Use of Estimates and Critical Accounting Policies The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure. On an ongoing basis, we evaluate our estimates, including those related to product returns, accounts receivable, inventories, intangible assets, warranty obligations, restructuring accruals, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies, and our procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.
We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. These policies may require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Our critical accounting policies cover the following areas:
• revenue recognition and product returns;

• depreciation and amortization;

• warranty obligations;

• allowance for doubtful accounts;

• excess and obsolete inventory;

• impairment of investments;

• long-lived asset valuation;

• business combination;

• income taxes;

• stock compensation; and

• loss contingencies.

This is not a comprehensive list of all of our accounting policies.
As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during these six months ended December 31, 2008 compared to those disclosed in our Annual Report on Form 10K for the fiscal year ended June 30, 2008 as filed with the SEC on September 12, 2008.

Additional information about these critical accounting policies may be found in the "Management's Discussion & Analysis of Financial Condition and Results of Operations" section included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
Results of Operations

   Revenues:

              Three Months Ended                     Percentage        Six Months Ended                      Percentage
                 December 31,          Change          Change            December 31,          Change          Change

Revenues for the second quarter of fiscal 2009 excluded $805,000 related to shipments of products for Nortel Networks, which filed for bankruptcy protection on January 14, 2009.
The decrease in revenues for the three and six month periods ended December 31, 2008 compared to the three and six month periods ended December 31, 2007 was primarily due to decreased unit shipments of our ROADM optical switching and routing product, which accounted for 76% and 70% of the decrease in revenue, respectively. Our ROADM optical switching and routing product, of which the primary and majority of the components are obtained from third party vendors accounted for approximately 13% and 15% of revenues for the three and six month periods ended December 31, 2008, respectively, compared to 28% and 25% in the three and six month periods ended December 31, 2007, respectively.
The decrease in unit shipments and declining average selling prices in our other major product categories, including multiplexer, conditioning and monitoring products and lines transmission applications, further contributed to the decrease in revenues for the three and six month periods ended December 31, 2008 compared to the three and six month periods ended December 31, 2007. This was partially offset by increased unit shipments of our optical amplification products. The decrease in unit shipment was mainly due to a general decrease in spending activity in the telecommunications industry.
For the third quarter of fiscal 2009, we expect our revenues to be in the range of $28 million and $32 million due to anticipated further declines in unit shipments resulting from a continued slowdown in spending activity in the telecommunications industry.
Looking beyond the third quarter, there are a number of risks and uncertainties that may put further downward pressure on our revenue and profitability, or at least limit our ability to predict revenue and profitability with any confidence. These risks and uncertainties include strong pricing pressures, due to competition and potential decreases in demand, and weakness in the worldwide telecommunications industry and economic environment in general. In addition, we believe that inventory levels of our products at one of our larger customers may have increased due to lower sales of their products, which could result in substantial reductions in purchases of our products by such customer until inventory levels are reduced. A prolonged worldwide economic downturn may lead to lower sales volume or reduced sales growth, lower sales prices or lower gross margins, which would negatively impact our business and results of operations.

   Gross Profit:

                          Three Months Ended                        Percentage          Six Months Ended                        Percentage
                             December 31,             Change          Change              December 31,            Change          Change
                         2008            2007                                          2008          2007
                                                               (In thousands, except percentages)
Gross profit            $  8,546       $ 10,988      $ (2,442 )           -22.2 %    $ 14,735      $ 22,816      $ (8,081 )           -35.4 %
Gross profit margin         22.7 %         22.5 %                                        18.3 %        23.3 %

The decrease in gross profit for the three month period ended December 31, 2008 compared to the three month period ended December 31, 2007 was primarily due to lower revenues, being partially offset by lower material costs, labor costs and manufacturing overhead expenses. Our gross profit for the three month period ended December 31, 2008 was positively impacted by the sale of inventory that had been previously fully reserved of $750,000, compared to the sale of inventory that had been previously fully reserved of $305,000 in the three months ended December 31, 2007.
The decrease in gross profit for the six month period ended December 31, 2008 compared to the six month period ended December 31, 2007 was mainly due to lower revenues and higher provision for excess and obsolete inventory which was primarily related to line transmission application, being partially offset by lower material costs, labor costs and manufacturing overhead expenses. Our gross profit for the six month period ended December 31, 2008 was positively impacted by the sale of inventory that had been previously fully reserved of $1.2 million, compared to the sale of inventory that had been previously fully reserved of $563,000 in the six months ended December 31, 2007.
Our gross margin increased slightly for the three months ended December 31, 2008 compared to the three months ended December 31, 2007 due primarily to lower labor costs as a percentage of revenue and a higher utilization of inventory that had been previously fully reserved, being partially offset by higher material costs as a percentage of revenue.
Our gross margin decreased for the six months ended December 31, 2008 compared to the six months ended December 31, 2007 mainly due to higher provision for excess and obsolete inventory which was primarily related to line transmission application and higher material costs as a percentage of revenue, being partially offset by lower labor costs and manufacturing overhead expenses as a percentage of revenue.
We expect our gross profit margin to decrease slightly in the third quarter of fiscal 2009 compared to the second quarter of fiscal 2009 due to a change in our product mix and lower utilization of manufacturing overhead costs resulting from expected lower revenue.
Research and Development:

                         Three Months Ended                       Percentage          Six Months Ended                        Percentage
                            December 31,            Change          Change              December 31,            Change          Change
                         2008           2007                                         2008          2007
                                                             (In thousands, except percentages)
Research and
development            $   3,037       $ 3,866       $ (829 )           -21.4 %     $  6,542      $ 8,564      $ (2,022 )           -23.6 %

Research and development expenses for the three month period ended December 31, 2008 compared to the three month period ended December 31, 2007 decreased $829,000, or 21.4%. Research and development expenses for the six month period ended December 31, 2008 compared to the six month period ended December 31, 2007 decreased $2.0 million, or 23.6%. The decrease was mainly driven by cost reduction as a result of the integration of OCP into Oplink and research and development programs being transitioned from higher cost facilities in the United States to lower cost facilities in China.

We believe that developing customer solutions at the prototype stage is critical to our strategic product development objectives. In order to meet the changing requirements of our customers, we will need to fund investments in several concurrent product development projects. We expect our research and development expense, excluding stock compensation expense, to decrease slightly in the third quarter of fiscal 2009 compared to the second quarter of fiscal 2009.
Sales and Marketing:

Three Months Ended Percentage Six Months Ended Percentage December 31, Change Change December 31, Change Change 2008 2007 2008 2007

Sales and marketing expenses for the three month period ended December 31, 2008 compared to the three month period ended December 31, 2007 decreased $790,000, or 26.3%. Sales and marketing expenses for the six month period ended December 31, 2008 compared to the six month period ended December 31, 2007 decreased $1.3 million, or 22.0%. The decrease was mainly driven by cost reduction resulting from the integration of OCP into Oplink and lower sales commission expenses resulted from decreased revenues. We expect our sales and marketing expense, excluding stock compensation expense, to decrease slightly in the third quarter of fiscal 2009 compared to the second quarter of fiscal 2009.
General and Administrative:

                          Three Months Ended                        Percentage          Six Months Ended                        Percentage
                             December 31,             Change          Change              December 31,            Change          Change
                          2008           2007                                          2008          2007
                                                               (In thousands, except percentages)
General and and
administrative          $   3,425       $ 6,533      $ (3,108 )           -47.6 %     $ 7,002      $ 12,039      $ (5,037 )           -41.8 %

General and administrative expenses for the three month and six month period ended December 31, 2008 compared to the three and six month period ended December 31, 2007 decreased $3.1 million, or 47.6%, and $5.0 million, or 41.8%, respectively. The decrease was mainly driven by cost savings associated with the integration of OCP into Oplink, lower stock compensation expense and decreased accounting and legal fees. We expect our general and administrative expense, excluding stock compensation expense, to decrease slightly in the third quarter of fiscal 2009 compared to the second quarter of fiscal 2009.
Stock Compensation Expense:

                         Three Months Ended                        Percentage          Six Months Ended                        Percentage
                            December 31,             Change          Change              December 31,            Change          Change
                         2008           2007                                          2008          2007
                                                              (In thousands, except percentages)
Stock compensation
expense                $   1,368       $ 3,528      $ (2,160 )           -61.2 %     $  2,935      $ 5,274      $ (2,339 )           -44.3 %

Stock compensation expense recorded in cost of revenues, research and development, sales and marketing and general and administrative is the amortization of the fair value of share-based payments made to employees and members of our board of directors, primarily in the form of stock options, restricted stock and purchases under the employee stock purchase plan in accordance with SFAS No. 123 (R) (see Note 14 - Stock Compensation). The fair

value of stock options and restricted stock granted and rights granted to purchase our common stock under the employee stock purchase plan is recognized as expense over the employee requisite service period.
Stock compensation expense decreased $2.2 million, or 61.2% for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. Stock compensation expense decreased $2.3 million, or 44.3% for the six months ended December 31, 2008 compared to the six months ended December 31, 2007. The acquisition of OCP contributed $2.3 million and $2.7 million in stock compensation expense for the three and six month periods ended December 31, 2007, respectively. The acquisition of OCP by Oplink resulted in the accelerated vesting of OCP stock options pursuant to change-in-control provisions. Excluding the impact of the OCP acquisition, stock compensation expense increased $117,000 and $396,000 for the three and six month periods ended December 31, 2008 compared to the three and six month periods ended December 31, 2007, respectively, as a result of additional grants to new and existing employees.
Stock compensation expense in fiscal 2009 includes the continued amortization of previously-granted stock options. We expect our stock compensation expense in the third quarter of fiscal 2009 to decrease slightly from the second quarter of fiscal 2009.
Transitional Costs for Contract Manufacturing A summary of accrued transitional costs for contract manufacturing in fiscal 2009 and 2008 is as follows (in thousands):

                                                      Consolidation of
                                      Workforce      Excess Facilities
                                      Reduction      and Other Charges       Total
     Balance at June 30, 2007        $     1,234     $                -     $  1,234
     Additional charge                       553                  1,732        2,285
     Other adjustment                       (100 )                    -         (100 )
     Cash payments                        (1,346 )               (1,732 )     (3,078 )

     Balance at June 30, 2008                341                      -          341
     Cash payments                           (59 )                    -          (59 )

     Balance at September 30, 2008           282                      -          282
     Other adjustment                        (39 )                    -          (39 )
     Cash payments                           (83 )                    -          (83 )

     Balance at December 31, 2008    $       160     $                -     $    160

On November 1, 2006, OCP reached an agreement with SAE Magnetics (H.K.) Limited ("SAE"), a wholly-owned subsidiary of TDK Corporation, which enabled OCP to begin manufacture of certain of its product lines in China in July 2007. As a result of the decision to transfer the manufacturing of certain of our product lines from our Woodland Hills, California and OCPA facilities to SAE, we recorded an expense of $532,000 and $1.3 million for the three and six month periods ended December 31, 2007, respectively. These transitional charges, which are primarily related to estimated severance and retention payments, along with expenses incurred to relocate certain fixed assets and product qualification associated with the manufacturing of certain of its product lines in China are recorded in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," and SFAS No. 112, "Employers' Accounting for Post Employment Benefits - an amendment of No. 5 and No. 43". The transition was substantially completed by June 30, 2008. We anticipate that the remaining balance will be paid in fiscal 2009.
Merger Fees
The Company recorded no merger fees during the three and six month periods ended December 31, 2008. Merger fees for the three and six month periods ended December 31, 2007 were $4.6 million and $6.0 million, respectively. Merger fees primarily reflected the costs incurred in connection with the acquisition of OCP, specifically, the cost of entering into employee retention programs, legal expenses, and an investment banking fee.

Impairment Charges and Other Costs
Due to the ongoing financial liquidity crisis, the current economic recession, changes to our operating results and forecasts, and a significant reduction in our market capitalization, in the second quarter of fiscal 2009, and in connection with our annual goodwill impairment testing we performed an impairment analysis in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets".
We reviewed intangible assets that are subject to amortization for recoverability of their carrying value. Recoverability of these assets is measured by comparing their carrying amounts to future undiscounted cash flows that the assets are expected to generate. As a result, we did not record any impairment charges related to intangible assets.
Oplink had goodwill of $10.8 million at June 30, 2008, which was acquired as part of Oplink's acquisition of OCP in fiscal 2008 and F3 and Fibercom in fiscal 2006. As a result of the impairment assessment, we concluded that the carrying value of the goodwill exceeded its implied fair value and recorded an impairment charge of $10.8 million in the second quarter of fiscal 2009.
An impairment charge of $517,000 was recorded for the three and six months ended December 31, 2007 primarily related to the intangible assets of F3. Restructuring expenses of $109,000 were recorded for the same periods ended December 31, 2007 as a result of restructuring activities implemented at F3.
Amortization of Intangible and Other Assets Amortization of intangible and other assets was approximately $954,000 and $865,000 for the three months ended December 31, 2008 and 2007, respectively, and approximately $1.9 million and $1.4 million for the six months ended December 31, 2008 and 2007, respectively. The increase in amortization expense for the six month period ended December 31, 2008 compared to the six month period ended December 31, 2007 was primarily attributable to the acquisition of the remaining 42% of OCP's outstanding shares of common stock that we did not already own on October 31, 2007, which further increased the portfolio of intangible assets.
Interest and Other Income, Net

                                    Three Months Ended                  Percentage        Six Months Ended                    Percentage
                                       December 31,          Change       Change            December 31,          Change        Change

Interest and other income for the three months ended December 31, 2008 included a release of escrow account of $466,000 which was primarily related to a previous acquisition by OCP. Excluding the impact of the release of escrow account, interest and other income for the three months ended December 31, 2008 was approximately $791,000. The decrease in interest and other income for the three month period ended December 31, 2008 compared to the three month period ended December 31, 2007 was primarily due to the declining average rate of return, being partially offset by increased balances of cash and cash equivalents, short-term and long-term investments. The average rate of return for the three month period ended December 31, 2008 was 1.8 % compared to the average rate of return of 5.3% for the three month period ended December 31, 2007.

The decrease in interest and other income for the six month period ended December 31, 2008 compared to the six month period ended December 31, 2007 was mainly due to the declining average rate of return. The decrease in average balances of cash and cash equivalents, short-term and long-term investments further contributed to the decrease in interest and other income for the six . . .