. However, different network system vendors — and even different systems designed by the same vendor — may use a different level of product integration ranging from a fully integrated subsystem to an optical module to a discrete optical component while still complying with industry standard interfaces.

     There are two broad categories of standardization in the optical communications industry. The first is industry standard interfaces that specify the frequency of light, data structure, detailed optical and electrical parameters, and data encoding. These are usually specified by international standards bodies such as the IEEE (Institute of Electrical and Electronics Engineers) and the ITU (International Telecommunication Union). Some examples include 10 Gigabit Ethernet and DWDM channel grid used primarily in telecommunications networks. The second broad category is a mechanical and electrical definition of a form factor generally specified as Multi-Source Agreements (MSAs). Many customers use these MSAs as a framework for the design of their new systems. These MSAs specify the mechanical dimensions, electrical interface, diagnostic and management features and other key specifications, such as heat and electrical interference, of the form factor and enable network systems vendors to plan their new systems accordingly. We were founders or early members of successfully adopted 10Gbps MSAs such as 300 pin, XENPAK, X2, SFP+, XLMD and XMD. In 2009, we were a founding member of a group that announced an industry MSA for 40Gbps and 100Gbps modules called CFP. We are also providing technical leadership in the Optical Internetworking Forum for developing MSAs for 100Gbps long-haul DWDM applications.

     Our products typically comply both with the industry standard interfaces as well as with MSA-defined form factors. The existence of these standards generally increases the level of competition, yet the two layers of standardization facilitate market expansion and reduce the risk that a custom design might never achieve mass deployment. Additionally, from the optical systems vendor to the network service provider, there is higher confidence to deploy standards-based equipment and interfaces more rapidly and widely. This confidence stems from the reduced supply risk as well as the backwards and forwards compatibility that industry standards provide.

     Within the constraints of these industry standards, optical subsystems, module and component companies still face significant technology challenges. We need to provide products that incorporate improved semiconductor laser technology and improved mixed-signal logic that address performance, power consumption, operating temperature and size, all of which are inter-related primary challenges, while also meeting customers’ stringent demands for product reliability and low cost. The following are some of the primary technical challenges we encounter in designing and bringing our products to market:

	•		The Power Challenge. Modules that operate at 10Gbps and 40Gbps consume two to more than five times as much electrical power as modules operating at the preceding data rate, and the power challenges are expected to become more difficult as the industry moves toward 100Gbps. Network service providers generally have fixed, limited space in their network central offices, closets, and data centers to house network equipment, creating de facto standards on the physical size allowed for each piece of network equipment regardless of data rate. To offer increasingly higher-speed systems, network system vendors need more efficient modules to support greater port density while adhering to power supply and cooling system constraints. These constraints drive the need for laser technology with higher temperature tolerance and improved efficiency, which reduces power consumption and enables smaller form factor modules to be used. Most carriers and system vendors also now have well established green programs and award preference to suppliers that help them reduce their carbon footprint through lower power consumption.
	•		The Temperature Challenge. Within an optical module, the laser diode is the component most sensitive to temperature. As a result, 10Gbps modules have in the past been constrained to 70°C maximum operating case temperature. Even in temperature controlled environments, heat dissipation from neighboring electronic components can raise internal equipment temperatures to levels that degrade laser and module performance. Furthermore, some network equipment is located outdoors in non-temperature controlled environments where transceiver modules need to operate reliably up to an operating case temperature of 85°C. Therefore, customers are demanding optical modules that can operate at wider temperature ranges, especially incorporating lasers that do not require costly and inefficient thermoelectric coolers. A benefit of more efficient and uncooled lasers is that they draw less current, which reduces power consumption and helps the environment. We are extending this technology to reaches of up to 80km at 10Gbps.
	•		The Size Challenge. The system throughput, data rate of each port and the overall chassis dimensions of a system define the bandwidth capacity of that system. Expanding the capacity of a system requires increasing the number of ports and the data rate of those ports. To meet these higher speed and density requirements, industry leaders have defined smaller transceiver packages. As the size of these packages decreases, so does their ability to dissipate heat, making it virtually impossible to support cooled-laser technology.

Therefore, lower power consumption uncooled-laser technology with higher temperature tolerance and improved efficiency is required to meet the thermal capacity of these smaller packages.

     These three challenges become greater factors as we move further into 40Gbps and 100Gbps client-side and line-side solutions.

Technology and Research and Development

     We use our proprietary technology at many levels within our product development, ranging from the basic materials to the component integration and optimization techniques for our modules and subsystems. We are conducting fundamental research in laser and photonic integration technologies. In addition, we are developing technology and designs for analog and digital integrated circuits to best complement our high speed optical components. Our technology is protected by our strong patent portfolio and our trade secrets. In particular, the following technologies are central to our business:

     Semiconductor Laser Design & Manufacturing. We are a leading designer and manufacturer of lasers for high-speed fiber optic communications such as 10Gbps and 40Gbps. In the development and manufacturing of new lasers, we utilize accumulated knowledge in areas such as semiconductor growth, semiconductor materials systems, quantum well engineering, wavelength design and high-frequency performance. This knowledge enables performance improvements such as miniaturization, wavelength control, wide temperature and high-speed operation, and provides us with a time to market and design advantage over companies that source their 10Gbps and 40Gbps lasers from other companies.

     Optical Semiconductor Materials. Central to our laser design and manufacturing is our experience and research in materials, one of the most challenging aspects of optical communications technology and a source of competitive advantage. Our advances in optical semiconductor materials have enabled us to develop new lasers that are more compact, offer greater control of the light emitted and utilize less power to operate. For example, our innovations in the use of aluminum in semiconductor lasers are utilized in several of our new lasers including our uncooled DFB laser and our EA-DFB laser, which integrates a modulator with the DFB laser on the same chip. The use of aluminum gives these lasers increased temperature tolerance, improved efficiency, faster response time and greater wavelength stability, all while achieving or exceeding industry reliability requirements. Our research continues on new materials systems for use in developing new laser structures to further improve laser operating temperature and efficiency.

     Subassembly Design. Laser diodes and photodetectors are particularly sensitive to external forces, fields and chemical environments, so they are typically housed in a hermetically sealed package. These laser diodes and photodetectors are placed upon special ceramic circuit boards and packaged into a mechanical housing with certain electronics into transmit or receive optical subassemblies, or TOSA (transmitter optical sub-assembly) and ROSA (receiver optical sub-assembly), respectively. We have experts dedicated to TOSA and ROSA design with fundamental knowledge in laser physics, high-frequency design and mechanical design who have been awarded numerous patents. We are a founding member of the XMD and XLMD MSA’s, which create a platform of miniature, high-performance TOSAs and ROSAs for 10Gbps and 40Gbps that are used across multiple products.

     Analog Integrated Circuit and Radio Frequency Design. We internally develop both silicon germanium integrated circuits and monolithic microwave integrated circuits for modulator driver amplifier applications. This analog electronics expertise captured in our integrated circuits provides our 40Gbps and 100Gbps transponders with improved performance and time-to-market advantages. In addition, we are continuing to optimize radio frequency techniques for 40Gbps applications and packaging and interconnect design at 40Gbps and 100Gbps.

     High Speed Optical Design. High speed optical interfaces such as 40Gbps and 100Gbps require significant development of the analog optical design to meet performance requirements while remaining readily manufacturable. In addition to delivering advanced performance for high speed 40Gbps and 100Gbps transponders, we have also pioneered the development of carrier-class polarization mode dispersion compensation (PMDC) technology. Polarization mode dispersion is primarily created by mechanical stress in the fiber link, causing the polarization states of an optical signal to travel with different propagation velocities and thus arrive at different times at the receiver. Polarization mode dispersion stresses the receiver in detecting the transmitted optical signal and may cause inter-symbol interference, which leads to bit errors. Opnext’s PMDC technology reduces the impairment effects of PMD.

     Digital Logic Design. Applications such as regional and long haul transmission are increasingly using digital logic to compensate for long haul optical transmission impairments. We internally developed the digital logic for our 40Gbps products, including optical carrier and transport framers, integrated random data traffic testers, precoder logic and enhanced FEC (Forward Error Correction). We

are developing digital logic designs for a 100Gbps long haul coherent receiver to provide superior performance and cost structure for our products.

     Module Design. Transceiver modules integrate the TOSA, ROSA, integrated circuits and other components into compact packages specified by various MSAs. We develop key technologies in the form of high-speed circuit design to allow for error-free receiving, processing and transmitting of information, exceptional mechanical design to allow for higher tolerance of electrical and mechanical shock and excellent thermal design to transfer heat away from key components of the module and the module itself. Long-distance transmission modules generally require special manipulation of the optical signal to ensure that error-free transmission is achieved over hundreds of kilometers of optical fiber.

     Modulation Techniques. In the communications industry, the modulation scheme refers to how bits of binary data are encoded into a new set of symbols that are more easily transmitted and received. A historical example is Morse code, which encodes data in short pulses, dots, and long pulses, dashes. Conventionally, optical communication has used a pulse of light to encode a binary “1” and the absence of light to encode a binary “0”. However, at higher data rates such as 40 Gbps and beyond, more complex modulation schemes are required. We possess expertise and know-how in using modulation schemes for long-reach and high data-rate optical transmission, including continuously optimized DPSK (Differential Phase Shift Keying), RZ-DQPSK (Return to Zero — Differential Quadrature Phase Shift Keying) and coherent technologies. Additionally, we maintain a database of carrier fiber characteristics and deployed infrastructure that allows us to accurately model our modulation solutions based upon real-world impairments.

     System-Level Software. At the system level, we offer a web-based graphical user interface that provides fault, configuration, accounting, performance and security, or FCAPS, capabilities within a self-contained, network-managed subsystem. Our software enables fast and simple integration into our original equipment manufacturer (“OEM”) customers’ management systems via XML (eXtensible Markup Language) or SNMP (Simple Network Management Protocol) management interfaces. By combining our standards-compliant software interfaces with our 40Gbps subsystem, OEM customers are not required to independently develop hardware to integrate our 40Gbps subsystems into their existing DWDM systems.

     Our research and development plans are driven by customer input obtained by our sales and marketing teams and by our participation in various MSAs, as well as by our long-term technology and product strategies. One example of our long-term technology strategy has been our investment in coherent technologies for long-haul optical transmission. We believe that this technology investment more closely resembles traditional IC semiconductor investments with higher initial costs and potentially higher margins than traditional optical component technology investments. We review research and development priorities on a regular basis and advise key customers and Tier 1 carriers of our research and development progress to achieve better alignment in our product and technology planning. For new components and more complex modules, research and development is conducted in close collaboration with our manufacturing operations to shorten the time-to-market and optimize the manufacturing process. We generally perform product commercialization activities ourselves and utilize our Hitachi relationship to jointly develop or fund more fundamental optical technology such as new laser designs and materials systems.

     Our total research and development expenses were $62.0 million, $74.1 million and $54.0 million in the fiscal years ended March 31, 2011, 2010 and 2009, respectively. In addition to our own sponsored research and development activities, we periodically enter into research and development agreements primarily to design, develop and manufacture complex 40Gbps and 100Gbps products according to the specifications of the customer. We recognized revenues of $0.4 million and $5.1 million pursuant to such research and development agreements during the fiscal years ended March 31, 2011 and 2010, respectively. We recognized no revenues pursuant to research and development agreements in the fiscal year ended March 31, 2009.

Products

     We categorize our communications products along three axes: data rate, application or reach, and product integration. The first axis of data rate indicates the speed at which the optical transceiver or device may operate. We have been a leader at the 10Gbps data rate, and we are investing in technically more challenging 40Gbps and 100Gbps technologies in an effort to extend our leadership to such data rates. The second axis of application or reach indicates the type of link and the distance over which the optical signal is transmitted and received. The terms client-side and line-side indicate the type of link. Line-side applications typically transport multiple signals over a shared fiber cable spanning distances within a large city to inter-continental reaches. Client-side applications use a dedicated fiber cable to transport the data over a distance spanning the interior of a building or within a small city. Sometimes we further segment the client-side applications by the type of optical fiber, such as multimode fiber, which is used for less than 100 meters or within building links, or single mode fiber, which is used for reaches that can extend between buildings or across municipalities. Finally, the third axis of product integration indicates the level of complexity and functionality of the particular product. These range from discrete laser and photodiodes sold in chip or TOSA/ROSA form factors to optical transceiver modules to integrated subsystems with full software management implementations.

     The primary technologies that comprise all of our products are laser diodes, photodetectors, digital logic and mixed-signal integrated circuits. These components are at the semiconductor chip level and are sometimes abbreviated as chips. The laser diode

provides the light source for communication over fiber optic cables. Our current communications laser diode product offering includes DFB lasers and EA-DFB lasers at selected 2.5Gbps, 10Gbps, 25Gbps and 40Gbps data rates and 1310nm and 1550nm wavelengths. We expect our future developments to include tunable lasers and 40GbE laser source(s). We offer high-performance positive-intrinsic-negative and avalanche photodiodes, or PIN’s and APDs, which operate at the same data rates and wavelengths as our lasers. We develop our laser diodes and photodetectors to offer superior performance in key metrics such as link distance, reliability, temperature range, power consumption, stability and sensitivity.

     The next level of integration is for our TOSA (transmitter optical sub-assembly) and ROSA (receiver optical sub-assembly) products. These involve packaging the laser diodes or photodetectors with integrated circuits and other electronic components that perform various control and signal conversion functions as well as optical focusing elements. A transmitter combines a laser diode with electronic components that control the laser and convert electrical signals from a digital integrated circuit into optical signals suitable for transmission over optical fiber. A receiver combines a photodetector with electronic components that perform the opposite function, converting the optical signal back into electrical form for processing by a digital integrated circuit.

     The integration of the transmit functionality and the receive functionality is accomplished in optical modules often referred to as transceivers or transponders. The term transceiver is used more often for client-side applications and usually implies a more compact size and module footprint, whereas a transponder is more often used for line-side applications and usually implies a larger form factor size with more complex digital controls. Optical network systems vendors rely upon these optical modules to perform transmit and receive functions in most of their new system designs. Telecommunications systems may have anywhere from two to 16 transceiver modules typically mounted onto line cards while data communications systems may have anywhere from two to 48 ports. A few network system vendors design and build the optical interfaces for line-side applications internally; however, almost all network system vendors use optical modules for client-side applications. Our modules support a wide range of protocol interfaces for telecommunications and data communications systems such as OTN, Ethernet, Fibre Channel, and SONET/SDH ranging in speeds from 155Mbps to 100Gbps, as well as utilizing DWDM and tunable technology.

     The final level of integration extends to optical terminal subsystems and custom subsystems, which encompass the optical interface, digital management, digital processing and software management. Our custom 40Gbps subsystem is currently embedded in next generation 40Gbps DWDM interfaces on an IP router, but could be customized for optical cross-connect switches, SONET/SDH multiplexers and transponder-based DWDM solutions. We provide custom integrated modules that meet network system vendors’ existing software control interface and mechanical, thermal and power design constraints, thus minimizing their development overhead and time-to-market. Our OTS-4000 optical terminal subsystem is an industry-compliant, shelf-level product that occupies one-third of a standard seven-foot equipment rack and supports eight hot-swappable line cards, each with 40Gbps total capacity, consisting of transponders, regenerators, shelf controllers and dispersion compensators. The OTS-4000 is scalable to nearly a terabit per second in a single seven-foot rack in single 40Gbps channel increments and provides a service provider with an immediate reduction in transmission cost per bit. Our 40Gbps transponder technology supports long-haul transmission using existing optical amplification techniques. The OTS-4000 chassis supports redundant direct current power feeds and provides full redundancy of all common equipment.

     Our products include:

Reach and Application				<10G		10G		40G		100G
Client- side		≤300 m		SFP		SFP+, XFP, X2, XENPAK
		≤2/10 km		SFP		SFP+, XFP, X2, XENPAK, 300pin, XMD TOSA, XMD ROSA, chips		300pin, QSFP+, CFP, XLMD TOSA, XLMD ROSA		CFP
		≤40 km		SFP, chips		SFP+, XFP, X2, XENPAK, 300pin, XMD TOSA, XMD ROSA, chips
		≤80 km		SFP, chips		SFP+, XFP, X2, XENPAK, 300pin, XMD TOSA, XMD ROSA, chips
Line-side		Metro to Long Haul		SFP, laser diode modules, chips		SFP+, XFP, X2, XENPAK, 300pin		300pin DPSK, 300pin DQPSK, DPSK Subsystem		Under Development

     In addition to our communication products, we offer lasers and infrared LEDs for a variety of industrial and commercial applications. Our products include 404nm, 445nm, 635nm, 650nm and 670nm wavelength-visible lasers for applications such as mini-projectors, laser printing, industrial barcode scanning, bio/medical imaging, industrial imaging and professional contractor tools; 780nm and 830nm wavelength infrared lasers for scientific measurement, night vision, and other infrared applications; and 640nm, 760nm, 840nm and 880nm wavelength infrared LEDs for sensors used in robotics and other industrial applications.

Customers

     We have a global customer base for both the telecommunications and data communications markets that consists of many of the leading network systems vendors worldwide, including Alcatel-Lucent, Ciena Corporation, Cisco, Ericsson Limited, Fiberhome Telecommunication Technologies Co. Ltd., Hitachi, Huawei, Juniper Networks, Inc., NSN and ZTE Kangxun Telecom Co. Ltd.. These customers purchase from us directly or, in certain cases, indirectly through their specified contract manufacturers. We have established long-term relationships by working closely with our customers to better understand the requirements of their products and by providing customer service and technical support.

     The number of leading network systems vendors that supply the global telecommunications and data communications market is concentrated, and so, in turn, is our customer base. Cisco and Alcatel-Lucent historically have been our two largest customers. In addition, sales to Huawei have grown significantly over the past two years. Sales to Cisco, Alcatel-Lucent and Huawei represented 44.8% in aggregate of our total revenue in the fiscal year ended March 31, 2011. Sales to Cisco and NSN represented 44.8% in aggregate of our total revenue in the fiscal year ended March 31, 2010.

     Our customers in the industrial and commercial markets consist of a broad range of companies that design and manufacture laser-based products, including medical and scientific systems, industrial bar code scanners, professional grade construction and surveying tools, gun sights and other security equipment, display and projection systems for mini-projectors and other projection applications, sensors for robotics and industrial automation, and printing engines for high-speed laser printers and plain paper copiers.

Competition

     The market for optical subsystems, modules and components is highly competitive and is characterized by continuous innovation. While no individual company competes against us in all of our product areas, our competitors range from the large, multinational companies offering a wide range of products to smaller companies specializing in narrow markets. In the telecommunications and data communications markets, we compete at the level of basic building blocks, such as lasers and photodetectors, as well as at the integrated module level, such as transceivers. Competitors include Avago, Emcore, Finisar, Fujitsu, JDS Uniphase, Oclaro, Source Photonics and Sumitomo Electric Devices. With respect to subsystems and certain emerging technologies such as 100Gbps line-side technologies, we also compete with the internal development efforts of network systems companies. We believe the principal competitive factors are:

	•		product performance, including size, speed, operating temperature range, power consumption and reliability;
	•		price-to-performance characteristics;
	•		delivery performance and lead times;
	•		ability to introduce new products in a timely manner that meet customers’ design-in schedules and requirements;
	•		ability to dedicate resources to, and successfully progress, research and development efforts;
	•		breadth of product solutions;
	•		sales, technical and post-sales service and support;
	•		sales channels; and
	•		ability to comply with new industry standard interfaces and MSAs.

     In our industrial and commercial product lines, we principally compete with Arima, Mitsubishi, QSI and Sony. We believe the principal competitive factors are:

	•		price-to-performance characteristics;
	•		delivery performance and lead times;
	•		breadth-of-product solutions;

	•		sales, technical and post-sales service and support; and
	•		sales channels.

Manufacturing

     We fabricate key lasers and photo detectors for use in our modules and for sale to other module suppliers in our manufacturing facilities in Totsuka and Komoro, Japan. Optical component manufacturing is highly complex, utilizing extensive know-how in multiple disciplines and accumulated knowledge of the fabrication equipment used to achieve high manufacturing yields, low cost and high product consistency and reliability. Co-location of our research and development and manufacturing teams and utilization of well-proven fabrication equipment helps us shorten the time-to-market and generally achieve or exceed manufacturing cost and yield targets. After chip fabrication, we generally utilize contract manufacturers for the more labor intensive step of packaging the bare die into standardized components such as TOSAs, ROSAs, laser diode modules and TO-cans that are then integrated into transceiver modules and other products.

     We complete the manufacturing of our 40Gbps and 100Gbps subsystems and 40Gbps DPSK modules in our Los Gatos facility from the subassemblies and components provided by our contract manufacturers and other suppliers. Our expertise in optical, electrical and radio frequency design enables us or one of our contract manufacturers to combine the subassemblies and components from our contract manufacturers with our proprietary technologies, install custom embedded software and conduct extensive system calibration and testing.

     For our 10Gbps transceiver modules, we use a combination of internal manufacturing and contract manufacturing. We strive to develop long-term relationships with contract manufacturers to reduce assembly costs and provide greater manufacturing flexibility. We are in the process of transitioning most 10Gbps module production to our contract manufacturers. The manufacture of highly complex 40Gbps and 100Gbps transceiver modules will remain in house for the near future to ensure time-to-market and the highest level of quality.

     For our 2.5Gbps and lower speed SFP modules, we transfer all designs to contract manufacturers once the design phase is completed. These lower speed modules are generally less complex than 10Gbps and above modules and ramp up to much greater volumes in mass production.

     Our contract manufacturers are located in China, Japan, the Philippines, Taiwan, Thailand and the United States. Certain of our contract manufacturers that assemble or produce modules are strategically located close to our customers’ contract manufacturing facilities to shorten lead times and enhance flexibility.

     We follow established new product introduction processes that ensure product reliability and manufacturability by controlling when new products move from sampling stage to mass production. We have stringent quality control processes in place for both internal and contract manufacturing. We utilize comprehensive manufacturing resource planning systems to coordinate procurement and manufacturing with our customers’ forecasts and orders. These processes and systems help us closely coordinate with our customers, support their purchasing needs and product release plans, and streamline our supply chain.

Sources and Availability of Raw Materials

     While we manufacture many parts, including some critical parts, internally, certain of our key components, such as laser diodes, TOSAs and ROSAs, are purchased from external sources. We use various companies and contract manufacturers to supply parts and components for the manufacture and support of our product lines. Although our intention is to establish at least two sources of supply for materials and components whenever possible, our customers have often qualified only a single source of supply for many of the components used in the production of our products. Thus, we may not be able to procure components from alternative sources or, even if we are able to procure materials or components from alternative sources, we may not be able to procure them at acceptable prices or within a reasonable timeframe. As a result, the loss or interruption of such supply arrangements could have a material impact on our ability to deliver certain products on a timely basis.

     For a further discussion of the importance to our business of, and the risks attendant to, our supply chain, see “Risk Factors—There is a limited number of potential suppliers for certain components used in our products. In addition, we depend on a limited number of suppliers whose components have been qualified into our products and who could disrupt our business if they stop, decrease or delay

shipments or if the components they ship have quality or consistency issues. We may also face component shortages if we experience increased demand for modules and components beyond what our qualified suppliers can deliver” in Item 1A of this Annual Report on Form 10-K.

Backlog and Geographic Financial Information

     As of each of June 10, 2011 and June 10, 2010, we had $62.9 million of backlog orders expected to be firm. We reasonably expect the full amount of such backlog as of June 10, 2011 to be filled in the current fiscal year ending March 31, 2012. Our level of backlog is significantly impacted by our participation in the vendor managed inventory programs certain of our more significant customers have implemented. For a further discussion of vendor managed inventory programs and the impact of our participation therein on us, see “Risk Factors—We participate in vendor managed inventory programs for the benefit of certain of our customers, which could result in increased inventory levels and/or decreased visibility into the timing of sales” in Item 1A of this Annual Report on Form 10-K.

     Please see Note 18 to Consolidated Financial Statements on page 85 for financial information regarding the regions in which we do business.

Sales, Marketing and Technical Support

     In the communications market, we primarily sell our products through our direct sales force supported by a network of manufacturer representatives and distributors. Our sales force works closely with our field application engineers and product marketing and sales operations teams in an integrated approach to address our customers’ current and future needs. We assign an account manager to each customer account to provide a clear interface for the customer, with some account managers responsible for multiple customers. The support provided by our field application engineers is critical in the product qualification stage. Transceiver modules, especially at higher data rates, are complex products that are subject to rigorous qualification procedures of both the product and the supplier and these procedures differ from customer to customer. Also, many customers have custom requirements in addition to those defined by MSAs to differentiate their products and meet design constraints. Our product marketing teams interface with our customers’ product development staffs to address customization requests, collect market intelligence to define future product development and represent us in MSAs. Our market development team meets regularly with the Tier 1 system providers to understand their requirements so we can better address the needs of our direct customer, the system vendor.

     For key customers, we hold periodic technology forums to allow their product development teams to interact directly with our product marketing teams. These forums provide us insight into our customers’ long-term needs while helping our customers adjust their plans to the product advances we can deliver. Also, our customers are increasingly utilizing contract manufacturers while retaining design and key component qualification activities. This trend requires us to continually upgrade our sales operations and manufacturing support to maximize our efficiency and coordination with our customers.

     In the industrial and commercial market, we primarily sell through a network of manufacturing representatives and/or distributors to address the broad range of applications and industries in which our products are used. The sales effort is managed by an internal sales team and supported by dedicated field application engineering and product marketing staff. We also sell directly to certain strategic customers. Through our customer interactions, we continually increase our knowledge of each application’s requirements, using this information to improve our sales effectiveness and guide product development.

     Since inception, we have actively communicated our brand worldwide through participation at trade shows and industry conferences, publication of research papers and bylined articles in trade media, advertisements in trade publications and interactive media, interactions with industry press and analysts, press releases and our company website, as well as through print and electronic sales material.

Patents and Other Intellectual Property Rights

     We rely on patent, trademark, copyright and trade secret laws and internal controls and procedures to protect our technology and brand.

     As of March 31, 2011, we have been issued 570 patents, of which 141 patents are from the same technology in different jurisdictions, and had 321 patent applications pending, of which 96 patents are from the same technology in different jurisdictions. Patents have been issued in various countries including the U.S., Japan, Germany and France, with the main concentrations in the U.S. and Japan. Of the 223 patents issued in the U.S., 15 will expire within the next five years and, of those, 11 will expire in the next two years. Of the 213 patents issued in Japan, 32 will expire in the next five years and, of those, 19 will expire in the next two years. We do not expect the expiration of our patents in the next two years to materially affect our business. Our patent portfolio covers a broad range of intellectual property, including semiconductor design and manufacturing, optical device packaging, TOSA/ROSA and module design and manufacturing, electrical circuit design, tunable and DWDM technology, connectors and manufacturing tools. We follow well-established procedures for patenting intellectual property and have internal incentive programs to encourage the protection of new inventions.

     For technologies that we develop in cooperation with Hitachi, either on a joint development or funded project basis, we have contractual terms that define the ownership, use rights, and responsibility for intellectual property protection for any inventions that arise. We also benefit from long-term cross-licensing agreements with Hitachi that allow either party to leverage certain of the other party’s intellectual property rights worldwide.

     Opnext is a registered trademark in the U.S., Japan, China and in the European Union as a Community Trademark (CTM).

     We take extensive measures to protect our intellectual property rights and information. For example, every employee enters into a confidential information and invention assignment agreement with us when they join us and employees are reminded of their responsibilities pursuant to such agreement when they depart from the Company. We also enter into confidential information and invention assignment agreements with our contractors.

Employees

     As of March 31, 2011, we had 512 full-time employees, of which 312 were located in Japan, 180 in the U.S., ten in Europe, four in Canada and six in China. Of our 512 total employees as of March 31, 2011, 191 were in research and development, 160 were in manufacturing, 89 were in sales and marketing, and 72 were in administration. We consider our relationships with our employees to be good. None of our employees is represented by a labor union.

Item 1A. Risk Factors

     You should carefully consider each of the following risks and all of the other information set forth in this annual report. The following risks relate principally to our business and our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not know or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develop into actual events, they could have a material adverse effect on our business, financial condition or results of operations, which could also adversely affect the trading price of our common stock.

We depend on a limited number of customers for a significant percentage of our sales, and any loss, cancellation, reduction or delay in purchases by these customers could harm our business.

     A limited number of customers have, historically, consistently accounted for a significant portion of our sales. For example, for the fiscal year ended March 31, 2011, sales to three customers, Alcatel-Lucent, Cisco and Huawei, in aggregate accounted for 44.7% of our total revenues, and for the fiscal year ended March 31, 2010, Cisco and NSN in aggregate accounted for 45% of our total revenues. Sales from any of our major customers may decline or fluctuate significantly in the future. We may not be able to offset any decline in sales from our existing major customers with sales from new customers or other existing customers. Because of our reliance on a limited number of customers, any decrease in sales from, or loss of, one or more of these customers without a corresponding increase in sales from other customers would harm our business, operating results and financial condition. In addition, any negative developments in the business of existing significant customers could result in significantly decreased sales to these customers, which could seriously harm our business, operating results and financial condition. Although we are attempting to expand our customer base, the markets in which we sell our optical components products are dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers. Accordingly, our success will depend on our continued ability to develop and manage relationships with significant customers, and we expect that the majority of our sales will continue to depend on sales of our products to a limited number of customers for the foreseeable future.

We do not have long-term volume purchase contracts with our customers, and, as a result, our customers may increase, decrease, cancel or delay their buying levels at any time with minimal advance notice to us, which may significantly harm our business.

     Our customers typically purchase our products pursuant to individual purchase orders. While our customers generally provide us with their demand forecasts, in most cases they are not contractually committed to buy any quantity of products. Our customers may increase, decrease, cancel or delay purchase orders already in place. If any of our major customers were to decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of orders may cause us to fail to achieve our short-term and long-term financial and operating goals. In the past, during periods of severe market

downturns, certain of our largest customers cancelled significant orders with us and our competitors, which resulted in losses of sales and excess and obsolete inventory and led to inventory and asset disposals throughout the industry. More recently, as the global economic recession that began in late 2007 deepened, particularly affecting the credit markets as well as equity markets, certain of our largest customers cancelled significant, previously committed purchase orders resulting in the loss of sales and excess and obsolete inventory for us and increasing the difficulties associated with accurately forecasting future sales. Similar or continued decreases, deferrals or cancellations of purchases by our customers may significantly harm our industry and specifically our business in these and in additional unforeseen ways, particularly if such decreases, deferrals or cancellations are not anticipated.

     In addition, as a consequence of natural disasters such as the March 11, 2011 earthquake and tsunami in Japan or other unforeseen events, our OEM customers may not be able to obtain sufficient supply of materials and components required for the production of their products, which could reduce sales of these products to end-users. If our OEM customers are unable to obtain adequate supplies of components needed for the manufacture of their products that incorporate our products, or if their operations are otherwise disrupted by any natural disaster, we may experience delays or cancellation of orders from our OEM customers. Furthermore, concerns about shortages could lead some of our customers to forecast or place orders in excess of actual demand in order to ensure supply of products, and these types of ordering patterns could result in the buildup of excess inventory or excess manufacturing capacity.

There is a limited number of potential suppliers for certain components used in our products. In addition, we depend on a limited number of suppliers whose components have been qualified into our products and who could disrupt our business if they stop, decrease or delay shipments or if the components they ship have quality or consistency issues. We may also face component shortages if we experience increased demand for modules and components beyond what our qualified suppliers can deliver.

     Our customers generally restrict our ability to change the component parts in our modules without their approval, which for less critical components may require as little as a specification comparison and for more critical components, such as lasers, photodetectors and key integrated circuits, as much as repeating the entire qualification process. We depend on a limited number of suppliers of key components we have qualified to use in the manufacture of certain of our products. Some of these components are available only from a sole source or have been qualified only from a single supplier. We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify new component suppliers. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery or quality problems or reduced control over product pricing, reliability and performance. In the past, we have had to change suppliers, which has, in some instances, resulted in delays in product development and manufacturing until another supplier was found and qualified. Any such delays in the future may limit our ability to respond to changes in customer and market demands.

     During the last several years, the number of suppliers of components has decreased significantly and, more recently, demand for components has increased rapidly. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products could adversely affect our ability to fulfill customer orders and our results of operations. For example, during the calendar year ended December 31, 2010, we experienced significant limitations on the availability of components from certain of our suppliers, resulting in losses of anticipated sales and the related revenues. In addition, following the March 11, 2011 earthquake and tsunami in Japan, we experienced some supply chain disruption, resulting in some loss of revenue for us. Any negative impact on our suppliers from earthquakes or other natural disasters, including disruption in the production of component parts for our products or the ability of our suppliers to transport these components, may affect the availability of components used in our products, adversely affecting our ability to fulfill orders and, thus, our business and results of operations.

We are dependent on contract manufacturers used by our customers for a significant portion of our sales.

     Many of our OEM customers, including Cisco and Alcatel-Lucent, use third-party contract manufacturers to manufacture their networking systems. Sales to contract manufacturers used by our customers represented 31.4% and 32.2% of our total revenues for the fiscal years ended March 31, 2011 and 2010, respectively. Certain contract manufacturers purchase our products directly from us on behalf of networking OEMs. Although we work with our OEM customers in the design and development phases of their systems, these OEM customers are gradually giving contract manufacturers more authority in product purchasing decisions. As a result, we depend on a concentrated group of contract manufacturers for a significant portion of our sales. If we cannot compete effectively for the business of these contract manufacturers or if any of the contract manufacturers that work with our OEM customers experience financial or other difficulties in their businesses, our sales and our business could be adversely affected.

Uncertainty in customers’ forecasts of their demands and other factors may lead to delays and disruptions in manufacturing, which could result in delays in product shipments to customers and could adversely affect our business.

     Fluctuations and changes in our customers’ demand are common in our industry. Such fluctuations, as well as quality control problems experienced in our manufacturing operations or those of our third-party contract manufacturers or vendors, may cause us to experience delays and disruptions in our manufacturing process and overall operations and reduce our output. As a result, product shipments could be delayed beyond the shipment schedules requested by our customers or could be cancelled, which would negatively affect our sales, operating income, strategic position with customers, market share and reputation. In addition, disruptions, delays or cancellations could cause inefficient production that in turn could result in higher manufacturing costs, lower yields and potential excess and obsolete inventory or manufacturing equipment. In the past, we have experienced such disruptions, delays and cancellations.

We participate in vendor managed inventory programs for the benefit of certain of our customers, which could result in increased inventory levels and/or decreased visibility into the timing of sales.

     Certain of our more significant customers have implemented a supply chain management tool called vendor managed inventory (“VMI”) that requires suppliers, such as Opnext, to assume responsibility for maintaining an agreed upon level of consigned inventory at the customer’s location or at a third-party logistics provider, based on the customer’s demand forecast. Notwithstanding the fact that the supplier builds and ships the inventory, the customer does not purchase the consigned inventory until the inventory is drawn or pulled from the customer or third-party location to be used in the manufacture of the customer’s product. Though the consigned inventory may be at the customer’s or third-party logistics provider’s physical location, it remains inventory owned by the supplier until the inventory is drawn or pulled, which is the time at which the sale takes place. Our participation in VMI programs has resulted in our experiencing higher levels of inventory than we might otherwise and has decreased our visibility into the timing of when our finished goods will ultimately result in revenue-generating sales.

     Certain VMI programs, particularly any involving products considered to be standard products, may require us to commit to delivering certain quantities of our products to our customers as consigned inventory without the customers having committed to purchase any such products. Such VMI programs increase the likelihood that estimates of our customers’ requirements that prove to be greater than our customers’ actual purchases could result in surplus inventory and we could be required to record charges for obsolete or excess inventories. Some of our products and supplies have in the past become obsolete while in inventory because rapidly changing customer specifications or a decrease in customer demand. If we or our customers with which we participate in VMI programs fail to accurately predict the demand for our products, we could incur additional excess and obsolete inventory write-downs. If we are unable to effectively manage the implementation of, and proper inventory management planning associated with, our customers’ VMI programs, our financial condition and results of operations could be materially adversely affected.

If our customers do not qualify our products or if their customers do not qualify their products, our results of operations may suffer.

     Most of our customers do not purchase our products prior to qualification of our products and satisfactory completion of factory audits and vendor evaluation. Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, because of the rapid technological changes in our market, a customer may cancel or modify a design project before we begin large-scale manufacture of the product and receive revenues from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized custom design projects absent a research and development agreement that provided for the payment of such expenses. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects, but any such delay, termination, cancellation or modification could have a negative effect on our results of operations.

     If network service providers that purchase systems from our customers fail to qualify or delay qualifications of any products sold by our customers that contain our products, our business could be harmed. The qualification and field testing of our customers’ systems by network service providers is long and unpredictable. This process is not under our or our customers’ control, and, as a result, timing of our sales is unpredictable. Any unanticipated delay in qualification of one of our customers’ network systems could result in the delay or cancellation of orders from our customers for products included in the applicable network system, which could harm our results of operations.

Our products are complex and may take longer to develop and qualify than anticipated and we may not recognize sales from new products until after long customer qualification periods.

     We are constantly developing new products and using new technologies in these products. These products often take substantial time to develop because of their complexity, rigorous testing and qualification requirements and because customer and market requirements can change during the product development or qualification process. Such activity requires significant spending by us. Because of the long development cycle and qualification process, we may not sell any of the new products until long after such expenditures are made.

     In the telecommunications market, there are stringent and comprehensive reliability and qualification requirements for optical networking systems. In the data communications industry, qualifications can also be stringent and time consuming. However, these requirements are less uniform than those found in the telecommunications industry from application to application and systems vendor to systems vendor.

     At the component level, such as for new lasers, the development cycle may be lengthy and may not result in a product that can be utilized cost-effectively in our modules or that meets customer and market requirements. Additionally, we often incur substantial costs associated with the research and development and sales and marketing activities in connection with products that may be purchased long after we have incurred the costs associated with designing, creating and selling such products.

We rely substantially upon a limited number of contract manufacturers and, if these contract manufacturers fail to meet our short and long-term needs and contractual obligations, our business may be negatively impacted.

     We rely on a limited number of contract manufacturers to assemble, manufacture and test the majority of our finished goods. The qualification and set-up of these independent manufacturers under quality assurance standards is an expensive and time-consuming process. Certain of our independent manufacturers have a limited history of manufacturing optical modules or components. In the past, we have experienced delays or other problems, such as inferior quality, insufficient quantity of product and an inability to meet cost targets, which have led to delays in our ability to fulfill customer orders. Additionally, in the past we have been required to qualify new contract manufacturers and replace contract manufacturers, which has led to delays in deliveries. Any future interruption in the operations of these manufacturers, or any deficiency in the quality, quantity or timely delivery of the components or products built for us by these manufacturers, could impede our ability to meet our scheduled product deliveries to our customers or require us to contract with and qualify new contract manufacturers. As a result, we may lose existing or potential customers or orders and our business may be negatively impacted.

Our financial results may vary significantly from quarter to quarter as the result of a number of factors, which may lead to volatility in our stock price.

     Our quarterly sales and operating results have varied in the past and may continue to vary significantly from quarter to quarter. This variability may lead to volatility in our stock price as market analysts and investors respond to these quarterly fluctuations. These fluctuations are attributable to numerous factors, including:

	•		fluctuations in demand for our products;
	•		the timing, size and product mix of sales of our products;
	•		the timing and size of revenues derived from research and development agreements;
	•		our ability to source component parts and to manufacture and deliver products to our customers in a timely and cost-effective manner;
	•		quality control problems in our and our contract manufacturers’ manufacturing operations;
	•		fluctuations in our manufacturing yields;
	•		length and variability of the sales cycles of our products;

	•		the loss or gain of significant customers;
	•		new product introductions and enhancements by our competitors and ourselves and the level of market acceptance thereof;
	•		changes in our pricing and sales policies or the pricing and sales policies of our competitors;
	•		our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner;
	•		the evolving and unpredictable nature of the markets for products incorporating our optical components and subsystems;
	•		the occurrence and effects of natural disasters, including in Japan which has a high level of seismic activity;
	•		unanticipated increases in costs and expenses; and
	•		fluctuations in foreign currency exchange rates.

     These events are difficult to forecast and these events, as well as other events, could materially adversely affect our quarterly or annual operating results. In addition, a significant amount of our operating expenses is relatively fixed in nature because of the extent of our internal manufacturing operations and the level of resources dedicated to our research and development, sales and general administrative efforts. Any failure to adjust spending quickly enough to compensate for a sales shortfall could magnify the adverse impact of such sales shortfall on our results of operations. Because many of the factors referenced above are beyond our control, we believe that quarter-to-quarter comparisons of our operating results may not be a reliable indication of our future performance, and you should not rely on our results for any single quarter as an indication of our future performance. Moreover, our operating results may not meet our announced guidance or expectations of equity research analysts or investors, in which case the price of our common stock could decrease significantly.

Our future operating results may be subject to volatility as a result of exposure to foreign currency exchange rate risks.

     We are exposed to foreign currency exchange rate risks. Foreign currency exchange rate fluctuations may affect our revenues and our costs and expenses and significantly affect our operating results. Because certain sales transactions and the related assets and liabilities are denominated in currencies other than the U.S. dollar, primarily the Japanese yen, our revenues are exposed to market risks related to fluctuations in foreign currency exchange rates. For example, for the fiscal years ended March 31, 2011, 2010 and 2009, 15.5%, 9.4% and 16.7%, respectively, of our revenues were denominated in Japanese yen. To the extent we continue to generate a significant portion of our revenues in currencies other than the U.S. dollar, our revenues will continue to be affected by foreign currency exchange rate fluctuations. In addition, a substantial portion of our cost of sales and the related assets and liabilities are denominated in Japanese yen and portions of our operating expenses are denominated in Japanese yen and euros. For example, during the fiscal years ended March 31, 2011, 2010 and 2009, approximately 44.0%, 37.2% and 60.5%, respectively, of our cost of sales were denominated in Japanese yen. As a result, we bear the risk that fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar could decrease our total revenues or increase our costs and expenses and, therefore, have a negative effect on future operating results.

We may experience low manufacturing yields or higher than expected costs.

     Manufacturing yields depend on a number of factors, including the stability and manufacturability of the product design, manufacturing improvements gained over cumulative production volumes, the quality and consistency of component parts and the nature and extent of customization requirements by customers. Higher volume demand for more mature designs requiring less customization generally results in higher manufacturing yields than products with lower volumes, less mature designs and requiring extensive customization. Capacity constraints, raw materials shortages, logistics issues, the introduction of new product lines and changes in our customer requirements, manufacturing facilities or processes or those of our third-party contract manufacturers and component suppliers have historically caused, and may in the future cause, significantly reduced manufacturing yields, negatively impacting the gross margins on, and our production capacity for, those products. Our ability to maintain sufficient manufacturing yields is particularly important with respect to certain products we manufacture, such as lasers and photodetectors as a result of the long manufacturing process. Moreover, an increase in the rejection and rework rate of products during the quality control process before, during or after manufacture would result in lower yields, gross margins and production capacity. Finally, manufacturing yields and

margins can also be lower if we receive and inadvertently use defective or contaminated materials from our suppliers. Because a significant portion of our manufacturing costs is relatively fixed, manufacturing yields may have a significant effect on our results of operations. Lower than expected manufacturing yields could delay product shipments increase our costs or decrease our sales and related revenues.

Shifts in our product mix may result in declines in gross margin.

     Our gross profit margins vary among our product families and are generally higher on our 100Gbps, 40Gbps and longer distance 10Gbps products. Our optical products sold for longer-distance applications typically have higher gross margins than our products for shorter-distance applications. Therefore, our overall gross profit margins can be significantly impacted by the relative levels of longer-distance and shorter-distance products sold in any particular period. Recently, we experienced five consecutive quarterly declines in sales of our 40Gbps subsystems products through the quarter ended June 30, 2010. Although sales of these products increased in the quarter ended March 31, 2011 relative to the previous quarter, reoccurrence of an unfavorable sales trend in these products or other 40Gbs and above products could negatively affect future gross margins, given that our gross margins are generally higher on these products.

     In addition, our gross margins are generally lower for newly introduced products and improve as unit volumes increase. Our overall operating income has fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices, our ability to reduce product costs, and recognition of revenues derived from research and development agreements, and these fluctuations are expected to continue in the future.

     In recent periods, certain of our products that operate at 10Gbps data rates and below have generated reduced gross margins, which reduced margins we believe are attributable to, among other factors, the increased average age of such products, delays in the development of certain internal subcomponents, our low level of vertical integration, as well as intensified competition in these product groups. To the extent that we are unable to introduce, or experience delays in introducing, the next generation of these products, or to the extent we are unsuccessful in achieving a desirable level of vertical integration with respect to the subcomponents of these products, we may continue to experience diminished gross margins in connection with the sales of certain 10Gbps products.

Certain of our revenues are derived from research and development agreements, which can result in material increases or decreases in our gross margin and net earnings from quarter to quarter due to the recognition or deferral of revenue related to these agreements in a particular quarter.

     We periodically enter into research and development agreements primarily to design, develop and manufacture complex 40Gbps and 100Gbps products according to the specifications of the customer. Revenues from such agreements are generally recognized upon the completion of certain milestones specified in such agreements. Such revenue may have limited or no corresponding cost of revenue, and therefore revenue from these agreements can have a substantial effect on our gross margin and net earnings during the period in which such revenue and the associated cost of sales is recognized.

Our products may contain defects that may cause us to incur significant costs, divert our attention from product development efforts, result in a loss of customers or possibly result in product liability claims.

     Our products are complex and undergo quality testing as well as formal qualification by both our customers and us. However, defects may be found from time to time. Our customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons (including, among others, the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions), our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair and/or replace defective products under warranty, particularly when such failures occur in installed systems. In addition, certain of our customer contracts require that, in addition to correcting the failure with the product, we reimburse the customer for the costs and expenses incurred by the customer in connection with an “epidemic failure” of our product. An epidemic failure with respect to a particular product generally occurs when in excess of a specified percentage of such installed product exhibits a failure of the same root cause within a certain specified time period. We have experienced such failures in the past and will continue to face this risk going forward, as our products are widely deployed throughout the world in multiple demanding environments and applications. In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty in order to maintain customer

relationships. We have in the past increased our warranty reserves and have incurred significant expenses relating to certain communications products. Any significant product failure could result in lost future sales of the affected product or other products, as well as severe customer relations problems, litigation or damage to our reputation.

     In addition, our products are typically embedded in, or deployed in conjunction with, our customers’ products which incorporate a variety of components and our products may be expected to interoperate with products produced by third parties. As a result, not all defects are immediately detectable and, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, all of which would harm our business.

     The occurrence of any defects in our products could give rise to liability for damages caused by such defects. Any defects could, moreover, impair the market’s acceptance of our products. Both could have a material adverse effect on our business and financial condition. For example, in the fiscal year ended March 31, 2008, we incurred a $1.0 million warranty charge to cover anticipated future costs associated with replacing defective 40Gbps Digital Mux/Demux integrated circuits purchased from an external supplier that were included in 40Gpbs transceivers previously sold to our customers.

The price of our common stock is highly volatile and may continue to fluctuate substantially, which could result in substantial losses for our investors.

     The trading price of our common stock has fluctuated significantly since our initial public offering in February 2007, and is likely to remain volatile in the future. For example, since the date of our initial public offering, our common stock has closed as low as $1.30 and as high as $18.71 per share. The trading price of our common stock could be subject to wide fluctuations in response to many events or factors, including the following:

	•		actual or anticipated fluctuations in our results of operations;
	•		variance in our financial performance from the expectations of market analysts;
	•		conditions and trends in the markets we serve;
	•		announcements of significant new products by us or our competitors;
	•		changes in our pricing policies or the pricing policies of our competitors;
	•		legislation or regulatory policies, practices, or actions;
	•		the commencement or outcome of litigation;
	•		our sale of common stock or other securities in the future, or sales of our common stock by our principal stockholders;
	•		changes in market valuation or earnings of our competitors;
	•		the trading volume of our common stock;
	•		changes in the estimation of the future size and growth rate of our markets;
	•		the occurrence and effects of natural disasters, including in Japan which has a high level of seismic activity;
	•		general economic conditions; and
	•		material weaknesses in internal controls.

     In addition, the stock market in general, and the NASDAQ and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance.

We face increasing competition from providers of competing products, which could negatively impact our results of operations and market share.

     A number of companies have developed or are developing transmit and receive optical modules and components and lasers and infrared LEDs that compete directly with our product offerings. Current and potential competitors may have substantially greater financial, marketing, research and manufacturing resources than we possess, and there can be no assurance that our current and future competitors will not be more successful than us in specific product lines or as a whole.

     Competition has intensified as additional competitors enter the market and current competitors expand their product lines. The industry has experienced an increase in low-cost providers of certain product lines. Companies competing with us may introduce products that are more competitively priced, have better performance, functionality or reliability, or our competitors may have stronger customer relationships, or may be able to react quicker to changing customer requirements and expectations. Increased competitive pressure has in the past and may in the future result in a loss of sales or market share or cause us to lower prices for our products, any of which would harm our business, financial condition and operating results. To attract new customers or retain existing customers, we may offer certain customers favorable prices on our products. A reduction in pricing for any existing or future customers may result in reduced pricing for other existing or future customers since our customers’ pricing is generally established pursuant to pricing agreements of not more than one year in duration or upon receipt of purchase orders. Most of the pricing agreements with our customers provide either that prices will be set at invoicing or at various intervals during the year or require us to offer our existing customers the most favorable pricing terms. All of these situations enable our customers to frequently negotiate based upon prevailing market price trends. As product prices decline, our average selling prices and operating profits decline.

     Because certain of our competitors have longer operating histories, stronger strategic alliances and greater financial, technical, marketing and other resources than we have, these companies have the ability to devote greater resources to the development, promotion, sale and support of their products. For example, in the telecommunications and data communications markets, some of our competitors offer broader product portfolios by supplying passive components or a broader range of lower speed transceivers. Other competitors may also have preferential access to certain network systems vendors or offer directly competitive products that may have certain better performance measures than our products. In addition, with respect to certain emerging technologies such as 100Gbps line-side technologies, we also compete with the internal development efforts of network system companies. Our competitors — including network systems companies developing potentially competitive products internally — that have large market capitalizations or cash reserves may be better positioned than we are to acquire other companies to gain new technologies or products that may compete with our product lines. Any of these factors could give our competitors a strategic advantage. Therefore, we cannot assure you that we will be able to compete successfully against either current or future competitors in the future.

The market for optical components continues to be characterized by intense price competition which has had, and will continue to have, a material adverse effect on our results of operations, particularly if we are not able to reduce our expenses commensurately.

     The market for optical components continues to be characterized by declining average selling prices resulting from factors such as intense price competition among optical component manufacturers, excess capacity, the introduction of new products, and increased unit volumes as manufacturers continue to deploy network and storage systems. In recent years, we have observed a modest acceleration in the decline of average selling prices. We anticipate that average selling prices will continue to decrease in the future in response to product introductions by our competitors or us, or in response to other factors, including price pressures from significant customers. In order to achieve and sustain profitable operations, we must, therefore, continue to develop and introduce new products on a timely basis that incorporate features that can be sold at higher average selling prices. Failure to do so could have an adverse effect on our business, financial condition and results of operations.

     In the current environment of declining average selling prices, and especially when such declines appear to be accelerating, we must continually seek ways to reduce our costs to achieve our desired operating results. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures. The continued uncertainties in the communications industry and the global economy make it difficult for us to anticipate revenue levels and therefore to make appropriate estimates and plans relating to cost management. To remain

competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to enable us to remain price competitive and achieve our desired operating results.

If demand for optical systems, particularly for 10Gbps and above network systems, does not continue to expand as expected, our business will suffer.

     Our future success as a manufacturer of transmit and receive optical modules, components and subsystems ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optics infrastructure. The continued uncertainties in the communications industry and the global economy make it difficult for us to anticipate sales levels. Continued uncertain demand for optical components would have a material adverse effect on our results of operations. Currently, while increasing demand for network services and for broadband access, in particular, is apparent, growth is limited by several factors, including, among others, the current global economic conditions, an uncertain regulatory environment and reluctance on the part of content providers to supply video and audio content because of insufficient copy protection and uncertainty regarding long-term sustainable business models as multiple industries (cable TV, traditional telecommunications, wireless, satellite, etc.) offer competing content delivery solutions. Ultimately, if long-term expectations for network growth and bandwidth demand are not realized or do not support a sustainable business model, our business would be significantly harmed.

Our markets are subject to rapid technological change and, to compete effectively, we must continually introduce new products that achieve market acceptance or our business may be significantly harmed.

     The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards, all with an underlying pressure to reduce cost and meet stringent reliability and qualification requirements. We expect that new technologies will emerge as competition and the need for higher and more cost-effective bandwidth increases. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a write-down in the value of inventory on hand related to existing products. We have in the past experienced a slowdown in demand for existing products and delays in new product development, and such delays may occur in the future. To the extent customers defer or cancel orders for existing products for any reason, our operating results would suffer. Product development delays may result from numerous factors, including:

	•		changing product specifications and customer requirements;
	•		access to or availability of parts and components needed in new products;
	•		unanticipated engineering complexities;
	•		delays in or denials of membership in future MSAs that become successful, or membership in and product development for MSAs that do not become successful;
	•		difficulties in hiring and retaining necessary technical personnel;
	•		difficulties in reallocating engineering resources and overcoming resource limitations; and
	•		changing market or competitive product requirements.

     We expect that new technologies will continue to emerge as competition in the communications industry increases and the need for higher and more cost efficient bandwidth expands. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing products or products in development uncompetitive, obsolete or unmarketable. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot make any assurance that we will be able to identify, develop, manufacture, market or support new or enhanced products

successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products, including those incorporating certain emerging technologies such as 100Gbps line-side technologies, in which we have made and continue to make significant investments, will gain market acceptance or that we will be able to respond effectively to product introductions by competitors, technological changes or emerging industry standards. We also may not be able to develop or license from third parties the underlying core technologies necessary to create new products and enhancements and to stay competitive in our markets. Any failure to respond to technological changes could significantly harm our business.

We depend on Hitachi for assistance with our research and development efforts. Any failure of Hitachi to provide these services could have a material adverse effect on our business.

     Our product expertise is based on our research ability developed within our Hitachi heritage and through joint research and development in lasers and optical technologies. A key factor to our business success and strategy is fundamental laser research. We rely on access to Hitachi’s research laboratories pursuant to a research and development agreement with Hitachi, which includes access to Hitachi’s research facilities and engineers, to conduct research and development activities that are important to the establishment of new technologies and products vital to our current and future business. Our research and development agreement with Hitachi and Opnext Japan’s research and development agreement with Hitachi will both expire on February 20, 2012. Should access to Hitachi’s research laboratories be unavailable or available at less attractive terms in the future, this may impede development of new technologies and products, and our financial condition and operating results could be materially adversely affected.

Adverse conditions in the global economy have negatively impacted our customers, suppliers and our business.

     The United States, Europe and Asia have experienced significant declines in economic activity, including, among other things, reduced consumer spending, declines in asset valuations, diminished liquidity and credit availability, significant volatility in securities prices, rating downgrades in certain instances, and fluctuations in foreign currency exchange rates. These economic developments have adversely affected, or have the potential to adversely affect, our customers, suppliers and businesses similar to ours and have resulted or could result in a variety of negative effects, such as reduction in revenues, increased costs, lower gross margin percentages, increased allowances for doubtful accounts and/or write-offs of accounts receivable, and required recognition of impairments of capitalized assets, including goodwill and other intangibles. Any such developments could have a material adverse effect on our business, results of operations, financial condition and cash flows. We are not able to predict the duration or severity of adverse economic conditions in the U.S. and other countries, and there can be no assurance that there will not be further declines in economic activity.

We depend on facilities located outside of the United States to manufacture our products, which subjects us to additional risks.

     In addition to our two manufacturing facilities in Japan, we rely on contract manufacturers located elsewhere in Asia and other countries for our supply of key products and we intend to further expand our use of contract manufacturers outside the United States. Each of these facilities and manufacturers subjects us to additional risks associated with international manufacturing, including:

	•		unexpected changes in regulatory requirements;
	•		legal uncertainties regarding liabilities, tariffs and other trade barriers;
	•		inadequate protection of intellectual property in some countries;
	•		greater incidence of shipping delays, including, but not limited to, as a result of customs delays;
	•		greater difficulty in overseeing manufacturing operations, including, but not limited to, the levels of inventory maintained at our and our contract manufacturers’ facilities;
	•		greater difficulty in hiring talent needed to oversee manufacturing operations;
	•		the impact of earthquakes or other natural disasters, including in Japan which has a high level of seismic activity;
	•		potential political and economic instability; and

•

the outbreak of infectious diseases that could result in travel restrictions or the closure of our facilities or the facilities of our contract manufacturers or suppliers.

     Any of these factors could significantly impair our ability to source our contract manufacturing requirements internationally.

Business disruptions resulting from international uncertainties or risks could negatively impact our profitability.

     We derive, and expect to continue to derive, a significant portion of our revenues from sales in various international markets. Our international sales and operations are subject to a number of material risks, including, but not limited to:

	•		different technical standards or requirements, such as country or region-specific requirements to eliminate the use of lead;
	•		difficulties in staffing, managing and supporting operations in more than one country;
	•		difficulties in enforcing agreements and collecting receivables through foreign legal systems;
	•		fewer legal protections for intellectual property;
	•		fluctuations in foreign economies;
	•		fluctuations in the value of foreign currencies and interest rates;
	•		domestic and international economic or political changes, hostilities or other disruptions in regions where we currently operate or may operate in the future;
	•		limitations on travel engendered by the outbreak of diseases and any other widespread public health problems; and
	•		different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future.

     The risks provided above impact our business in areas in which we operate, including Japan and Europe, which constitute a significant portion of our international operations. As an example, the European Union enforced a mandatory requirement through a directive concerning the Reduction of Hazardous Substances (RoHS 2002/95/EC), which required us to make changes to our product line on a global basis to comply with the European directive, and may institute similar or additional requirements in the future. Negative developments in one or more countries or regions in which we operate or sell our products could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulties in producing and delivering our products, threats to our intellectual property, difficulty in collecting receivables, or a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations.

Our business and future operating results may be adversely affected by events outside of our control, including, but not limited to, natural disasters such as the recent earthquake and tsunami in Japan.

     Our business and operating results are vulnerable to interruption by events outside of our control, including, but not limited to, natural disasters, particularly possible earthquakes that may affect our factories or facilities in Japan or California or the facilities of our contract manufacturers or critical vendors. Other possible disruptions include: fire, tsunami, volcanic activity, flood, power loss, telecommunications failures, political instability, military conflict and uncertainties arising from terrorist attacks, the economic consequences of military action or terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce. Any of the foregoing events could have a material adverse effect on our business, financial condition or results of operations. In addition, in the event of an economic downturn triggered by one or more of the foregoing events, we may suffer a decline in revenues and we may not be able to reduce costs fast enough to compensate, particularly since we may be hampered in reducing employee headcount in foreign jurisdictions because of foreign labor regulations.

     For example, on March 11, 2011 the northeast coast of Japan experienced a severe earthquake followed by a tsunami, with continuing aftershocks from the earthquake. These geological events caused significant damage in the region, including severe damage

to Japan’s power and other infrastructure as well as its economy. Our module assembly facility in Totsuka, Japan suffered minor disruption from the earthquake, with production at this facility interrupted for ten days. While our chip production facility in Totsuka also suffered minor damage, production at this facility did not fully resume for approximately five weeks due to the time required to recalibrate and verify the proper operation of the equipment located there.

     Certain of our suppliers located in Japan were also impacted by the March 11 earthquake and tsunami and, in certain instances, we had to obtain alternative sources of supply or implement other measures. Any negative impact on our suppliers from earthquakes or other natural disasters, including disruption in the production of components used in our products or the ability of our suppliers to transport such components, may affect the availability and price of components used in our products. Other factors stemming from the March 11 events that could impact our suppliers in Japan and our products include disruption of stable power supply, the impact of the damaged nuclear power plant, including radiation contamination, infrastructure issues such as transportation disruption, potential screening for radiation or other contamination, and workforce availability.

     We were also impacted by power outages in the Totsuka area in March and April 2011 and there is continued uncertainty regarding the availability of electrical power. Thus, there remains a risk that we could in the future experience interruptions to our production or delays or other constraints in obtaining key components and/or price increases related to such components that could materially adversely affect our business, financial condition and results of operations.

     The ten-day interruption in our module manufacturing operations in Japan resulted in some loss of revenue in the quarter ended March 31, 2011 and we expect the continuing effects of the earthquake will impact our revenues into our quarter ending September 30, 2011. Although the value of equipment and inventory damaged by the earthquake was minimal, we experienced approximately $1.0 million of idle capacity costs in the quarter ended March 31, 2011 and we expect to continue to experience unutilized capacity costs into our quarter ending September 30, 2011.

     While the March 11, 2011 earthquake did not directly damage our facilities to any significant extent, Japan in general is subject to earthquakes. Earthquakes and other natural events beyond our control can harm our business, financial condition and results of operation by causing, among other things, production stoppages, the incurrence of significant costs, including, but not limited to, increased cost of component parts, supply chain shortages, or reduced demand for our products due to the impact of our customers or their supply chains.

We may not be able to obtain additional capital in the future, and failure to do so may harm our business.

     We believe that our existing balances of cash and cash equivalents will be sufficient to meet our cash needs to fund working capital, capital expenditures and our capital lease obligations for at least the next 12 months. We may, however, require additional financing to fund our operations in the future. Due to the unpredictable nature of the capital markets, particularly in the technology sector, we cannot assure you that we will be able to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, we could be required to significantly reduce or restructure our business operations. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders.

If we fail to obtain the right to use others’ intellectual property rights necessary to operate our business, our ability to succeed will be adversely affected.

     Numerous patents in our industry are held by others, including our competitors and certain academic institutions. Our competitors may seek to gain a competitive advantage or other third parties may seek an economic return on their intellectual property portfolios by making infringement claims against us. For example, on March 27, 2008, Furukawa Electric Co. (“Furukawa”) filed a complaint against Opnext Japan, Inc., our wholly owned subsidiary (“Opnext Japan”), alleging that certain laser diode modules sold by Opnext Japan infringe Furukawa’s Japanese Patent No. 2,898,643. The complaint seeks an injunction as well as 300 million yen in royalty damages. While the Tokyo District Court entered judgment in favor of Opnext Japan in February of 2010, the judgment was appealed by Furukawa to the Intellectual Property High Court on March 9, 2010. While we continue to defend ourselves vigorously in this litigation, the defense of this action has required significant expenditures on our part. There can be no assurance that this action or other actions which may in the future be filed against us will not result in a material recovery against, or significant additional expenses to, us.

     In the future, we may need to obtain license rights to patents or other intellectual property held by others to the extent necessary for our business. Unless we are able to obtain those licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit sales of our existing products and the development of new products for our markets. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our operating results. Our competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage.

     If we are unable to obtain a license from a third party, or successfully defeat their infringement claim, we could be required to:

	•		cease the manufacture, use or sale of the infringing products, processes or technology;
	•		pay substantial damages for past, present and future use of the infringing technology;
	•		expend significant resources to develop non-infringing technology; or
	•		pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology.

     Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

We license our intellectual property to Hitachi and its wholly owned subsidiaries without restriction. In addition, Hitachi is free to license certain of Hitachi’s intellectual property that we use in our business to any third party, including our competitors, which could harm our business and operating results.

     We were initially created as a stand-alone entity by acquiring certain assets of Hitachi through various transactions. In connection with these transactions, we acquired a number of patents and know-how from Hitachi, but also granted Hitachi and its wholly owned subsidiaries a perpetual right to continue to use those patents and know-how, as well as other patents and know-how that we develop during a period ending in July 2011 (and October 2012 in certain cases). This license back to Hitachi is broad and permits Hitachi to use this intellectual property for any products or services anywhere in the world, including to compete with us.

     Additionally, while significant intellectual property owned by Hitachi was assigned to us when we were formed, Hitachi retained and only licensed to us the intellectual property rights to underlying technologies used in both our products and the products of Hitachi. Under the agreement, Hitachi remains free to license these intellectual property rights to the underlying technologies to any party, including our competitors. The intellectual property that has been retained by Hitachi and that can be licensed in this manner does not relate solely or primarily to one or more of our products, or groups of products; rather, the intellectual property that is licensed to us by Hitachi is generally used broadly across our entire product portfolio. Competition by third parties using the underlying technologies retained by Hitachi could harm our business, financial condition and operating results.

Our failure to protect our intellectual property may significantly harm our business.

     Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and internal procedures, to establish and protect our proprietary rights. Although a number of patents have been issued to us and we have obtained a number of other patents as a result of our acquisitions, we cannot assure you that our issued patents will be upheld if challenged by another party. Additionally, with respect to any patent applications that we have filed, we cannot assure you that any patents will issue as a result of these applications. If we fail to protect our intellectual property, we may not receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on it.

Pursuing infringers of our intellectual property rights can be costly.

     Pursuing infringers of our proprietary rights could result in significant litigation costs, and any failure to pursue infringers could result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive advantage and decreased sales. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as

do the laws of the United States. Protecting our intellectual property is difficult, especially after our employees or those of our third-party contract manufacturers end their employment or engagement. We may have employees leave us and go to work for competitors. Attempts may be made to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or prevent others from developing similar technology. Furthermore, policing the unauthorized use of our intellectual property is difficult and expensive. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. For example, on May 27, 2011 Opnext Japan filed a complaint against Furukawa in the Tokyo District Court, alleging that certain laser diode modules sold by Furukawa infringe Opnext Japan’s Japanese patent No. 3,887,174. Opnext Japan is seeking an injunction as well as damages in the amount of 100 million yen. The costs and diversion of resources from this or other litigation that may be necessary to enforce our intellectual property rights could significantly harm our business. However, if we fail to protect our intellectual property, we may not receive any return or an acceptable return on the resources expended to create the intellectual property or generate any competitive advantage based on it.

Third parties may claim we are infringing their intellectual property rights, and we could be prevented from selling our products or suffer significant litigation expense, even if these claims have no merit.

     Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may claim that we, or our products, operations or any products or technology we obtain from other parties are infringing their intellectual property rights, and we may be unaware of intellectual property rights of others that may cover some of our assets, technology and products. There may be third parties that refrained from asserting intellectual property infringement claims against our products or processes while we were a majority-owned subsidiary of Hitachi that may elect to pursue such claims now that we are no longer a majority-owned subsidiary of Hitachi. For example, on March 27, 2008, Furukawa filed a complaint against Opnext Japan, alleging that certain laser diode modules sold by Opnext Japan infringe Furukawa’s Japanese Patent No. 2,898,643. The complaint seeks an injunction as well as 300 million yen in royalty damages. While the Tokyo District Court entered judgment in favor of Opnext Japan in February of 2010, the judgment was appealed by Furukawa to the Intellectual Property High Court on March 9, 2010. While we continue to defend ourselves vigorously in this litigation, the defense of this action has required significant expenditures on our part. There can be no assurances that this action or other actions that might be brought against us in the future will not result in a material recovery against, or significant additional expenses to, us.

     In addition, from time to time we receive letters from third parties that allege we are infringing their intellectual property and asking us to license such intellectual property, and we review the merits of each such letter. Any litigation regarding patents, trademarks, copyrights or other intellectual property rights, even those without merit, could be costly and time consuming, and divert our management and key personnel from operating our business. The complexity of the technology involved and inherent uncertainty and cost of intellectual property litigation increases our risks. If any third party has a meritorious or successful claim that we are infringing its intellectual property rights, we may be forced to change our products or manufacturing processes or enter into a licensing arrangement with such third party, which may be costly or impractical, particularly in the event we are subject to a contractual commitment to continue supplying impacted products to one or more of our customers. This also may require us to stop selling our products as currently engineered, which could harm our competitive position. We also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our products or services and may result in a material decrease in sales.

The anticipated benefits of the acquisition of StrataLight may not be realized fully, or realized at all, or may take longer to realize than expected.

     Achieving the potential benefits of the acquisition of StrataLight depends in substantial part on the successful integration of the two companies’ technologies, operations and personnel. We face significant challenges in continuing to integrate StrataLight’s organization and operations. Some of the challenges involved in this integration include:

	•		integrating product offerings and manufacturing activities;
	•		coordinating sales and marketing efforts to effectively communicate our capabilities to customers;
	•		coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost; and

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preserving important relationships of both Opnext and StrataLight and resolving potential conflicts that may arise.

     The integration of StrataLight has been and will continue to be a complex, time consuming and expensive process and has and will continue to require significant attention from management and other personnel, which may distract their attention from our day-to-day business. The diversion of management’s attention and any difficulties associated with integrating StrataLight into Opnext could have a material adverse effect on our business, financial condition and results of operation and could result in our not achieving the anticipated benefits of the acquisition.

We may not achieve strategic objectives, anticipated synergies and cost savings and other potential benefits of the acquisition of StrataLight.

     We expected to realize strategic and other financial and operating benefits as a result of the acquisition of StrataLight, including, among other things, certain cost and sales synergies. However, we cannot predict with certainty the extent to which these benefits will be or will continue to be achieved or the timing of the realization of any such benefits. The following factors, among others, may prevent or delay us from realizing these benefits:

	•		our inability to increase product sales;
	•		our inability to make the significant capital expenditures required to develop StrataLight’s planned products;
	•		unfavorable customer reaction to the our company’s products;
	•		competitive factors, including technological advances attained by competitors and patents granted to or contested by competitors, which would enhance their ability to compete against us;
	•		the failure of key markets for our products to develop to the extent or as rapidly as expected;
	•		changes in technology that increase the number of competitors we face or require us to develop competitive products; and
	•		the failure to retain key employees.

     Failure to achieve the strategic objectives and anticipated potential benefits of the acquisition could have a material adverse effect on our sales, levels of expenses and operating results and could result in dilution in our earnings per share.

Potential future acquisitions may not generate the results expected and could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.

     As part of our business strategy, we may pursue acquisitions of companies, technologies and products that we believe could accelerate our ability to compete in our core markets or allow us to enter new markets. If we fail to manage the pursuit, consummation and integration of acquisitions effectively, in particular during periods of industry uncertainty, our business could suffer. In addition, if we fail to properly evaluate acquisitions, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. Acquisitions involve numerous risks, any of which could harm our business, including:

	•		difficulties in integrating the manufacturing, operations, technologies, products, existing contracts, accounting and personnel of the target company and realizing the anticipated synergies of the combined businesses;
	•		difficulties in supporting and transitioning customers, if any, of the acquired company;
	•		diversion of financial and management resources from existing operations;
	•		the price we pay or other resources that we devote may exceed the value we actually realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity or for our existing operations;
	•		risks associated with entering new markets in which we have limited or no experience;

	•		potential loss of key employees, customers and strategic alliances from either our current business or the acquired company’s business;
	•		assumption of unanticipated problems or latent liabilities, such as problems with the quality of the acquired company’s products;
	•		inability to generate sufficient revenue and profitability to offset acquisition costs;
	•		equity-based acquisitions may have a dilutive effect on our stock; and
	•		inability to successfully consummate transactions with identified acquisition candidates.

     There can be no assurance that any acquisition we might consummate will generate the anticipated results. While we continue to believe that the acquisition of StrataLight, a high-speed transport company that we acquired in January of 2009, complements our core of high speed client technologies, StrataLight has not contributed the level of revenues we initially anticipated that it would contribute to our overall results. For example, StrataLight contributed revenue of $16.7 million in the quarter ended March 31, 2011 as compared to revenue of $37.8 million in the quarter ended March 31, 2009.

     Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results. We recorded a goodwill impairment charge of $5.7 million for the quarter ended December 31, 2008, which represented the full amount of goodwill recorded at the time of the acquisition of Pine Photonics Communications, Inc. In addition, we recorded a goodwill impairment charge of $62.0 million for the quarter ended March 31, 2009 in connection with the acquisition of StrataLight, which represented the full amount of goodwill recorded in connection with such acquisition.

We could be subject to legal and regulatory consequences if we fail to comply with applicable export control laws and regulations.

     Exports of certain of our products are subject to export controls imposed by the U.S. government and administered by the United States Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the Export Administration Regulations, or EAR, administered by the Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the final destination, the identity of the end user and whether a license exception might apply. Virtually all exports of products subject to the International Traffic in Arms Regulations, or ITAR, administered by the Department of State’s Directorate of Defense Trade Controls, require a license. In addition, products developed and manufactured in our foreign locations are subject to export controls of the applicable foreign nation.

     Obtaining necessary export licenses can be difficult and time-consuming. Failure to obtain necessary export licenses could significantly reduce our revenue and materially adversely affect our business, financial condition and results of operations. We could be subject to investigation and potential regulatory consequences, including, but not limited to, a no-action letter, monetary penalties, debarment from government contracting or denial of export privileges and criminal sanctions, any of which would adversely affect our results of operations and cash flow. Compliance with U.S. government regulations may also subject us to significant fees and expenses, including legal expenses, and require us to expend significant time and resources. Finally, the absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.

Environmental laws and regulations may subject us to significant costs and liabilities.

     Our operations include the use, generation and disposal of hazardous materials. We are subject to various U.S. federal, state and foreign laws and regulations relating to the protection of the environment, including those governing the use of hazardous substances, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. For example, the European Union enforced a mandatory requirement through a directive concerning the Reduction of Hazardous Substances (RoHS 2002/95/EC), which required us to make changes to our product line on a global basis to comply with the European directive, and may institute similar or additional directives in the future. A rework or repair expense may be incurred if products are shipped in non-compliance with such directives. These costs may exceed compensation, if any, from parts suppliers, and

could have a material adverse effect on our business, financial condition and results of operation. In the future, we could incur substantial costs, including cleanup costs, as a result of violations of or liabilities under environmental laws.

We were recently the target of securities class action complaints and are at risk of future securities class action litigation. Any additional litigation could result in substantial costs to us, drain our resources and divert our management’s time and attention.

     On February 20, 2008, a putative class action captioned Bixler v. Opnext, Inc., et al. was filed in the United States District Court for the District of New Jersey (the “Court”) against us and certain of our present and former directors and officers (the “Individual Defendants”), alleging, inter alia, that the registration statement and prospectus issued in connection with our initial public offering (the “IPO”) contained material misrepresentations in violation of federal securities laws. In March 2008, two additional putative class actions were filed in the Court, captioned Coleman v. Opnext, Inc., et al. and Johnson v. Opnext, Inc., et al., with similar allegations and naming us, the Individual Defendants, our independent auditor and the underwriters of the IPO as defendants. On May 22, 2008, the Court issued an order consolidating Bixler, Coleman, and Johnson and, on July 30, 2008, a consolidated complaint was filed on behalf of all persons who purchased our common stock on or before February 13, 2008, pursuant to or traceable to the IPO. On November 6, 2008, our independent auditor was voluntarily dismissed from the action by plaintiff without prejudice.

     On September 8, 2009, the remaining parties, including us and the Individual Defendants, entered into a Stipulation and Agreement of Settlement (the “Settlement”). On January 6, 2010, the Court granted final approval of the Settlement, which approval is no longer subject to appeal. We and the Individual Defendants have denied and continue to deny the claims asserted in the consolidated action and entered into the Settlement solely to avoid the costs and risks associated with further litigation. Under the terms of the Settlement, our insurer paid $2,000,000 to a settlement fund that was used to pay eligible claimants and plaintiffs’ counsel, plaintiff dismissed the consolidated action with prejudice and all defendants (including us and the Individual Defendants) were released from any claims that were brought or could have been brought in the consolidated action.

     We incurred significant legal fees in responding to this lawsuit and the expense of defending any additional litigation that may arise may also be significant. The amount of time that would be required to resolve any future lawsuits could be unpredictable and any such litigation could divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

A lack of effective internal control over financial reporting could result in an inability to accurately report our financial results, which could lead to a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

     Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal controls. For example, as more fully described in Item 9A of Amendment No. 1 to our Annual Report filed on Form 10-K/A for the fiscal year ended March 31, 2007, our management concluded that in the course of preparing our financial statements for the quarter ended December 31, 2007 errors occurred in the valuation of inventory consigned to one of our contract manufacturers and that, as a result, our inventory and trade payables balances and the reported amounts of cost of goods sold and other income (expense), net, were not properly reported for each of the fiscal years ended March 31, 2006 and March 31, 2007, and for the quarters beginning September 30, 2005 through March 31, 2007, and our inventory and trade payables balances and the reported amount of cost of goods sold were not properly reported for the quarter ended June 30, 2007. As a result of these errors, we restated our audited financial statements for the fiscal years ended March 31, 2007 and 2006, and filed Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2007 to restate these financial statements, as well as Amendment No. 1 to our Quarterly Reports on Form 10-Q/A for the fiscal quarters ended June 30, 2007 and September 30, 2007. These restatements caused our management to conclude that we had a material weakness in our internal control over financial reporting because the controls did not identify the errors on a timely basis. During the quarter ended March 31, 2008, our management implemented processes and procedures that it believes remediated this weakness. As a result, our management concluded that our internal control over financial reporting was operating effectively as of March 31, 2008 and for each subsequent quarterly period through the fiscal year ended March 31, 2011.

     A failure to maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business, financial condition, operating results and our stock price, and we could be subject to further stockholder litigation and the costs associated therewith.

     Prior to the closing of our acquisition of StrataLight, StrataLight’s independent registered public accounting firm identified material weaknesses and significant deficiencies in StrataLight’s internal control over financial reporting. The identified material weaknesses included a lack of adequate financial statement resources and the lack of an appropriate level of qualified accounting staff, which resulted in a failure to adequately maintain books and records relating to non-recurring engineering arrangements and incorrect accounting for complex or unusual transactions. StrataLight also had a material weakness with respect to inconsistency in the effectiveness of the review over the inputs and analysis of warranty reserve, labor and overhead capitalization and inventory valuation. These material weaknesses were identified by StrataLight’s independent registered public accounting firm in connection with the audit of StrataLight’s financial statements for the year ended December 31, 2007, along with other matters involving its internal controls that constituted significant deficiencies and control deficiencies.

     The existence of a material weakness could result in errors or material misstatements in financial statements. While we believe we have been successful in remediating StrataLight’s material weakness, any recurrence of such material weaknesses, or any occurrence of other material weaknesses, may make it difficult for us to report our future financial results accurately and in a timely fashion. Because of the size of StrataLight in relation to Opnext, any errors resulting from StrataLight’s material weaknesses, significant deficiencies or control deficiencies could result in material misstatements to our future financial statements, which could cause an adverse effect on the trading price of our common stock.

Our ability to utilize our net operating loss carryforwards to offset future taxable income is limited and may in the future be subject to further limitations.

     As of December 31, 2009, we experienced an “ownership change” as that term is defined in Section 382 of the Internal Revenue Code of 1986, as Amended (“Section 382”), with the result of limiting the availability of our net operating loss carryforwards and other related tax attributes (“NOLs”) for future use. As a result of the “ownership change,” our U.S. federal and state NOLs were reduced by $28.0 million and $40.2 million, respectively, as of December 31, 2009. Our U.S. federal and state NOLs had been previously reduced by $15.8 million and $35.9 million, respectively, as a result of prior acquisitions. After giving effect to such reductions, we had U.S. federal, state and foreign NOLs of $148.3 million, $47.5 million and $267.5 million, respectively, at March 31, 2011. Of the NOLs at March 31, 2011, $131.9 million of U.S. federal NOLs and $33.7 million of state NOLs are subject to annual limitations in the amounts of $6.5 million and $2.7 million, respectively. There can be no assurance that in the future we will not experience further limitations with respect to the utilization of our NOLs.

If we fail to retain our senior management and other key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

     Our future depends, in part, on our ability to attract and retain key personnel, including the members of our senior management team and key technical personnel, each of whom would be difficult to replace. The loss of services of members of our senior management team or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business. Competition for highly skilled technical personnel is extremely intense and we continue to experience difficulty identifying and hiring qualified personnel in many areas of our business. We may not be able to hire and retain qualified personnel at compensation levels consistent with our existing compensation and salary structure. On April 1, 2009, we announced certain plans to reduce our cost structure and operating expenses, including a ten percent reduction in executive salaries and a five percent reduction in the salaries for other employees. Such salary reductions remained in effect until March 31, 2010, at which time they were discontinued. There can be no assurance that such measures will not adversely impact our ability to attract and retain key personnel. In addition, some of the companies with which we compete for hiring experienced employees have greater resources than we have. Further, in making employment decisions, particularly in the high technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Therefore, significant volatility in the price of our stock or the poor relative performance of our stock could adversely affect our ability to attract or retain key technical or other personnel.

     On December 10, 2010, Gilles Bouchard resigned from his position as our Chief Executive Officer and President and our Board of Directors (the “Board”) appointed Harry Bosco, our Chairman of the Board, to the position of Chief Executive Officer and President on an interim basis. Prior to assuming the position of Chairman of the Board in April 2009, Mr. Bosco had served as our Chief Executive Officer and President and a member of the Board since our formation in November 2000. There can be no assurance that we will be successful in identifying and attracting a permanent chief executive officer nor can there be any assurance as to the timing of when we might be successful in identifying and attracting a permanent chief executive officer.

Hitachi and Clarity could effectively together control the outcome of shareholder actions in the Company.

     As of June 1, 2011, Hitachi held an approximately 31.4%, and Clarity Partners, L.P. and Clarity Opnext Holdings II, LLC (collectively, “Clarity”) held an approximately 7.1%, equity interest in the Company. In addition, Hitachi and Clarity Management, L.P. each hold fully vested options to purchase 1,010,000 and 1,000,000 shares of our common stock, respectively, and they each have employees who serve as members of our board of directors. Their equity shareholdings could effectively give them the power to collectively control many or all actions that require shareholder approval, including the election of our board of directors. Significant corporate actions, including the incurrence of material indebtedness or the issuance of a material amount of equity securities may require the consent of our shareholders. Hitachi and Clarity, collectively or individually, might oppose any action that would dilute their respective equity interests in the Company, and may be unable or unwilling to participate in future financings of the Company and thereby materially harm our business and prospects.

     We may have conflicts of interest with Hitachi and, because of Hitachi’s significant ownership interest in the Company, may not be able to resolve such conflicts of interest on favorable terms for us. For example, Hitachi has another majority-owned subsidiary, Hitachi Cable, Ltd., that directly competes with us in certain 10Gbps 300 pin and LX4 applications and certain SFP applications.

Certain provisions of our corporate governing documents and Delaware Law could make an acquisition of our company difficult.

     Certain provisions of our organizational documents and Delaware law could discourage potential acquisition proposals, delay or prevent a change in control of the Company or limit the price that investors may be willing to pay in the future for shares of our common stock. For example, our amended and restated certificate of incorporation and amended and restated bylaws:

	•		authorize the issuance of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;
	•		limit the persons who can call special stockholder meetings;
	•		provide that a supermajority vote of our stockholders is required to amend some portions of our amended and restated certificate of incorporation and amended and restated bylaws;
	•		establish advance notice requirements to nominate persons for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings;
	•		do not provide for cumulative voting in the election of directors; and
	•		provide for the filling of vacancies on our board of directors by action of a majority of the directors and not by the stockholders.

     These and other provisions in our organizational documents could allow our board of directors to affect the rights of our stockholders in a number of ways, including making it difficult for stockholders to replace members of the board of directors. Because our board of directors is responsible for approving the appointment of members of our management team, these provisions could in turn affect any attempt to replace the current management team. These provisions could also limit the price that investors would be willing to pay in the future for shares of our common stock.

     In addition to our governing documents, on June 18, 2009, our board of directors adopted a shareholder rights plan (the “Rights Plan”) designed to protect our NOLs and other related tax attributes that could be used to reduce future potential federal and state income tax obligations. The rights were designed to deter stock accumulations made without prior approval from our board of directors that would trigger an “ownership change,” as that term is defined in Section 382, with the result of limiting the availability for future use of our NOLs. The Rights Plan was not adopted in response to any known accumulation of shares of our stock and was approved by our stockholders at our 2009 annual meeting of stockholders. On February 8, 2010, Marubeni Corporation filed a Schedule 13G/A reporting events that, when taken together with other changes in ownership of our common stock by our five percent or greater stockholders during the prior three-year period, constituted an “ownership change” for us as that term is defined in Section 382, with the result of limiting the availability of our NOLs and other related tax attributes for future use. Notwithstanding such “ownership change,” the Rights Plan remains in place and may continue to deter accumulations of shares of our common stock.

     Section 203 of the Delaware General Corporation Law also imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock that could have the effect of delaying, deferring or prohibiting a merger or other takeover or a change of control of our company. Generally, Section 203 of the Delaware General Corporation Law prohibits us from engaging in a business combination with any holder of 15% or more of our common stock for a period of three years after the time that the stockholder acquired our common stock, subject to certain exceptions.

Item 1B. Unresolved Staff Comments.

     Not Applicable.

Item 2. Properties

     We currently lease space in the United States, Japan, Germany and China.

     We do not own any real property. We believe that our leased facilities are adequate to meet our needs for the foreseeable future. The table below lists and describes the terms of our leased properties:

Location		Approximate Square Feet		Function		Lease Expiration Date
United States
Eatontown, New Jersey		7,853		Administration, Sales		August 31, 2011
Fremont, California		30,574		Administration, Sales, Marketing, Manufacturing, Research and Development		November 30, 2013
Los Gatos, California Building 1		33,290		Administration, Marketing, Manufacturing, Research and Development		September 30, 2011
Los Gatos, California Building 2		10,073		Administration, Marketing, Research and Development		June 30, 2011
San Jose, California (with a rent commencement date on or about September 1, 2011)		25,300		Administration, Marketing, Research and Development		November 30, 2016
International
Chiyoda-ku, Japan		2,330 (216 square meters)		Sales		June 11, 2012 (automatic 2-year extensions unless notice given by either party)
Komoro, Japan		34,542 (3,209 square meters)		Manufacturing, Research and Development		March 31, 2016 (automatic 5-year extensions unless notice given by either party)
Munich, Germany		2,992 (278 square meters)		Sales		October 31, 2012
Shanghai, China		1,356 (126 square meters)		Sales		January 21, 2014
Totsuka, Japan		115,852 (10,763 square meters)		Administration, Manufacturing, Research and Development		September 30, 2011 (automatic 1-year extensions unless notice given by either party)
Kanazawa-ku, Japan		2,727 (253 square meters)		Research and Development		February 28, 2015 (automatic 2-year extensions unless notice given by either party)

Item 3. Legal Proceedings.

     On March 27, 2008, Furukawa filed a complaint against Opnext Japan in the Tokyo District Court, alleging that certain laser diode modules sold by the Company infringe the Furukawa Patent. The complaint sought an injunction as well as 300 million yen in royalty damages. Opnext Japan filed its answer on May 7, 2008 stating therein its belief that it does not infringe the Furukawa Patent and that the Furukawa Patent is invalid. On February 24, 2010, the Tokyo District Court entered judgment in favor of Opnext Japan, which judgment

was appealed by Furukawa to the Intellectual Property High Court on March 9, 2010. We intend to defend ourselves vigorously in this litigation.

     On May 27, 2011, Opnext Japan filed a complaint against Furukawa in the Tokyo District Court, alleging that certain laser diode modules sold by Furukawa infringe Opnext Japan’s Japanese patent No. 3,887,174. Opnext Japan is seeking an injunction as well as damages in the amount of 100 million yen.

Item 4. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Since the commencement of public trading of our common stock on February 15, 2007 in connection with our initial public offering, our common stock has traded on the NASDAQ Market under the symbol “OPXT.” The following table sets forth the range of high and low closing sale prices of our common stock for the periods indicated:

		High				Low
Fiscal 2011 Quarter:
January 1, 2011 to March 31, 2011			4.19				1.84
October 1, 2010 to December 31, 2010			1.90				1.35
July 1, 2010 to September 30, 2010			1.85				1.36
April 1, 2010 to June 30, 2010			2.46				1.65
Fiscal 2010 Quarter:
January 1, 2010 to March 31, 2010			2.69				1.74
October 1, 2009 to December 31, 2009			3.20				1.75
July 1, 2009 to September 30, 2009			3.14				1.72
April 1, 2009 to June 30, 2009			2.53				1.72

     The approximate number of stockholders of record as of June 3, 2011 was 364.

Stock Performance Graph

     The graph set forth below compares the cumulative total stockholder return on our common stock between February 15, 2007 and March 31, 2011, with the cumulative total return of (i) the NASDAQ Telecommunications Index, (ii) the NASDAQ Composite Index and (iii) the Amex Networking Index, over the same period. This graph assumes the investment of $100.00 on February 15, 2007 in each of our common stock, the NASDAQ Telecommunications Index, the NASDAQ Composite Index and the Amex Networking Index and assumes the reinvestment of dividends, if any. The graph assumes our closing sale price on February 15, 2007 of $17.40 per share as the initial value of our common stock. The comparisons shown in the graph below are based upon historical data and are not necessarily indicative of potential future performance.

     Prior to February 15, 2007, there was no public market for our securities and, as a result, data for the period preceding February 15, 2007 is not presented on the graph below.

		2/15/2007				3/31/2007				3/31/2008				3/31/2009				3/31/2010				3/31/2011
Opnext, Inc.			100.00				85.00				31.32				9.83				13.56				13.97
NASDAQ Telecommunications Index			100.00				96.50				92.87				61.31				92.41				91.00
NASDAQ Composite Index			100.00				96.98				91.27				61.21				96.03				111.37
Amex Networking Index			100.00				95.74				84.07				52.82				100.57				130.72

Dividend Policy

     We have never declared, or paid, any cash dividends on our common stock and we currently do not anticipate paying any cash dividends for the foreseeable future. Instead, we anticipate that any earnings on our common stock will be used to provide working capital, to support our operations, and to finance the growth and development of our business, including potentially the acquisition of, or investment in, businesses, technologies or products that complement our existing business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including, but not limited to, our future earnings, capital requirements, financial condition, future prospects, applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits, and other factors our board of directors might deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

     The following table summarizes our stock-based incentive plans as of March 31, 2011 that were approved or not approved by our stockholders (in thousands, except per share data):

Number of Securities to be issued

Number of securities

upon exercise of outstanding

Weighted-average

remaining available for

options, stock appreciation rights

exercise

future issuance under equity

and stock units

price

compensation plans

Equity compensation plans approved by our security holders

13,778

$

5.90

13,238

Equity compensation plans not approved by our security holders

—

$

—

—

Repurchases of Equity

     We made no repurchases of our common stock during our fourth fiscal quarter ended March 31, 2011.

Item 6. Selected Financial Data.

     The following consolidated balance sheet data as of March 31, 2011 and 2010 and the consolidated statements of operations data for the fiscal years ended March 31, 2011, 2010 and 2009 have been derived from our audited financial statements and related notes that are included elsewhere in this annual report. The consolidated balance sheet data as of March 31, 2009, 2008 and 2007 and the statement of operations data for the fiscal years ended March 31, 2008 and 2007 have been derived from our audited financial statements and related notes that do not appear in this annual report. The consolidated selected financial data set forth below should be read in conjunction with our consolidated financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report. The historical results are not necessarily indicative of the results to be expected for any future period.

Historical Financial Data

		Fiscal Year Ended March 31,
		2011				2010				2009				2008				2007
		(in thousands, except per share data)
Consolidated statements of operations data:
Revenues(1)		$	357,641			$	319,132			$	318,555			$	283,498			$	222,859
Cost of sales			281,418				252,490				242,782				187,123				148,753
Amortization of acquired developed technology			5,780				5,780				1,321				—				—
Gross margin			70,443				60,862				74,452				96,375				74,106
			19.7	%			19.1	%			23.4	%			34.0	%			33.3	%
Research and development expenses			62,039				74,145				54,043				38,324				35,615
Selling, general, and administrative expenses			58,258				54,829				63,483				48,291				40,231
Impairment of goodwill			—				—				67,681				—				—
Acquired in-process research and development			—				—				15,700				—				—
Amortization of purchased intangibles			1,368				9,240				5,540				—				—
Loss on disposal of property and equipment			578				159				122				502				311
Operating (loss) income			(51,800	)			(77,511	)			(132,117	)			9,258				(2,051	)
Gain on sale of technology assets, net			21,436				—				—				—				—
Interest (expense) income, net			(823	)			(615	)			2,748				8,534				3,298
Other expense, net			(494	)			(472	)			(187	)			(744	)			(551	)
(Loss) income before income taxes			(31,681	)			(78,598	)			(129,556	)			17,048				696
Income tax (expense) benefit			(151	)			85				(16	)			—				—
Net (loss) income		$	(31,832	)		$	(78,513	)		$	(129,572	)		$	17,048			$	696
Net (loss) income per share:
Basic		$	(0.35	)		$	(0.88	)		$	(1.86	)		$	0.26			$	0.01
Diluted			(0.35	)			(0.88	)			(1.86	)			0.26				0.01
Weighted average number of shares:
Basic			89,904				88,952				69,775				64,598				53,432
Diluted			89,904				88,952				69,775				64,633				53,486
Consolidated balance sheet data:
Total assets		$	374,357			$	370,298			$	449,764			$	432,459			$	367,849
Long-term liabilities			19,409				16,672				26,050				22,192				17,271
Total shareholders’ equity			236,226				253,540				320,537				323,078				290,657

Selected Quarterly Financial Information (Unaudited)

     The following table shows our unaudited consolidated quarterly statements of operations data for each of the quarters in the fiscal years ended March 31, 2011 and 2010. This information has been derived from our unaudited financial information, which, in the opinion of management, has been prepared on the same basis as our audited financial statements and includes all adjustments necessary for the fair presentation of the financial information for the quarters presented. This information should be read in conjunction with the audited financial statements and related notes included elsewhere in this annual report.

		Three Months Ended
		March 31,				Dec. 31,				Sept. 30,				June 30,
		2011				2010				2010				2010
		(in thousands, except per share data)
Revenues		$	95,348			$	97,051			$	86,376			$	78,866
Gross margin			18,703				19,362				17,587				14,791
Net income (loss) (1)			9,035				(10,180	)			(14,427	)			(16,260	)
Net income (loss) per share:
Basic		$	0.10			$	(0.11	)		$	(0.16	)		$	(0.18	)
Diluted			0.10				(0.11	)			(0.16	)			(0.18	)
Weighted average shares outstanding:
Basic			89,964				89,892				89,889				89,873
Diluted			91,974				89,892				89,889				89,873

		Three Months Ended
		March 31,				Dec. 31,				Sept. 30,				June 30,
		2010				2009				2009				2009
		(in thousands, except per share data)
Revenues		$	76,783			$	76,065			$	80,975			$	85,309
Gross margin			14,407				12,120				17,589				16,746
Net loss (1)			(18,303	)			(18,580	)			(17,913	)			(23,717	)
Net loss per share:
Basic		$	(0.20	)		$	(0.21	)		$	(0.20	)		$	(0.27	)
Diluted			(0.20	)			(0.21	)			(0.20	)			(0.27	)
Weighted average shares outstanding:
Basic			89,392				88,960				88,769				88,656
Diluted			89,392				88,960				88,769				88,656

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this annual report. Statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from the forward-looking statement. Although the information is based on our current expectations, actual results could vary from expectations stated in this report. Numerous factors will affect our actual results, some of which are beyond our control. These include current and future economic conditions and events and their impact on us and our customers, the impact of natural events such as severe weather or earthquakes in locations in which we, our customers, our contract manufacturers or our suppliers operate, the strength of telecommunications and data communications markets, competitive market conditions, interest rate levels, volatility in our stock price, and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this annual report. We assume no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to disclose material information. For a discussion of important risks related to our business, and related to investing in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see Item 1A: Risk Factors and the discussion under the captions “— Factors That May Influence Future Results of Operations” and “— Liquidity and Capital Resources” below. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

Overview and Background

     We were incorporated as a wholly owned subsidiary of Hitachi, Ltd., or Hitachi, in September of 2000. In July of 2001, Clarity Partners, L.P. and related investment vehicles invested in us and we became a majority owned subsidiary of Hitachi. In October 2002, we acquired Hitachi’s opto device business and expanded our product line into select industrial and commercial markets. In June 2003, we acquired Pine Photonics Communication Inc. (“Pine”) and expanded our product line of SFP transceivers with data rates less than 10Gbps that are sold to telecommunication and data communication customers. In February 2007, we completed our initial public offering of common stock on the NASDAQ market. On January 9, 2009, we completed our acquisition of StrataLight Communications, Inc. (“StrataLight”), which expanded our product line to include 40Gbps subsystems.

     We presently have sales and marketing offices in the U.S., Europe, Japan and China, which are strategically located in close proximity to our major customers. We also have research and development facilities that are co-located with each of our manufacturing facilities in the U.S. and Japan. In addition, we use contract manufacturing partners that are located in China, Japan, the Philippines, Taiwan, Thailand and the U.S. Certain of our contract manufacturing partners that assemble or produce modules are strategically located close to our customers’ contract manufacturing facilities to shorten lead times and enhance flexibility.

Japan Earthquake and Tsunami

     On March 11, 2011, the northeast coast of Japan experienced a severe earthquake followed by a tsunami, with continuing aftershocks from the earthquake. These geological events caused significant damage in the region, including severe damage to nuclear power plants, and impacted Japan’s power and other infrastructure as well as its economy.

     Our industrial and commercial production facility located in Komoro, Japan and our Tokyo sales office were undamaged by the earthquake and operations at these facilities resumed shortly following the earthquake. Our module assembly facility in Totsuka, Japan suffered minor disruption from the earthquake and production at this facility was reinstated on March 21, 2011. While our chip production facility in Totsuka also suffered minor damage, production at this facility did not fully resume until mid-April, however, due to the time required to recalibrate and verify the proper operation of the equipment. While certain of our suppliers located in Japan were also impacted by the earthquake and tsunami, we were generally able to obtain alternative sources of supply or implement other measures.

     We were also impacted by power outages in the Totsuka area in March and April, 2011 and we are in the process of installing backup power systems to mitigate the impact of any future interruptions. We expect these backup power systems will be operational by the end of June 2011. Notwithstanding our efforts, uncertainty exists with respect to the availability of electrical power. Thus, there is a risk that we could in the future experience interruptions to our production or delays or other constraints in obtaining key components and/or price increases related to such components that could materially adversely affect our financial condition and operating results.

     The ten-day interruption in our module manufacturing operations resulted in some loss of revenue in the fiscal quarter ended March 31, 2011 and we expect the continuing effects of the earthquake will impact our revenues into our fiscal quarter ending September 30, 2011. Although the value of equipment and inventory damaged by the earthquake was minimal, we experienced approximately $1.0 million of idle capacity costs in the fiscal quarter ended March 31, 2011. In addition, we expect to continue to experience unutilized capacity costs into our fiscal quarter ending September 30, 2011, though such costs will likely be less than the approximately $1.0 million of idle capacity costs we experienced in the fiscal quarter ended March 31, 2011.

Acquisition of StrataLight

     On January 9, 2009, we completed our acquisition of StrataLight, now named Opnext Subsystems, Inc., a wholly owned subsidiary of Opnext. The aggregate consideration for such acquisition consisted of 26,545,455 shares of common stock and $47.9 million in cash, including the impact of net purchase price adjustments pursuant to the merger agreement. For the fiscal years ended March 31, 2011, 2010 and 2009, StrataLight’s operations contributed revenues of $47.1 million, $83.0 million and $37.8 million, respectively. The decrease in StrataLight revenues for the fiscal year ended March 31, 2011 compared to the fiscal year ended March 31, 2010 resulted from a decline in sales of 40Gbp subsystems. StrataLight revenues have favorably impacted our gross margin percentage as sales of StrataLight products generally have higher relative margins. We also experienced incremental increases of research and development and selling, general and administrative expenses related to the StrataLight operations. During the fiscal year ended March 31, 2009, in connection with the acquisition of StrataLight, we expensed $15.7 million of in-process research and development costs, and following the completion of the acquisition, we recognized a goodwill impairment charge of $62.0 million.

Sale of Technology Assets

     On February 9, 2011, Opnext Subsystems, Inc. (“Opnext Subsystems”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Juniper Networks, Inc. (“Juniper”) to sell certain technology related to modem Application Specific Integrated Circuits used for long haul/ultra-long optical transmission to Juniper for $26 million (the “Purchase Price”), $23.5 million of which was paid simultaneously with the execution of the Purchase Agreement and $2.5 million of which was paid on May 6, 2011. Juniper has assumed all liabilities to the extent arising out of or related to the ownership, use and operation of this technology following the sale, as well as certain other liabilities relating to certain of Opnext Subsystem’s employees to be hired by Juniper.

Revenues

     Through our direct sales force supported by manufacturer representatives and distributors, we sell products to many of the leading network systems vendors throughout the Americas, Europe, Japan and the rest of Asia. Our customers include many of the top telecommunications and data communications network systems vendors in the world. We also supply components to several major transceiver module companies and we sell to select industrial and commercial customers. Sales to telecommunication and data communication customers, our communication sales, accounted for 91.5%, 95.1% and 94.1% of our total revenues during each of the fiscal years ended March 31, 2011, 2010 and 2009, respectively. Also during each of the fiscal years ended March 31, 2011, 2010 and 2009, sales of our communications products with 10Gbps or lower data rates, which we refer to as our “10Gbps and below products,” represented 62.2%, 63.2% and 74.7% of total revenues, respectively, while sales of our communications products with 40Gbps or higher data rates, which we refer to as our “40Gbps and above products,” represented 29.0%, 31.8% and 19.3% of total revenues, respectively. The term “sales” when used herein in reference to our 40Gbps and above products includes revenues received pursuant to development agreements.

     The number of leading network systems vendors that supply the global telecommunications and data communications markets is concentrated, and so, in turn, is our customer base. For the fiscal year ended March 31,

2011, our top three customers, Alcatel-Lucent, Cisco Systems Inc. and subsidiaries (“Cisco”) and Huawei Technologies Co. Ltd. (“Huawei”), accounted for 44.7% in the aggregate of our consolidated revenues. Although we continue to attempt to expand our customer base, we anticipate that a small number of customers will continue to represent a significant percentage of our total revenues.

     During the fiscal years ended March 31, 2011, 2010 and 2009, sales attributed to the Americas represented 40.0%, 45.4% and 49.8% of total revenues, sales attributed to Asia Pacific (excluding Japan) represented 24.0, 14.6% and 9.7% of total revenues, sales attributed to Europe represented 21.0%, 30.6% and 27.0% of total revenues, and sales attributed to Japan represented 15.0%, 9.4% and 13.5% of total revenues, respectively.

     Because certain sales transactions and the related assets and liabilities are denominated in currencies other than the U.S. dollar, primarily the Japanese yen, our revenues are exposed to market risks related to fluctuations in foreign currency exchange rates. For example, for the fiscal years ended March 31, 2011, 2010 and 2009, 15.5%, 9.4% and 16.7% of our revenues were denominated in Japanese yen, respectively. To the extent we continue to generate a significant portion of our revenues in currencies other than the U.S. dollar, our revenues will continue to be affected by foreign currency exchange rate fluctuations.

Cost of Sales and Gross Margin

     Our cost of sales primarily consists of materials including components that are either assembled at one of our three internal manufacturing facilities or at one of several of our contract manufacturing partners or procured from third-party vendors. Because of the complexity and proprietary nature of laser manufacturing, and the advantage of having our internal manufacturing resources co-located with our research and development staffs, most of the lasers used in our optical module and component products are manufactured in our facilities in Komoro and Totsuka, Japan. Our materials include certain parts and components that are purchased from a limited number of suppliers or, in certain situations, from a single supplier. Our cost of sales also includes labor costs for employees and contract laborers engaged in the production of our components and the assembly of our finished goods, outsourcing costs, the cost and related depreciation of manufacturing equipment, as well as manufacturing overhead costs, including the costs for product warranty repairs and inventory adjustments for excess and obsolete inventory.

     Our cost of sales is exposed to market risks related to fluctuations in foreign currency exchange rates because a significant portion of our costs and the related assets and liabilities are denominated in Japanese yen. During the fiscal years ended March 31, 2011, 2010 and 2009, approximately 44.9%, 37.2% and 60.5% of our cost of sales were denominated in Japanese yen, respectively. The percentage decline during the fiscal year ended March 31, 2010 was primarily attributable to the contribution of cost of sales from the StrataLight operations, which are denominated in U.S. dollars, and our ability to procure more raw materials denominated in U.S. dollars. The percentage increase during the fiscal year ended March 31, 2011 was primarily attributable to the decline in sales from the StrataLight operations as compared to the prior year.

     Our gross margins vary among our product lines and are generally higher on our 40Gbps and above and longer distance 10Gbps products. Our gross margins are also generally higher on products where we enjoy a greater degree of vertical integration with respect to the subcomponents of such products. Our overall gross margins primarily fluctuate as a result of our overall sales volumes, changes in average selling prices and product mix, the introduction of new products and subsequent generations of existing products, manufacturing yields, our ability to reduce product costs and fluctuations in foreign currency exchange rates. Our gross margins are also impacted by amortization of acquired developed technology resulting from the acquisition of StrataLight.

Research and Development Expense

     Research and development expense consists primarily of salaries and benefits of personnel related to the design, development and quality testing of new products or enhancement of existing products, as well as outsourced services provided primarily by Hitachi’s research laboratories pursuant to our contractual agreements. We incurred $3.4 million, $4.1 million and $5.8 million of expenses in connection with these agreements during the fiscal years ended March 31, 2011, 2010 and 2009, respectively. In addition, our research and development expense includes the cost of developing prototypes and material costs associated with the testing of products prior to shipment, the cost and related depreciation of equipment used in the testing of products prior to shipment, and other contract research and development related services.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses consist primarily of salaries and benefits for our employees that perform our sales and related support, marketing, supply chain management, finance, legal, information technology, human resource and other general corporate functions, as well as internal and outsourced logistics and distribution costs, commissions paid to our manufacturers’ representatives, professional fees and other corporate related expenses. Selling, general and administrative expenses also include the costs associated with pending litigation.

     During the fiscal year ended March 31, 2010, we experienced a decrease in our selling, general and administrative expenses as we implemented certain expense reduction measures in response to the weak macroeconomic environment and as we benefitted from certain synergies associated with the integration of StrataLight. Selling, general and administrative expenses increased during the fiscal year ended March 31, 2011, as certain temporary expense reduction measures expired.

Impairment of Goodwill

     As a result of the significant deterioration in the macroeconomic environment and the significant decrease in our market capitalization, for the fiscal year ended March 31, 2009, we recorded aggregate write-downs of goodwill of $67.8 million attributable to the previously completed acquisitions of StrataLight and Pine.

Inventory

     Certain of our more significant customers have implemented a supply chain management tool called vendor managed inventory (“VMI”) that requires suppliers, such as us, to assume responsibility for maintaining an agreed upon level of consigned inventory at the customer’s location or at a third-party logistics provider based on the customer’s demand forecast. Notwithstanding the fact that we build and ship the inventory, the customer does not purchase the consigned inventory until the inventory is drawn or pulled by the customer or third-party logistics provider to be used in the manufacture of the customer’s product. Though the consigned inventory may be at the customer’s or the third-party logistics provider’s physical location, it remains inventory owned by us until the inventory is drawn or pulled, which is the time at which the sale takes place. Given that under such programs we are subject to the production schedule and inventory management decisions of the customer or the third-party logistics provider, our participation in VMI programs generally requires us to carry higher levels of finished goods inventory than we might otherwise carry. As of March 31, 2011 and 2010, inventories included inventory consigned to customers or their third-party logistics providers pursuant to VMI arrangements of $9.7 million and $7.5 million, respectively.

Income Taxes

     We are subject to taxation in the United States, Japan and various state, local and other foreign jurisdictions. Our U.S. income tax returns have been examined by the Internal Revenue Service through the fiscal year ended March 31, 2008. Our New Jersey corporate business tax returns and German tax returns have been examined by the respective tax authorities through the fiscal year ended March 31, 2007. Our Japan tax returns have been examined by the Japan tax authorities through the fiscal year ended March 31, 2006.

     As of December 31, 2009, we experienced an “ownership change” as that term is defined in Section 382 of the Internal Revenue Code of 1986, as Amended, with the result of limiting the availability of our net operating loss carryforwards and other related tax attributes (“NOLs”) for future use. As a result of the “ownership change,” our U.S. federal and state NOLs were reduced by $28.0 million and $40.2 million, respectively, as of December 31, 2009. Our U.S. federal and state NOLs had been previously reduced by $15.8 million and $35.9 million, respectively, as a result of prior acquisitions. After giving effect to such reductions, we had U.S. federal, state and foreign NOLs of $148.3 million, $47.5 million and $267.5 million, respectively, at March 31, 2011. Of the NOLs at March 31, 2011, $131.9 million of U.S. federal NOLs and $33.7 million of state NOLs are subject to annual limitations in the amounts of $6.5 million and $2.7 million, respectively.

Factors That May Influence Future Results of Operations

Global Economic Conditions

     In recent years, the credit and financial markets have experienced significant volatility characterized by the bankruptcy, failure, collapse or sale of various financial institutions, increased volatility in securities and commodities prices and currency rates, severely diminished liquidity and credit availability, concern over the economic stability of certain economies in Europe and a significant level of intervention from the United States and other governments, as applicable. Continued concerns about the systemic impact of potential long-term or widespread recession, unemployment, energy costs, geopolitical issues including government deficits, the availability and cost of credit, and reduced consumer confidence have contributed to increased market volatility and diminished expectations for most developed and emerging economies. While recent economic data reflect some stabilization of the economy and credit markets, the cost and availability of credit may continue to reflect volatility and uncertainty. Continued turbulence in the United States and international markets and global economies could restrict our ability and the ability of our customers to refinance indebtedness, increase the costs of borrowing, limit access to capital necessary to meet liquidity needs and materially harm operations or the ability to implement planned business strategies. With respect to our customers, these factors could also negatively impact the timing and amount of infrastructure spending, further negatively impacting our sales.

Japan Earthquake and Tsunami

     The March 11, 2011 earthquake and tsunami in Japan resulted in a ten-day interruption in our manufacturing operations at our module assembly facility in Totsuka, Japan and an approximately five-week disruption to full production at our chip production facility also located in Totsuka. Certain of our suppliers located in Japan were also impacted by the earthquake and tsunami, and in certain instances we had to obtain alternative sources of supply or implement other measures.

     These events in Japan caused significant damage to Japan’s power infrastructure and, during March and April 2011, we were impacted by power outages in the Totsuka area. While we are in the process of installing backup power systems to mitigate the impact of any future interruptions, uncertainty still exists with respect to the availability of electrical power. Thus, there is a risk that we could in the future experience interruptions to our production or delays or other constraints in obtaining key components and/or price increases related to such components that could materially adversely affect our financial condition and operating results.

     We expect the continuing effects of the earthquake will impact our revenues into our fiscal quarter ending September 30, 2011.

Fluctuations of the Japanese Yen and the U.S. Dollar

     The Japanese yen has appreciated significantly relative to the U.S. dollar in the past several years. For example, one U.S. dollar approximated 100 Japanese yen on March 31, 2008 and 83 Japanese yen on March 31, 2011. Our operating results are sensitive to fluctuations in the relative value of the Japanese yen and U.S. dollar because certain of our sales, costs and expenses and the related assets and liabilities are denominated in Japanese yen. As a result, fluctuations in the relative value of the Japanese yen and U.S. dollar impact both our revenues and our operating costs. Our sales denominated in Japanese yen represented 15.5%, 9.4% and 16.7% of our revenues in the fiscal years ended March 31, 2011, 2010 and 2009, respectively. The percentage of our cost of sales denominated in Japanese yen during the fiscal years ended March 31, 2011, 2010 and 2009 were 44.9%, 37.2% and 60.5%, respectively. While we anticipate that we will continue to have a substantial portion of our cost of sales denominated in Japanese yen, we expect the percentage of cost of sales denominated in Japanese yen to diminish as we expand the use of contract manufacturers outside of Japan and procure more raw materials in U.S. dollars. Nonetheless, continued appreciation in the value of the Japanese yen relative to the U.S. dollar could increase our operating costs and, therefore, adversely affect our financial condition and results of operations. In addition, to the extent we continue to generate a significant portion of our sales in Japanese yen or other currencies, our future revenues will continue to be affected by foreign currency exchange rate fluctuations, and could be materially adversely affected.

Expiration of Temporary Expense Reduction Initiatives

     On April 1, 2009, we announced certain measures intended to reduce our cost structure and operating expenses,

including, but not limited to, an approximately ten percent reduction in our global workforce, elimination of bonuses for the fiscal year ended March 31, 2010, a ten percent reduction in executive salaries and director cash compensation, a five percent reduction in salaries for other employees, and suspension of our matching contribution to the 401(k) plan. In October 2009, we further reduced our global workforce by approximately five percent. Executive salaries, director cash compensation and the salaries for other employees were reinstated to their prior levels effective April 1, 2010, increasing our annual cost and operating expense structure by approximately $4.5 million over the reduced levels. Our matching contribution to the 401(k) plan was reinstated effective April 1, 2011.

Impact of Price Declines and Supply Constraints on Revenues

     Our revenues are affected by capital spending of our customers for telecommunications and data communications networks and for lasers and infrared LEDs used in select industrial and commercial markets. The primary markets for our products continue to be characterized by increasing demand, primarily driven by increases in traditional telecommunication and data communication traffic and increasing demand for high bandwidth applications, such as video and music downloads and streaming, on-line gaming, peer-to-peer file sharing and IPTV, as well as new industrial and commercial laser applications. The increased unit volumes as service providers deploy network systems has contributed — along with intense price competition among optical component manufacturers, excess capacity, and the introduction of next generation products — to the market for optical components continuing to be characterized by declining average selling prices. In recent years, we have observed a modest acceleration in the decline of average selling prices. We anticipate that our average selling prices will continue to decrease in future periods, although we cannot predict the extent of these decreases for any particular period.

     Our revenues are also impacted by our ability to procure critical component parts for our products from our suppliers. During the last several years, the number of suppliers of component parts has decreased significantly and, more recently, demand for component parts has increased rapidly. Any supply deficiencies relating to the quality or quantities of components we use to manufacture our products can adversely affect our ability to fulfill customer orders and our results of operations. For example, during the calendar year ended December 31, 2010, we experienced significant limitations on the availability of components from certain of our suppliers, resulting in losses of anticipated sales and the related revenues. While we did not experience such component limitations in the quarter ended March 31, 2011, we cannot be assured that such limitations will not reoccur in the future.

Effect of Product Life Cycle on Gross Margins

     In recent periods, certain of our products that operate at 10Gbps data rates have generated reduced gross margins, which reduced margins we believe are attributable to, among other factors, the increased average age of such products, delays in the development of certain internal subcomponents, our low level of vertical integration, as well as intensified competition in these product groups. To the extent that we are unable to introduce, or experience delays in introducing, the next generation of these products, or to the extent we are unsuccessful in achieving a desirable level of vertical integration with respect to the subcomponents of these products, we may continue to experience diminished gross margins in connection with the sales of these products.

     We experienced five consecutive quarterly declines in sales of our 40Gbps subsystems products through the quarter ended June 30, 2010. Although sales of these products increased in the quarter ended March 31, 2011 relative to the previous quarter, reoccurrence of an unfavorable sales trend in these products or other 40Gbs and above products could negatively affect future gross margins, given that our gross margins are generally higher on these products.

Research and Development Expense

     Our research and development costs increased during the fiscal year ended March 31, 2010 relative to the prior fiscal year as a result of the full-year contribution of StrataLight’s operations and decreased during the fiscal year ended March 31, 2011, as several advanced development programs transitioned to new product introduction efforts. In the future, we expect these costs to vary with our efforts to meet the anticipated market demand for our new and planned future products and to support enhancements to our existing products.

Significant Accounting Policies and Estimates

Revenue Recognition, Warranties and Allowances

     Revenue is derived principally from the sales of our products. We recognize revenue when persuasive evidence of an arrangement exists (usually in the form of a purchase order), delivery has occurred or services have been rendered, title and risk of loss have passed to the customer, the price is fixed or determinable and collection is reasonably assured based on the creditworthiness of the customer and certainty of customer acceptance. These conditions generally exist upon shipment or upon notice from certain customers in Japan that they have completed their inspection and have accepted the product.

     We participate in VMI programs with certain of our customers, whereby we maintain an agreed upon quantity of certain products at a customer-designated warehouse. Revenue pursuant to the VMI programs is recognized when the products are physically pulled by the customer, or its designated contract manufacturer, and put into production. Simultaneous with the inventory pulls, purchase orders are received from the customer, or its designated contract manufacturer, as evidence that a purchase request and delivery have occurred and that title has passed to the customer at a previously agreed upon price.

     We sell certain of our products to customers with a product warranty that provides repairs at no cost or the issuance of a credit to the customer. The length of the warranty term depends on the product being sold, ranging from one year to five years. In addition to accruing for specific known warranty exposures, we accrue the estimated exposure to warranty claims based upon historical claim costs as a percentage of sales multiplied by prior sales still under warranty at the end of any period. Our management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or as other information becomes available.

     Allowances for doubtful accounts are based upon historical payment patterns, aging of accounts receivable and actual write-off history, as well as assessments of customers’ creditworthiness. Changes in the financial condition of customers could have an effect on the allowance balance required and result in a related charge or credit to earnings.

Inventory Valuation

     Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Inventories consist of raw materials, work-in-process and finished goods, including inventory consigned to our customers and our contract manufacturers. Inventory valuation and firm committed purchase order assessments are performed on a quarterly basis and those items that are identified to be obsolete or in excess of forecasted usage are written down to their estimated realizable value. Estimates of realizable value are based upon management’s analyses and assumptions, including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. We typically use a 12-month rolling forecast based on factors, including, but not limited to, our production cycles, anticipated product orders, marketing forecasts, backlog, shipment activities and inventories owned by us but part of VMI programs and held at customer locations. If market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we may require additional inventory write-downs. If demand is higher than expected, inventories that had previously been written down may be sold.

Income Taxes

     Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. At March 31, 2011 and 2010, management considered recent operating results, near-term earnings expectations, and the highly competitive nature of our markets in making this assessment. At the end of each of the respective years, management determined that it was more likely than not that the full tax benefit of the deferred tax assets would not be realized. Accordingly, full valuation allowances have been provided against the net deferred tax assets. There can be no assurance that deferred tax assets

subject to our valuation allowance will ever be realized.

Impairment of Long-Lived Assets

     Long-lived assets, such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in an amount equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. In estimating future cash flows, assets are grouped at the lowest level of identifiable cash flows that are largely independent of cash flows from other groups. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Our evaluations for the fiscal years ended March 31, 2011, 2010 and 2009 indicated that no impairments were required to be recorded.

Goodwill and Business Combinations

     Goodwill represents the excess of purchase price over the fair value of net assets acquired. We account for acquisitions using the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. We then allocate the purchase price in excess of tangible assets acquired to identifiable intangible assets based on valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed to goodwill.

     We use a two-step impairment test to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then the goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then a second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded in an amount equal to the difference between the implied fair value and the carrying value of the goodwill.

     Based upon the impairment analyses performed during the fiscal year ended March 31, 2009, we recorded aggregate goodwill impairment charges of $67.8 million attributable to the acquisitions of StrataLight and Pine. The Company had no recorded goodwill at March 31, 2011, 2010 and 2009.

Stock-Based Incentive Plans

     All equity-based payments, including grants of employee stock options, are recognized in our financial statements based on their grant-date fair value. We estimate the fair value of our share-based awards utilizing the Black-Scholes pricing model. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The fair value calculations involve significant judgments, assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods. The factors include:

	•		The time period our stock-based awards are expected to remain outstanding has been determined based on the average of the original award period and the remaining vesting period in accordance with the SEC’s simplified method. Our expected term assumption for awards issued during the fiscal years ended March 31, 2011, 2010 and 2009 was 4.6 years, 4.5 years and 4.9 years, respectively. As additional evidence develops from our option activity, the expected term assumption may be refined to capture more relevant trends.
	•		We estimated volatility based on our historical stock prices. The expected volatility assumption for awards issued during the fiscal years ended March 31, 2011, 2010 and 2009 was 82.6%, 86.2% and 83.5%, respectively.
	•		A dividend yield of zero has been assumed for awards issued during the fiscal years ended March 31, 2011, 2010 and 2009 based on our actual past experience and the fact that we do not anticipate paying a dividend on our shares in the near future.
	•		We have based our risk-free interest rate assumption for awards issued during the fiscal years ended March 31, 2011, 2010 and 2009 on the implied weighted-average yields of 2.0%, 2.1% and 2.3%, respectively, available on U.S. Treasury zero-coupon issues with an equivalent expected term.

•

Forfeiture rates for awards issued during the fiscal years ended March 31, 2011, 2010 and 2009 have been estimated based on our actual historical forfeiture trends of approximately 10% over their expected terms.

     Compensation expense for all employee stock-based awards was $8.2 million, $6.6 million and $5.6 million for the fiscal years ended March 31, 2011, 2010 and 2009, respectively.

Use of Estimates

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods reported. These estimates are based on historical experience and on assumptions that are believed to be reasonable under the circumstances. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. These estimates include assessments of the ability to collect accounts receivable, the use and recoverability of inventory, the realization of deferred tax assets, expected warranty costs, fair value of stock awards, purchased tangible and intangible assets and liabilities in business combinations, and estimated useful lives for depreciation and amortization periods of tangible and intangible assets, among others. Actual results may differ from these estimates, and the estimates will change under different assumptions or conditions.

Results of Operations for the Fiscal Years Ended March 31, 2011, 2010 and 2009

     The following table reflects the results of our operations in U.S. dollars and as a percentage of revenue. Our historical operating results may not be indicative of the results of any future period.

		Fiscal Year Ended March 31,												Fiscal Year Ended March 31,
		2011				2010				2009				2011				2010				2009
		(in thousands)												(as percentage of revenue)
Revenues		$	357,641			$	319,132			$	318,555				100.0	%			100.0	%			100.0	%
Cost of sales			281,418				252,490				242,782				78.7	%			79.1	%			76.2	%
Amortization of acquired developed technology			5,780				5,780				1,321				1.6	%			1.8	%			0.4	%
Gross margin			70,443				60,862				74,452				19.7	%			19.1	%			23.4	%
Research and development expenses			62,039				74,145				54,043				17.3	%			23.3	%			17.0	%
Selling, general and administrative expenses			58,258				54,829				63,483				16.3	%			17.2	%			19.9	%
Impairment of goodwill			—				—				67,681				—				—				21.3	%
Acquired in-process research and development			—				—				15,700				—				—				4.9	%
Amortization of purchased intangibles			1,368				9,240				5,540				0.4	%			2.9	%			1.7	%
Loss on disposal of property and equipment			578				159				122				0.2	%			0.0	%			0.0	%
Operating loss			(51,800	)			(77,511	)			(132,117	)			(14.5	)%			(24.3	)%			(41.5	)%
Gain on sale of technology assets, net			21,436				—				—				6.0	%			—				—
Interest (expense) income, net			(823	)			(615	)			2,748				(0.2	)%			(0.2	)%			0.9	%
Other expense, net			(494	)			(472	)			(187	)			(0.1	)%			(0.1	)%			(0.1	)%
Loss before income taxes			(31,681	)			(78,598	)			(129,556	)			(8.9	)%			(24.6	)%			(40.7	)%
Income tax (expense) benefit			(151	)			85				(16	)			(0.0	)%			0.0	%			(0.0	)%
Net loss		$	(31,832	)		$	(78,513	)		$	(129,572	)			(8.9	)%			(24.6	)%			(40.7	)%

Comparison of the Fiscal Years Ended March 31, 2011 and 2010

     Revenues. Total revenues increased $38.5 million, or 12.1%, to $357.6 million in the fiscal year ended March 31, 2011 from $319.1 million in the fiscal year ended March 31, 2010, including a $3.6 million increase from fluctuations in foreign currency exchange rates, partially offset by lower average selling prices.

     For the fiscal year ended March 31, 2011, sales of our 10Gbps and below products increased $20.7 million, or 10.3%, to $222.2 million, while 40Gbps and above sales increased $3.0 million, or 2.9%, to $104.9 million and sales of our industrial and commercial products increased $14.8 million, or 94.3%, to $30.5 million. The increase in sales of our 10Gbps and below products primarily resulted from increased demand for our XFP and SFP+ modules, partially offset by lower demand for our Xenpak modules. The increase in 40Gbps and above sales primarily resulted from increased demand for our 40Gbps and 100Gbps modules partially offset by lower demand for 40Gbps subsystems.

     For the fiscal year ended March 31, 2011, sales to three customers, Alcatel-Lucent, Cisco and Huawei, together accounted for 44.7% of total revenues. For the fiscal year ended March 31, 2010, sales to two customers, Cisco and Nokia Siemens Networks (“NSN”), together accounted for 44.8% of total revenues. No other customer accounted for more than 10% of total revenues in either such year.

     Gross Margin. Gross margin increased $9.6 million, or 15.7%, to $70.4 million in the fiscal year ended March 31, 2011 from $60.9 million in the fiscal year ended March 31, 2010. Gross margin for the fiscal year ended March 31, 2011 included a negative effect of $3.2 million attributable to unfavorable foreign currency exchange rate fluctuations, net of the impact from foreign currency exchange forward contracts. For the fiscal years ended March 31, 2011 and 2010, we incurred $5.8 million of amortization of acquired developed technology associated with the StrataLight acquisition, and for the fiscal year ended March 31, 2010, we incurred $1.0 million of charges attributable to a purchase price accounting adjustment for inventory and $0.9 million of Employee Liquidity Bonus Plan expense, each associated with the StrataLight acquisition. During the fiscal years ended March 31, 2011 and 2010, gross margin included charges for excess and obsolete inventory of $3.0 million and $4.1 million, respectively.

     As a percentage of revenue, gross margin increased to 19.7% for the fiscal year ended March 31, 2011 from 19.1% for the fiscal year ended March 31, 2010. This increase was primarily attributable to reduced charges associated with the StrataLight acquisition, reduced charges for excess and obsolete inventory and provision for warranty, partially offset by lower average selling prices and an unfavorable impact from foreign currency exchange rate fluctuations and hedging programs.

     Research and Development Expenses. Research and development expenses decreased $12.1 million, or 16.3%, to $62.0 million in the fiscal year ended March 31, 2011 from $74.1 million in the fiscal year ended March 31, 2010, notwithstanding a $2.6 million increase attributable to fluctuations in foreign currency exchange rates. Research and development expenses decreased as a percentage of sales to 17.3% for the fiscal year ended March 31, 2011 from 23.3% for the fiscal year ended March 31, 2010. The decrease in research and development expenses was primarily the result of the elimination of Employee Liquidity Bonus Plan expense associated with the acquisition of StrataLight and reduced outsourcing services provided primarily by Hitachi’s research laboratories and other outsourcing service providers.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $3.5 million, or 6.3%, to $58.3 million in the fiscal year ended March 31, 2011 from $54.8 million in the fiscal year ended March 31, 2010, including a $1.3 million increase attributable to fluctuations in foreign currency exchange rates. Selling, general and administrative expenses decreased as a percentage of sales to 16.3% for the fiscal year ended March 31, 2011 from 17.2% for the fiscal year ended March 31, 2010. The increase in selling, general and administrative expenses was principally attributable to employee expenses, including severance costs, restoration of executive and other employee salaries to prior levels upon expiration of the expense reduction measures in effect during the fiscal year ended March 31, 2010, stock-based expenses associated with the departure of the Company’s chief executive officer, as well as unfavorable fluctuations in foreign currency exchange rates.

     Amortization of Purchased Intangibles. Amortization of purchased intangibles related to the acquisition of StrataLight was $1.4 million and $9.2 million for the fiscal years ended March 31, 2011 and 2010, respectively. For the fiscal year ended March 31, 2011, the $1.4 of amortization was related to customer relationships. For the fiscal year ended March 31, 2010, the amortization consisted of $7.9 million related to order backlog and $1.3 million related to customer relationships.

     Loss on Disposal of Property and Equipment. Loss on disposal of property and equipment was $0.6 million and $0.2 million for the fiscal years ended March 31, 2011 and 2010, respectively.

     Gain on Sale of Technology Assets, Net. Gain on sale of technology assets, net was $21.4 million for the fiscal year ended March 31, 2011. Total proceeds from the sale were $23.5 million, partially offset by $2.1 million of associated direct expenses.

     Interest Expense, Net. Interest expense, net increased by $0.2 million to $0.8 million in the fiscal year ended March 31, 2011 from $0.6 million in the fiscal year ended March 31, 2010. Interest expense, net for the fiscal years ended March 31, 2011 and 2010 consisted of interest expense on short-term debt and capital leases offset by interest earned on cash and cash equivalents. The increase primarily reflected the increase in interest rates and the reduction in cash and cash equivalent balances over the respective periods.

     Other Expense, Net. Other expense, net was $0.5 million for each of the fiscal years ended March 31, 2011 and 2010, respectively, and consisted primarily of net exchange losses on foreign currency transactions.

     Income Taxes. During the fiscal year ended March 31, 2011, we recorded a current income tax expense of $151,000 attributable to income earned in certain foreign and state tax jurisdictions. In other tax jurisdictions, we generated operating losses and recorded a valuation allowance to offset potential income tax benefits associated with these operating losses.

     During the fiscal year ended March 31, 2010, we recorded an $85,000 current income tax benefit resulting from a U.S. Federal income tax benefit of $228,000 due to acceleration of research credits under the 2008 Housing and Economic Recovery Act, partially offset by an income tax expense of $143,000 attributable to income earned in certain foreign and state tax jurisdictions. In other tax jurisdictions, we generated operating losses and recorded a valuation allowance to offset potential income tax benefits associated with these operating losses.

     Because of the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset potential income tax benefits associated with our operating losses and other net deferred tax assets. There can be no assurance that deferred tax assets subject to our valuation allowance will ever be realized.

Comparison of the Fiscal Years Ended March 31, 2010 and 2009

     Revenues. Total revenues increased $0.5 million, or 0.2%, to $319.1 million in the fiscal year ended March 31, 2010 from $318.6 million in the fiscal year ended March 31, 2009, primarily as a result of a $45.2 million increase in sales of StrataLight products and a $1.4 million increase from fluctuations in foreign currency exchange rates, partially offset by lower sales volumes of other communication and industrial and commercial products as well as lower average selling prices.

     For the fiscal year ended March 31, 2010, sales of our 10Gbps and below products decreased $36.2 million, or 15.2%, to $201.8 million, while 40Gbps and above sales increased $40.0 million, or 64.9%, to $101.6 million. The decrease in sales of our 10Gbps and below products primarily resulted from decreased demand for our 300 pin tunable and fixed wavelength, Xenpak and SFP modules, partially offset by higher demand for our XFP products. The increase in 40Gbps and above sales primarily resulted from the acquisition of StrataLight. Sales of our industrial and commercial products decreased $3.2 million, or 16.9%, to $15.7 million.

     For the fiscal year ended March 31, 2010, sales to two customers, Cisco and NSN, together accounted for 44.8% of revenues. For the fiscal year ended March 31, 2009, sales to two customers, Cisco and Alcatel-Lucent, together accounted for 48.2% of revenues. No other customer accounted for more than 10% of total revenues in either such year.

     Gross Margin. Gross margin decreased $13.4 million, or 18.3%, to $60.9 million in the fiscal year ended March 31, 2010 from $74.5 million in the fiscal year ended March 31, 2009. Gross margin for the fiscal year ended March 31, 2010 included negative effects of $4.5 million from increased acquired developed technology amortization associated with the StrataLight acquisition, and $4.4 million attributable to unfavorable foreign currency exchange rate fluctuations, net of the impact from foreign currency exchange forward contracts. Additional costs associated with the StrataLight acquisition that were incurred during the fiscal years ended March 31, 2010 and 2009 include $5.8 million and $1.3 million, respectively, of amortization of acquired developed technology, $1.0 million and $1.8 million, respectively, of charges attributable to the purchase price accounting adjustment for inventory, and $0.9 million and $0.8 million, respectively, of Employee Liquidity Bonus Plan expense. During the fiscal years ended March 31, 2010

and 2009, gross margin included charges for excess and obsolete inventory of $4.1 million and $10.4 million, respectively.

     As a percentage of revenue, gross margin decreased to 19.1% for the fiscal year ended March 31, 2010 from 23.4% for the fiscal year ended March 31, 2009. This decline was primarily attributable to higher per unit manufacturing costs derived from lower sales volumes, lower average selling prices, higher acquired developed technology amortization and an unfavorable impact from foreign currency exchange rate fluctuations and hedging programs, partially offset by higher relative margins from sales of StrataLight products, lower fixed manufacturing, material and outsourcing costs as well as lower excess and obsolete inventory and warranty charges.

     Research and Development Expenses. Research and development expenses increased $20.1 million, or 37.2%, to $74.1 million in the fiscal year ended March 31, 2010 from $54.0 million in the fiscal year ended March 31, 2009, including a $2.2 million increase attributable to fluctuations in foreign currency exchange rates. Research and development expenses increased as a percentage of sales to 23.3% for the fiscal year ended March 31, 2010 from 17.0% for the fiscal year ended March 31, 2009. The increase in research and development expenses was primarily the result of the acquisition of StrataLight, and was partially offset by reduced outsourcing services provided by Hitachi’s research laboratories, as well as lower employee and material costs.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $8.7 million, or 13.6%, to $54.8 million in the fiscal year ended March 31, 2010 from $63.5 million in the fiscal year ended March 31, 2009, including a $1.3 million increase attributable to fluctuations in foreign currency exchange rates. Selling, general and administrative expenses decreased as a percentage of sales to 17.2% for the fiscal year ended March 31, 2010 from 19.9% for the fiscal year ended March 31, 2009. The decrease in selling, general and administrative expenses was principally attributable to lower Employee Liquidity Bonus Plan costs associated with the acquisition of StrataLight, as well as lower commission, logistics, litigation, bad debt and employee costs, partially offset by the full year impact of selling general and administrative costs resulting from the acquisition of StrataLight.

     Impairment of Goodwill. As part of the annual assessment of goodwill completed during the quarter ended March 31, 2009, there were significant indicators to conclude that an impairment of the goodwill associated with the acquisition of StrataLight on January 9, 2009 may have occurred. This conclusion was based on the significant decrease in our market capitalization and a significant deterioration in the macroeconomic environment from the time of the acquisition announcement on July 9, 2008 through March 31, 2009. We concluded in the impairment analysis that the carrying value of the goodwill associated with the StrataLight acquisition exceeded its fair value. As a result, we recorded an impairment charge of $62.0 million in the quarter ended March 31, 2009, which represented the full amount of goodwill recorded in connection with the acquisition.

     During the quarter ended December 31, 2008, there were sufficient indicators to require an interim goodwill impairment analysis, including a significant decrease in our market capitalization and a significant deterioration in the macroeconomic environment largely caused by the widespread unavailability of business and consumer credit. Based upon the interim goodwill impairment analysis conducted, an impairment was indicated and we recorded a $5.7 million charge, which represented the full amount of goodwill recorded in connection with the Pine acquisition. As a result of such impairments, goodwill was $0 at March 31, 2010 and 2009.

     Acquired In-process Research and Development. We incurred $15.7 million of in-process research and development expenses for the fiscal year ended March 31, 2009 related to the StrataLight acquisition. We incurred no in-process research and development expenses for the fiscal year ended March 31, 2010.

     Amortization of Purchased Intangibles. Amortization of purchased intangibles related to the acquisition of StrataLight was $9.2 million and $5.5 million for the fiscal years ended March 31, 2010 and 2009, respectively. For the fiscal year ended March 31, 2010, the amortization consisted of $7.9 million related to order backlog and $1.3 million            related to customer relationships. For the fiscal year ended March 31, 2009, the amortization consisted of $5.2 million related to order backlog and $0.3 million related to customer relationships.

     Loss on Disposal of Property and Equipment. Loss on disposal of property and equipment was $0.2 million and $0.1 million for the fiscal years ended March 31, 2010 and 2009, respectively.

     Interest (Expense) Income, Net. Interest (expense) income, net decreased by $3.3 million to $0.6 million of

interest expense, net in the fiscal year ended March 31, 2010 from $2.7 million of interest income, net in the fiscal year ended March 31, 2009. Interest (expense) income, net for the fiscal years ended March 31, 2010 and 2009 consisted of interest earned on cash and cash equivalents offset by interest expense on short-term debt and capital leases. The decrease primarily reflects the decline in interest rates and the reduction in cash and cash equivalent balances over the respective periods.

     Other Expense, Net. Other expense, net was $0.5 million and $0.2 million for the fiscal years ended March 31, 2010 and 2009, respectively, and consisted primarily of net exchange losses on foreign currency transactions.

     Income Taxes. During the fiscal year ended March 31, 2010, we recorded an $85,000 current income tax benefit resulting from a U.S. Federal income tax benefit of $228,000 due to acceleration of research credits under the 2008 Housing and Economic Recovery Act, partially offset by an income tax expense of $143,000 attributable to income earned in certain foreign and state tax jurisdictions. In other tax jurisdictions, we generated operating losses and recorded a valuation allowance to offset potential income tax benefits associated with these operating losses.

     During the fiscal year ended March 31, 2009, we recorded current income tax expense of $16,000. The expense was attributable to income earned in certain foreign tax jurisdictions. In other tax jurisdictions, we generated operating losses and recorded a valuation allowance to offset potential income tax benefits associated with these operating losses.

     Because of the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset potential income tax benefits associated with our operating losses and other net deferred tax assets. There can be no assurance that deferred tax assets subject to our valuation allowance will ever be realized.

Liquidity and Capital Resources

     At March 31, 2011 and 2010, cash and cash equivalents totaled $100.3 million and $132.6 million and the outstanding balances of our short-term loans were $18.1 million and $21.4 million, respectively. During the fiscal year ended March 31, 2011, cash and cash equivalents decreased by $32.4 million as $30.1 million of net cash used in operating activities, $11.0 million of payments on capital lease obligations, $8.6 million of capital expenditures and $5.8 million of short-term debt payments were partially offset by $21.4 million of net proceeds from sale of technology assets, $1.4 million from the effect of foreign currency exchange rates on cash and cash equivalents and $0.3 million from the exercise of stock options. Net cash used in operating activities reflected our net loss of $31.8 million, a $21.4 gain on sale of technology assets and an increase in net current assets excluding cash and cash equivalents of $17.1 million, partially offset by non-cash charges for depreciation and amortization of $24.3 million, stock-based compensation expense of $8.2 million, amortization of purchased intangibles of $7.1 million, and loss on disposal of property and equipment of $0.6 million. The increase in net current assets excluding cash and cash equivalents primarily resulted from an increase in inventories, accounts receivable, prepaid expenses and other current assets, partially offset by an increase in accounts payable and accrued expenses.

     At March 31, 2010 and 2009, cash and cash equivalents totaled $132.6 million and $168.9 million and the outstanding balances of the short-term loans were $21.4 million and $20.2 million, respectively. During the fiscal year ended March 31, 2010, cash and cash equivalents decreased by $36.3 million as $18.6 million of net cash used in operating activities, $10.6 million of payments on capital lease obligations, and $7.9 million of capital expenditures were partially offset by $0.8 million from the effect of foreign currency exchange rates on cash and cash equivalents. Net cash used in operating activities reflected our net loss of $78.5 million, partially offset by non-cash charges for depreciation and amortization of $22.3 million, amortization of purchased intangibles of $15.0 million, stock-based compensation expense of $6.6 million, and $1.2 of compensation expense associated with the StrataLight Employee Liquidity Bonus Plan (the “ELBP”), as well as a decrease in net current assets excluding cash and cash equivalents of $14.6 million and a loss on disposal of property and equipment of $0.2 million. The decrease in net current assets excluding cash and cash equivalents primarily resulted from a decrease in inventories and accounts receivable and an increase in accounts payable, partially offset by a decrease in accrued expenses.

     Pursuant to the terms of the Agreement and Plan of Merger, dated July 9, 2008, by and among the Company, StrataLight, Omega Merger Sub 1, Inc., Omega Merger Sub 2, Inc. and Jerome S. Contro, as the stockholder representative, the Company made the final distributions of cash and shares of the Company’s common stock to ELBP participants during the fiscal year ended March 31, 2010. During the fiscal year ended March 31, 2010, the Company distributed approximately $5.7 million of cash and 1.2 million shares of previously issued common stock,

and accepted cancellation of rights to receive common stock as requested by certain ELBP participants to satisfy approximately $2.8 million in employee withholding tax obligations paid by the Company. During the fiscal year ended March 31, 2009, the Company distributed approximately $1.8 million of cash and 1.8 million shares of previously issued common stock pursuant to the ELBP.

     During the fiscal year ended March 31, 2009, cash and cash equivalents decreased by $52.8 million to $168.9 million from $221.7 million. This decline consisted of $10.4 million of net cash used in operating activities, $28.4 million of cash used in the acquisition of StrataLight, net of cash acquired, $9.1 million of payments on capital lease obligations, $4.2 million of capital expenditures, $0.6 million from the effect of foreign exchange rates on cash and cash equivalents and $0.1 million used to repurchase restricted shares. Net cash used by operating activities reflected our net loss of $129.6 million, partially offset by the following non-cash charges: a $67.7 million impairment of goodwill, a $15.7 million write-off of in-process research and development, depreciation and amortization of $14.4 million, amortization of purchased intangibles of $6.9 million, StrataLight Employee Liquidity Bonus Plan costs of $5.8 million, stock-based compensation expense of $5.6 million, and a decrease in net current assets excluding cash and cash equivalents of $3.1 million. The decrease in net current assets excluding cash and cash equivalents primarily resulted from a decrease in inventories partially offset by a decrease in accounts payable attributable to the reduction in sales volumes. During the fiscal year ended March 31, 2009, we also entered into $15.4 million of new capital lease obligations.

     We believe that existing cash and cash equivalent balances will be sufficient to fund our anticipated cash needs at least for the next twelve months. However, we may require additional financing to fund our operations in the future and there can be no assurance that additional funds will be available, especially if we experience operating results below expectations, or, if available, there can be no assurance as to the terms on which funds might be available. In addition, unprecedented volatility in recent years in the global credit markets may affect the availability and cost of funding in the future. If adequate financing is not available as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.

Contractual Obligations

     During the fiscal year ended March 31, 2011, we entered into $10.4 million of new capital lease obligations. The following table summarizes our contractual obligations at March 31, 2011 in millions of dollars.

						Payments Due by Period
						Less than
		Total				1 Year				1-3 Years				3-5 Years
Capital lease obligations		$	26.1			$	11.4			$	10.6			$	4.1
Operating lease obligations			3.3				2.6				0.7				—
Purchase obligations			71.6				71.6				—				—
Short-term debt			18.1				18.1				—				—
Total contractual obligations		$	119.1			$	103.7			$	11.3			$	4.1

     Capital lease obligations, including interest, consist primarily of manufacturing assets under non-cancelable capital leases. Operating leases consist primarily of leases on buildings. Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not yet received the goods or services. These obligations include purchase commitments with our contract manufacturers. We enter into agreements with contract manufacturers and suppliers that allow them to procure inventory based upon agreements defining our material and services requirements. In certain instances, these agreements allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to firm orders being placed.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet financing or unconsolidated special purpose entities.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

     Our exposure to market risk consists of foreign currency exchange rate fluctuations related to our international

sales and operations and changes in interest rates on cash and cash equivalents and short-term debt.

     To the extent we generate sales denominated in currencies other than the U.S. dollar, our revenues will be affected by currency fluctuations. For the fiscal years ended March 31, 2011, 2010 and 2009, 15.5%, 9.4% and 16.7%, respectively, of our sales were denominated in Japanese yen and 1.0% or less were denominated in euros. The remaining sales were denominated in U.S. dollars.

     To the extent we manufacture our products in Japan, our cost of sales will be affected by currency fluctuations. During the fiscal years ended March 31, 2011, 2010 and 2009, approximately 44.9%, 37.2% and 60.5%, respectively, of our cost of sales was denominated in Japanese yen. While we anticipate that we will continue to have a substantial portion of our cost of sales denominated in Japanese yen, we anticipate the percentage of cost of sales denominated in Japanese yen to diminish as we plan to expand the use of contract manufacturers outside of Japan and procure more raw materials in U.S. dollars.

     To the extent we perform research and development activities and selling, general and administrative functions in Japan, our operating expenses will be affected by currency fluctuations. During the fiscal years ended March 31, 2011, 2010 and 2009, approximately 42.6%, 34.6% and 41.9%, respectively, of our operating expenses were denominated in Japanese yen. We anticipate that we will continue to have a substantial portion of our operating expenses denominated in Japanese yen in the foreseeable future.

     To the extent that our sales, cost of sales and operating expenses are denominated in Japanese yen, our operating results will be subject to fluctuations due to changes in the relative value of the Japanese yen and the U.S. dollar. If the exchange rate of the Japanese yen in relation to the U.S. dollar had appreciated by ten percent during the fiscal year ended March 31, 2011, our operating loss would have increased by approximately $13.6 million. If the exchange rate had depreciated by ten percent during the fiscal year ended March 31, 2011, our operating loss would have been reduced by approximately $11.1 million.

     As of March 31, 2011, we had a net payable position of $10.7 million and as of March 31, 2010, we had a net receivable position of $1.2 million subject to foreign currency exchange risk between the Japanese yen and the U.S. dollar. We are also exposed to foreign currency exchange fluctuations on intercompany sales transactions involving the Japanese yen and the U.S. dollar. At March 31, 2011, we had three foreign currency exchange contracts in place with an aggregate nominal value of $18.0 million and expiration dates of 120 days or less to hedge a portion of this risk. At March 31, 2010, we had six foreign currency exchange contracts in place with an aggregate nominal value of $12.0 million and expiration dates of 90 days or less. We do not enter into foreign currency exchange forward contracts for trading purposes, but rather as a hedging vehicle to minimize the impact of foreign currency fluctuations. If the foreign currency exchange forward contracts were to be held to maturity and the exchange rate of the Japanese yen in relation to the U.S. dollar were to depreciate by ten percent from the closing spot rate on March 31, 2011 to the maturity date, we would realize an approximate gain at maturity of $1.5 million. If the yen were to appreciate by ten percent, we would realize an approximate loss at maturity of $2.1 million.

     We have entered into a short-term, yen-denominated loan with The Sumitomo Trust Bank, which is due monthly unless renewed. At March 31, 2011 and 2010, the loan balance was $18.0 million and $21.4 million, respectively. During the fiscal year ended March 31, 2011, payments of 500 million yen were made, reducing the yen balance from 2.0 billion yen at March 31, 2010 to 1.5 billion yen at March 31, 2011. Interest is paid monthly at TIBOR plus a premium that ranged from 1.26% to 1.73%, 1.26% to 1.57% and 1.42% to 1.81% during the fiscal years ended March 31, 2011, 2010 and 2009, respectively.

     To the extent we maintain significant cash balances in money market accounts, our interest income will be affected by interest rate fluctuations. As of March 31, 2011 and 2010, we had $100.3 million and $132.6 million, respectively, of cash balances invested primarily in traded institutional money market funds or money market deposit accounts at banking institutions. Interest income earned on these accounts was $0.1 million, $0.4 million and $3.7 million for the fiscal years ended March 31, 2011, 2010 and 2009, respectively.

Item 8. Financial Statements and Supplementary Data.

OPNEXT, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm on Financial Statements			55
Consolidated Balance Sheets at March 31, 2011 and March 31, 2010			56
Consolidated Statements of Operations for the fiscal years ended March 31, 2011, 2010 and 2009			57
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the fiscal years ended March 31, 2011, 2010 and 2009			58
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2011, 2010 and 2009			59
Notes to Consolidated Financial Statements			60

Report of Independent Registered Public Accounting Firm on Financial Statements

The Board of Directors and Shareholders of
Opnext, Inc.

     We have audited the accompanying consolidated balance sheets of Opnext, Inc. (the Company) as of March 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Opnext, Inc. at March 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2011, in conformity with U.S. generally accepted accounting principles.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Opnext, Inc.’s internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 14, 2011 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Metro Park, New Jersey
June 14, 2011

Opnext, Inc.

Consolidated Balance Sheets

		March 31,
		2011				2010
		(in thousands, except share and per
		share amounts)
ASSETS
Current assets:
Cash and cash equivalents, including $1,210 and $1,205 of restricted cash at March 31, 2011 and 2010, respectively		$	100,284			$	132,643
Trade receivables, net, including $8,557 and $4,509 due from related parties at March 31, 2011 and 2010, respectively			70,701				54,849
Inventories			118,588				93,018
Prepaid expenses and other current assets			7,458				4,755
Total current assets			297,031				285,265
Property, plant, and equipment, net			59,992				60,322
Purchased intangibles			17,076				24,220
Other assets			258				491
Total assets		$	374,357			$	370,298
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade payables, including $6,191 and $4,707 due to related parties at March 31, 2011 and 2010, respectively		$	63,383			$	44,040
Accrued expenses			23,771				22,101
Short-term debt			18,055				21,430
Capital lease obligations			13,513				12,515
Total current liabilities			118,722				100,086
Capital lease obligations			12,554				11,202
Other long-term liabilities			6,855				5,470
Total liabilities			138,131				116,758
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01 per share: 15,000,000 authorized, no shares issued and outstanding			—				—
Common stock, par value $0.01 per share: authorized 150,000,000 shares; issued 91,363,613, outstanding 90,028,612, net of 58,630 shares of treasury stock at March 31, 2011; issued 91,192,937, outstanding 89,857,936, net of 58,630 shares of treasury stock at March 31, 2010			727				725
Additional paid-in capital			724,775				716,315
Accumulated deficit			(504,977	)			(473,145	)
Accumulated other comprehensive income			15,701				9,645
Total shareholders’ equity			236,226				253,540
Total liabilities and shareholders’ equity		$	374,357			$	370,298

See accompanying notes to consolidated financial statements.

Opnext, Inc.

Consolidated Statements of Operations

		Fiscal Year Ended March 31,
		2011				2010				2009
		(in thousands, except per share amounts)
Revenues, including $9,016, $14,659 and $19,470 to related parties for the fiscal years ended March 31, 2011, 2010 and 2009, respectively		$	357,641			$	319,132			$	318,555
Cost of sales			281,418				252,490				242,782
Amortization of acquired developed technology			5,780				5,780				1,321
Gross margin			70,443				60,862				74,452
Research and development expenses, including $3,743, $4,368 and $6,077 from related parties for the fiscal years ended March 31, 2011, 2010 and 2009, respectively			62,039				74,145				54,043
Selling, general and administrative expenses, including $4,582, $3,832, and $5,493 from related parties for the fiscal years ended March 31, 2011, 2010 and 2009, respectively			58,258				54,829				63,483
Amortization of purchased intangibles			1,368				9,240				5,540
Loss on disposal of property and equipment			578				159				122
Impairment of goodwill			—				—				67,681
Acquired in-process research and development			—				—				15,700
Operating loss			(51,800	)			(77,511	)			(132,117	)
Gain on sale of technology assets, net			21,436				—				—
Interest (expense) income, net			(823	)			(615	)			2,748
Other expense, net			(494	)			(472	)			(187	)
Loss before income taxes			(31,681	)			(78,598	)			(129,556	)
Income tax (expense) benefit			(151	)			85				(16	)
Net loss		$	(31,832	)		$	(78,513	)		$	(129,572	)
Net loss per share:
Basic and diluted		$	(0.35	)		$	(0.88	)		$	(1.86	)
Weighted average number of shares used in computing net loss per share:
Basic and diluted			89,904				88,952				69,775

See accompanying notes to consolidated financial statements.

Opnext, Inc.

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
Fiscal Years Ended March 31, 2011, 2010 and 2009

														Retained				Accumulated
		Number								Additional				Earnings				Other
		Of				Par				Paid-In				(Accumulated				Comprehensive				Shareholders’				Comprehensive
		Shares				Value				Capital				Deficit)				Income (Loss)				Equity				Income (Loss)
		(in thousands, except share and per share amounts)
Balance at March 31, 2008			64,619,913				552				583,766				(265,060	)			3,820				323,078
Stock-based compensation, net of forfeitures			—				—				5,705				—				—				5,705
Stock options exercised			3,934				—				6				—				—				6
Restricted shares forfeited			(8,333	)			—				—				—				—				—
Restricted shares repurchased			(30,571	)			(63	)			—				—				—				(63	)
Equity offering to StrataLight shareholders, net			22,298,161				223				113,336				—				—				113,559
StrataLight Employee Liquidity Bonus Plan			1,773,343				18				5,775				—				—				5,793
Net loss			—				—				—				(129,572	)			—				(129,572	)		$	(129,572	)
Unrealized loss on foreign currency forward contracts			—				—				—				—				(145	)			(145	)			(145	)
Defined benefit plan costs, net			—				—				—				—				65				65				65
Foreign currency translation adjustment			—				—				—				—				2,111				2,111				2,111
Total comprehensive loss																										$	(127,541	)
Balance at March 31, 2009			88,656,447				730				708,588				(394,632	)			5,851				320,537
Stock-based compensation, net of forfeitures			—				—				6,630				—				—				6,630
Stock options exercised			11,053				—				16				—				—				16
Restricted shares repurchased			(7,122	)			(17	)			—				—				—				(17	)
StrataLight Employee Liquidity Bonus Plan, net of cancellations			1,197,558				12				1,081				—				—				1,093
Net loss			—				—				—				(78,513	)			—				(78,513	)		$	(78,513	)
Unrealized loss on foreign currency forward contracts			—				—				—				—				(191	)			(191	)			(191	)
Defined benefit plan costs, net																			125				125				125
Foreign currency translation adjustment			—				—				—				—				3,860				3,860				3,860
Total comprehensive loss																										$	(74,719	)
Balance at March 31, 2010			89,857,936			$	725			$	716,315			$	(473,145	)		$	9,645			$	253,540
Stock-based compensation, net of forfeitures			—				—				8,167				—				—				8,167
Stock options exercised			170,676				2				293				—				—				295
Net loss			—				—				—				(31,832	)			—				(31,832	)		$	(31,832	)
Unrealized loss on foreign currency forward contracts			—				—				—				—				(20	)			(20	)			(20	)
Defined benefit plan costs, net																			157				157				157
Foreign currency translation adjustment			—				—				—				—				5,919				5,919				5,919
Total comprehensive loss																										$	(25,776	)
Balance at March 31, 2011			90,028,612			$	727			$	724,775			$	(504,977	)		$	15,701			$	236,226

See accompanying notes to consolidated financial statements.

Opnext, Inc.
Consolidated Statements of Cash Flows

		Fiscal Year Ended March 31,
		2011				2010				2009
		(in thousands)
Cash flows from operating activities
Net loss		$	(31,832	)		$	(78,513	)		$	(129,572	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			24,330				22,312				14,385
Stock-based compensation expense associated with equity awards			8,167				6,632				5,644
Amortization of purchased intangibles			7,148				15,019				6,861
Stock-based compensation expense associated with the StrataLight Employee Liquidity Bonus Plan			—				1,216				5,766
Impairment of goodwill			—				—				67,681
Acquired in-process research and development			—				—				15,700
Loss on disposal of property and equipment			578				159				122
Gain on sale of technology assets, net			(21,436	)			—				—
Changes in assets and liabilities, net of acquisition of business:
Trade receivables, net			(14,112	)			9,073				(4,374	)
Inventories			(18,013	)			12,397				23,046
Prepaid expenses and other current assets			(2,345	)			(492	)			(454	)
Other assets			243				(167	)			(163	)
Trade payables			15,240				4,523				(16,939	)
Accrued expenses and other liabilities			1,979				(10,742	)			1,871
Net cash used in operating activities			(30,053	)			(18,583	)			(10,426	)
Cash flows from investing activities
Capital expenditures			(8,605	)			(7,877	)			(4,157	)
Acquisition of business, net of cash acquired			—				—				(28,425	)
Proceeds from sale of technology assets, net			21,436				—				—
Net cash provided by (used in) investing activities			12,831				(7,877	)			(32,582	)
Cash flows from financing activities
Payments on capital lease obligations			(10,964	)			(10,602	)			(9,105	)
Short-term debt payments, net			(5,822	)			—				—
Restricted shares repurchased			—				(17	)			(63	)
Exercise of stock options			294				16				6
Net cash used in financing activities			(16,492	)			(10,603	)			(9,162	)
Effect of foreign currency exchange rates on cash and cash equivalents			1,355				797				(607	)
Decrease in cash and cash equivalents			(32,359	)			(36,266	)			(52,777	)
Cash and cash equivalents at beginning of year			132,643				168,909				221,686
Cash and cash equivalents at end of year		$	100,284			$	132,643			$	168,909
Supplemental cash flow information
Cash paid during the year for:
Interest paid		$	955			$	980			$	965
Income tax paid (refunded), net		$	78			$	(129	)		$	—
Supplemental investing activities
Net cash paid for acquisition of StrataLight		$	—			$	—			$	21,593
Payments for acquisition and equity registration costs			—				—				6,832
Acquisition of StrataLight, net of cash acquired		$	—			$	—			$	28,425
Non-cash financing activities
Capital lease obligations incurred		$	(10,395	)		$	(109	)		$	(15,384	)