UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, ~~2006~~2008

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

For the transition period from to

Commission file number 000-29175

AVANEX CORPORATION

(Exact name of Registrant as Specified in its Charter)

Delaware

94-3285348

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

40919 Encyclopedia Circle

Fremont, California 94538

(Address of Principal Executive Offices including Zip Code)

(510) 897-4188

(Registrant’s Telephone Number, Including Area Code)

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 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company x (do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

There were ~~208~~15,~~525~~602,~~520~~669 shares of the Company’s Common Stock, par value $.001 per share, outstanding on January 3130, ~~2007~~2009.

AVANEX CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION	~~PART I. FINANCIAL INFORMATION~~	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2006	3
	Condensed Consolidated Balance Sheets as of December 31, 2008 and June 30, 2008	3
	Condensed Consolidated Statements of Operations for the Three months and Six months Ended December 31, 2006 and 2005	4
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows for the Six months Ended December 31, 2006 and 2005	5
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended December 31, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1517
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2327
Item 4.	Controls and Procedures	2428
PART II. OTHER INFORMATION	~~PART II. OTHER INFORMATION~~	25
Item 1.	Legal Proceedings	2528
Item 1A.	Risk Factors	26
Item 1A	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3943
Item 3.	Defaults Upon Senior Securities	3943
Item 4.	Submission of Matters to a Vote of Security Holders	4044
Item 5.	Other Information	4144
Item 6.	Exhibits	4144
Signatures		45

2 of 4145

PART I — FINANCIAL INFORMATION

ITEM 1. — Financial Statements

AVANEX CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except share and par value data)

(Unaudited)

	December 31,2006			June 30,2006
	December 31,2008			June 30,2008
Assets
Current assets:
Cash and cash equivalents	$	3713,~~360~~897		$	2814,~~963~~839
Restricted cash and investments		5,891			6,676
Restricted cash		3,803			3,776
Short-term investments		1419,~~638~~550			3840,~~696~~590
Accounts receivable, net of of allowance for doubtful accounts of $55 and $0 at December 31, 2006 and June 30, 2006, respectively		34,587			26,768
Accounts receivable		30,197			39,032
Inventories, net		21,893			18,417
Inventories		19,528			15,979
Due from related party		~~17,972~~123			~~10,404~~85
Other current assets		137,~~477~~021			156,~~473~~486
Total current assets		~~145~~94,~~818~~119			~~145~~120,~~397~~787
Property and equipment, net		68,~~064~~906			57,~~668~~688
Intangibles, net		~~1,749~~—			~~3,246~~314
Goodwill		~~9,408~~—			9,408
Other assets		2,228			1,839
Deposits and other assets		3,094			2,870
Total assets	$	~~165~~106,~~267~~119		$	~~165~~141,~~558~~067
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4724,~~998~~371		$	3833,~~276~~255
Accrued compensation		73,~~581~~811			6,~~872~~272
Accrued warranty		~~1,742~~350			~~1,799~~626
Due to related party		~~4,750~~75			~~4,475~~110
Other accrued expenses and deferred revenue		96,~~472~~810			45,~~467~~893
Current portion of long-term obligations		~~976~~12			~~823~~13
Current portion of accrued restructuring		63,~~359~~068			62,~~321~~940
Total current liabilities		7838,~~878~~497			6349,~~033~~109
Long-term liabilities:
Accrued restructuring		113,~~122~~613			135,~~252~~043
Convertible notes		4,438			4,569
Other long-term obligations		1,364			1,520
Other long-term obligations		11,446			11,366
Total liabilities		43,474			55,672
Total liabilities		105,884			92,220
Contingencies (Note 11)
Stockholders’ equity:
Common stock, $0.001 par value, 450,000,000 and 300,000,000 shares authorized at December 31, 2006 and June 30, 2006, respectively; 207,568,597 and 204,361,846 shares outstanding at December 31, 2006 and June 30, 2006, respectively, net of 157,656 and 160,749 treasury shares at December 31, 2006 and June 30, 2006, respectively		208			204
Common stock, $0.001 par value, 30,000,000 shares authorized; 15,608,367 and 15,318,982 shares outstanding, net of 10,555 treasury shares, at December 31, 2008 and June 30, 2008, respectively		16			15
Additional paid-in capital		~~747~~788,~~955~~204			~~742~~784,~~951~~492
Accumulated other comprehensive income		31,~~991~~269			41,~~687~~277
Accumulated deficit		(~~692~~726,~~771~~844	)		(~~674~~700,~~504~~389	)
Total stockholders’ equity		5962,~~383~~645			7385,~~338~~395
Total liabilities and stockholders’ equity	$	~~165~~106,~~267~~119		$	~~165~~141,~~558~~067

See accompanying notes.

3 of 4145

AVANEX CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended								Six Months Ended
	Three Months EndedDecember 31,						Six Months EndedDecember 31,
		December 31,								December 31,
	2008			2007			2008				2007
	2006			2005					2006				2005
Net revenue:
Net revenue:
Third parties	$	37,924		$	47,155		$	83,137			$	88,550
Third parties	$	40,325		$	25,475				$	77,679			$	53,386
Related parties		77			4,852			138				18,166
Related parties		15,298			10,650					28,835				23,972
Total net revenue		38,001			52,007			83,275				106,716
Total net revenue		55,623			36,125					106,514				77,358
Cost of revenue:
Cost of revenue:
Cost of revenue except for purchases from related parties		31,864			35,567			68,904				75,083
Cost of revenue except for purchases from related parties		44,968			32,287					90,542				69,906
Purchases from related parties		295			321			756				322
Purchases from related parties		159			920					164				2,408
Total cost of revenue		32,159			35,888			69,660				75,405
Total cost of revenue		45,127			33,207					90,706				72,314
Gross profit		5,842			16,119			13,615				31,311
Gross profit		10,496			2,918					15,808				5,044
Operating expenses:
Operating expenses:
Research and development		6,037			7,604			12,722				14,378
Research and development		5,832			5,452					11,457				12,579
Sales and marketing		2,827			4,202			6,879				8,117
Sales and marketing		3,891			2,783					7,439				6,571
General and administrative		3,777			4,980			8,665				9,455
General and administrative:
Amortization of intangibles		53			101			107				660
Third parties		9,148			3,694					14,810				7,423
Restructuring		157			2			2,476				(333	)
Related parties		(73	)		147					(84	)			1,692
Impairment of goodwill and intangibles		9,615			—			9,615				—
Amortization of intangibles		656			1,385					1,508				3,150
Total operating expenses		22,466			16,889			40,464				32,277
Restructuring		436			2,942					373				2,982
Loss from operations		(16,624	)		(770	)		(26,849	)			(966	)
Gain on disposal of property and equipment		(28	)		(775	)				(48	)			(768	)
Interest and other income (expense), net		(179	)		1,083			(351	)			1,598
Total operating expenses		19,862			15,628					35,455				33,629
Income (loss) before income taxes		(16,803	)		313			(27,200	)			632
Loss from operations		(9,366	)		(12,710	)				(19,647	)			(28,585	)
Income tax benefit (provision)		(11	)		(227	)		745				(501	)
Interest and other income		1,121			379					1,960				930
Net income (loss)	$	(16,814	)	$	86		$	(26,455	)		$	131
Interest and other expense		(308	)		(6,212	)				(580	)			(7,811	)
Basic net income (loss) per common share	$	(1.08	)	$	0.01		$	(1.71	)		$	0.01
Net loss	$	(8,553	)	$	(18,543	)			$	(18,267	)		$	(35,466	)
Diluted net income (loss) per common share	$	(1.08	)	$	0.01		$	(1.71	)		$	0.01
Basic and diluted net loss per common share	$	(0.04	)	$	(0.13	)			$	(0.09	)		$	(0.24	)
Weighted-average number of shares used in computing:
Weighted-average number of shares used in computing basic and diluted net loss per common share		206,873			145,215					206,131				145,199
Basic net income (loss) per common share		15,564			15,235			15,460				15,176
Diluted net income (loss) per common share		15,564			15,460			15,460				15,424

See accompanying notes.

4 of 4145

AVANEX CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended
	Six Months EndedDecember 31,
		December 31,
	2008			2007
	2006			2005
Operating Activities:
Net loss	$	(18,267	)	$	(35,466	)
Net income (loss)	$	(26,455	)	$	131
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on disposal of property and equipment		(48	)		(775	)
Loss on disposal of property and equipment		10			—
Depreciation and amortization		1,~~330~~973			31,~~295~~484
Amortization of intangibles		~~1,507~~107			~~3,150~~659
Stock-based compensation		32,~~701~~867			13,~~060~~637
Provision for doubtful accounts and sales returns		51651			~~387~~377
Loss in connection with convertible notes modification		-			4,761
Non-cash pension expense		43			—
Non-cash interest expense		317			893
Write-off of excess and obsolete inventory		2,444			3,770
Write-down of excess and obsolete inventory		6,898			3,994
Impairment of goodwill and intangibles		9,615			—
Reduction in fair value of investment		-			177
Changes in operating assets and liabilities:
Accounts receivable		(78,~~296~~131	)		18,~~948~~512
Inventories		(107,~~179~~748	)		1(4,~~499~~971	)
Other current assets		~~4,121~~(905	)		(~~190~~394	)
Other assets		(~~434~~212	)		(29161	)
Due to/from related parties		(7,293	)		6,121
Due to/from related party		(72	)		(2,552	)
Accounts payable		(8,~~866~~689	)		~~6,803~~(258	)
Accrued compensation		~~474~~(1,544	)		~~(2,881~~490	)
Accrued restructuring		(21,~~410~~302	)		(151,~~391~~728	)
Accrued warranty		(~~107~~276	)		(~~583~~102	)
Other accrued expenses and deferred revenues		3,338			(342	)
Other accrued expenses and deferred revenue		2,407			(914	)
Total adjustments		2,836			13,897
Net cash provided by (used in) operating activities		(18,955	)		7,980
Net cash used in operating activities		(15,431	)		(21,569	)
Investing Activities:
Purchases of investments		(~~220~~11,~~713~~476	)		(5087,694	)
Maturities of investments		~~244~~32,~~796~~643			1179,~~627~~802
Decrease in restricted cash		785			1,269
Increase in restricted cash		(27	)		(2,864	)
Purchases of property and equipment		(13,~~552~~269	)		(1,~~590~~426	)
Proceeds from sale of property and equipment		106			2,285
Net cash used in asset purchase		—			(2,139	)
Net cash provided by investing activities		23,422			13,541
Net cash provided by (used in) investing activities		17,871			(14,321	)
Financing Activities:
Payments on capital lease obligations		(~~712~~6	)		(~~1,274~~4	)
Payments in connection with convertible notes modification		-			(4,075	)
Proceeds from issuance of common stock		127			549
Proceeds from issuance of common stock		858			501
Net cash provided by financing activities		121			545
Net cash provided by (used in) financing activities		146			(4,848	)
Effect of exchange rate changes on cash		21			243
Effect of exchange rate changes on cash		260			(140	)
Net decrease in cash and cash equivalents		(942	)		(5,553	)
Net increase/(decrease) in cash and cash equivalents		8,397			(13,016	)
Cash and cash equivalents at beginning of period		14,839			14,837
Cash and cash equivalents at beginning of period		28,963			26,811
Cash and cash equivalents at end of period	$	13,897		$	9,284
Cash and cash equivalents at end of period	$	37,360		$	13,795
Supplemental Information:
Cash paid during the period for:
Interest expense	$	28		$	83
Non-cash investing and financing activities:
Conversion of senior convertible notes into common stock, net of discount of $96	$	449		$	-
Fixed asset purchases included in accounts payable	$	529		$	—
Warrants-related charges	$	-		$	686
Pension liability recognized in accumulated other comprehensive income	$	—		$	(16	)
Net issuance of restricted stock awards (restricted stock and restricted stock units)	$	1,089		$	3,861

See accompanying notes.

5 of 4145

AVANEX CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation

Avanex Corporation and its wholly- owned subsidiaries (~~collectively~~ “~~Avanex,~~the Company”, “we”, or“us” ~~the~~and “~~Company~~our”) design, manufacture and market fiber optic-based products, ~~known as photonic processors,~~ which ~~are designed to~~ increase the performance of optical networks. WeThe ~~sell~~Company ~~our~~sells products to telecommunications system integrators and their network carrier customers. WeThe ~~were~~ Company was incorporated in October 1997 in California and reincorporated in Delaware in January 2000~~, and began making volume shipments of our products during the quarter ended September 30, 1999~~.

The accompanying unaudited condensed consolidated financial statements as of December 31, ~~2006 and 2005~~2008, and for the three ~~months~~ and six months ended December 31, ~~2006~~2008 and ~~2005~~2007 have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting~~in ~~principles~~the United States of America (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and include the accounts of Avanex and its subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position at December 31, ~~2006~~2008, the consolidated operating results for the three ~~months~~ and six months ended December 31, ~~2006~~2008 and 2007, and the consolidated cash flows for the three ~~months~~ and six months ended December 31, ~~2006~~2008 and 2007. The consolidated results of operations for the three ~~months~~ and six months ended December 31, ~~2006,~~2008 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 30, ~~2007~~2009.

The condensed consolidated balance sheet at June 30, ~~2006~~2008 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. ~~These~~The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended June 30, ~~2006~~2008, contained in its Annual Report on Form 10-K filed with the ~~Securities~~SEC ~~and Exchange Commission~~ on September 285, ~~2006~~2008.

2During the six months ended December 31, 2008, the Company incurred a net loss of $26.5 ~~Stock~~million, and its balance of unrestricted cash, cash equivalents and short-~~based~~term ~~Compensation~~investments declined from $55.4 million at June 30, 2008 to $33.4 million at December 31, 2008. The Company expects these balances of cash, cash equivalents, and investments to continue to decline in future periods. These factors cast substantial uncertainty on the Company’s ability to continue as an ongoing enterprise for a reasonable period of time. The Company’s ability to continue as an ongoing enterprise is dependent on its improving operational cash flow and securing additional funding or consummating the proposed merger with Bookham, Inc. announced on January 27, 2009 (see Note 13). The Company’s management is pursuing opportunities to streamline development efforts, reduce inventory levels and simplify its operating structure, while maintaining customer satisfaction. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as an ongoing enterprise.

Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) prescribes a two-step process for impairment testing of goodwill and indefinite life of intangible assets. The first step screens for impairment, while the second step, measures the impairment, if any. SFAS 142 requires impairment testing based on reporting units.

The first step is a comparison of each reporting unit’s fair value to its carrying value. The Company estimates fair value using the best information available, including market information and discounted cash flow projections also referred to as the income approach. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.

As of December 31, 2008, the Company continued to evaluate goodwill due to indications of impairment including the current economic environment, its operating results, a sustained decline in its market capitalization, changes in management, and a decline in its forecasted revenue for the remainder of fiscal 2009. The Company operates in one

6 of 45

reporting unit. The Step 2 analysis concluded that there had been an impairment of the recorded goodwill. This conclusion is supported by the fair value implied by the proposed merger with Bookham, Inc. announced on January 27, 2009. As such, the Company has written off the book value of $9.4 million of goodwill as of December 31, 2008.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements” (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. Statement 157 was effective for the Company’s fiscal year beginning July 1, 2008. The adoption of Statement 157 did not have a material impact on the Company’s consolidated financial statements. Statement 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets for similar assets or liabilities that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. At December 31, 2008, $4.6 million of the Company’s cash equivalents, $3.8 million of the restricted cash, and $19.6 million of the short-term investments are valued as Level 1 investments.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“Statement 159”), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent changes in measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. Statement 159 also establishes additional disclosure requirements. This Statement 159 was effective for the Company’s fiscal year beginning July 1, 2008. The adoption of Statement 159 did not have a material impact on the Company’s consolidated financial statements.

Following the close of market on August 12, 2008, the Company effected a fifteen-for-one reverse stock split of its common stock. Accordingly, each fifteen shares of issued and outstanding Avanex common stock and equivalents as of the close of market on August 12, 2008 was converted into one share of common stock, and the reverse stock split was reflected in the trading price of Avanex’s common stock at the opening of market on August 13, 2008. Unless indicated otherwise, all share amounts and per share prices appearing in this Quarterly Report on Form 10-Q reflect the reverse stock split for all periods presented.

2.	Stock-Based Compensation

The Company accounts for stock-based compensation under FASB Statement No. 123(R),”Share-Based Payment” (“SFAS 123(R)”), which requires companies to recognize in their statement of operations all share-based payments, including grants of stock options to employees, based on the grant date fair value of such share-based awards. The application of SFAS No. 123(R) requires the Company’s management to make judgments in the determination of inputs into the Black-Scholes option pricing model which the Company uses to determine the grant date fair value of stock options it grants. Inherent in this model are assumptions related to expected stock price volatility, expected term, risk-free interest rate and expected dividend yield. While the risk free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment which make them critical accounting estimates.

Determining Fair Value

Valuation and amortization method—The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single-option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—~~The~~ Through December 31, 2007, the Company’s expected term ~~represents~~was based on the ~~period~~SEC ~~that~~Staff ~~the~~Accounting ~~Company’s~~Bulletin ~~stock-based~~107 ~~awards~~simplified method. ~~are~~Beginning ~~expected~~January 1, to2008, bethe ~~outstanding~~Company ~~and~~has isestimated ~~determined~~the time-to-exercise based on ~~the~~historical ~~Staff~~exercise ~~Accounting~~patterns ~~Bulletin~~of ~~107~~employee ~~simplified~~and ~~method~~director populations.

Expected Volatility—The Company’s volatility factor is estimated using the Company’s stock price history.

~~Expected~~7 ~~Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input. The dividend yield~~ of ~~zero~~45 ~~is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends in the future.~~

Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. Where the expected term of the Company’s stock-based awards does not correspond with the term for which an interest rate is quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities.

Fair Value—Fair value of the Company’s stock options granted to employees for the three months and six months ended December 31, 2006 and 2005 was estimated using the following weighted-average assumptions:

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	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
Option Plan Shares
Expected term (in years)		6.25			6.25			6.25			6.25
Volatility		80.0	%		78.0	%		80.5	%		77.5	%
Expected dividend		0	%		0	%		0	%		0	%
Risk-free interest rate		4.70	%		4.36	%		4.65	%		4.29	%
Weighted-average fair value	$	1.19		$	0.58		$	1.20		$	0.60
ESPP Shares
Expected term (in years)		1.00			1.00			1.00			1.00
Volatility		80.0	%		77.0	%		80.5	%		77.0	%
Expected dividend		0	%		0	%		0	%		0	%
Risk-free interest rate		4.86	%		3.92	%		4.86	%		3.92	%
Weighted-average fair value	$	2.75		$	1.81		$	2.75		$	1.81

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input. The use of an expected dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends in the future.

~~Stock~~Risk-Free ~~Compensation~~Interest ~~Expense~~Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. Where the expected term of the Company’s stock-based awards does not correspond with the term for which interest rates are quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities.

~~Under~~Fair ~~the~~Value—Fair ~~provisions~~value of ~~Statement~~the Company’s ofstock ~~Financial~~options ~~Accounting~~granted ~~Standards~~to ~~(“SFAS”)~~employees ~~123(R) “Share-Based Payment,” effective July 1, 2005, we recorded $1.8 million~~ and ~~$618,000~~directors ~~of stock compensation expense in our consolidated statements of operations~~ for the three and six months ended December 31, ~~2006~~2008 and ~~2005,~~2007 ~~and~~was ~~$3.7~~estimated ~~million~~using ~~and $1.1 million for~~ the ~~six~~following ~~months~~weighted-average ~~ended~~assumptions: ~~December 31, 2006 and 2005, respectively.~~

At December 31, 2006 and 2005, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was approximately $4.5 million and $3.6 million, respectively, net of estimated forfeitures of $2.3 million and $263,000, respectively. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 3.3 years and will be adjusted for subsequent changes in estimated forfeitures.


	Three Months Ended December 31,						Six Months Ended December 31,
	2008			2007			2008			2007
Option Plan Shares:
Expected term (in years)		4.50			6.25			4.50			6.25
Volatility		85.0	%		76.0	%		84.5	%		75.5	%
Expected dividend		0	%		0	%		0	%		0	%
Risk-free interest rate		1.41	%		3.60	%		1.50	%		3.96	%
Weighted-average fair value	$	0.61		$	16.08		$	0.96		$	16.67
ESPP Shares:
Expected term (in years)		1.00			1.00			1.00			1.00
Volatility		66.2	%		62.0	%		66.2	%		62.0	%
Expected dividend		0	%		0	%		0	%		0	%
Risk-free interest rate		2.21	%		4.15	%		2.21	%		4.15	%
Weighted-average fair value	$	9.77		$	14.18		$	9.77		$	14.18

~~The~~Fair ~~amortization~~value of the Company’s restricted stock ~~compensation~~units ~~under~~granted ~~SFAS~~to ~~123(R)~~employees for the three ~~months~~ and six months ended December 31, ~~2006~~2008 and ~~2005~~2007 iswas determined based on the ~~single-option~~Company’s ~~approach~~stock price at the date of the grant.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 4.7 million options that were inStock-~~the-money~~Based ~~at December 31, 2006 and for the 3.5 million options that~~Compensation ~~were~~Expense in-the-money at December 31, 2005. During the three months ended December 31, 2006 and 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $140,000 and $35,000, respectively. During the six months ended December 31, 2006 and 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $152,000 and $56,000, respectively. Intrinsic value was determined as of the date of option exercise.

~~Stock~~Under ~~option~~SFAS ~~activity~~123 ~~under~~(R), the ~~Option~~Company ~~Plans~~recorded $0.8 million and $1.8 million of stock compensation expense in its consolidated statements of operations for the ~~Director~~three ~~Plan~~months ~~was~~ended asDecember 31, ~~follows:~~2008 and 2007, and $2.2 million and $3.6 million for the six months ended December 31, 2008 and 2007, respectively.

	Number ofShares		Weighted-averageExercisePrice
Beginning outstanding, July 1, 2006	12,688,341		$	4.84
Granted	2,442,250		$	1.66
Exercised	(175,461	)	$	1.01
Canceled	(1,903,707	)	$	4.83
Ending outstanding, December 31, 2006	13,051,423		$	4.31
Ending vested + expected to vest, December 31, 2006	11,484,236		$	4.67

At December 31, 2008, the total stock-based compensation expense related to unvested stock grants to employees under the Company’s stock plans but not yet recognized was approximately $10.0 million, net of estimated forfeitures of $5.3 million. This expense will be amortized on a straight-line basis over a weighted-average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures.

Range of ExercisePrices	NumberOutstanding as ofDecember 31,2006	AverageRemainingContractualTerm, in Years	Weighted-averageExercisePrice		NumberExercisable as ofDecember 31,2006	Weighted-averageExercisePrice
$0.39 – $1.01	1,313,924	8.00	$	0.92	646,403	$	0.89
$1.03 – $1.59	1,356,700	8.69	$	1.24	174,211	$	1.21
$1.64 – $1.64	1,550,000	9.83	$	1.64	-	$	-
$1.70 – $2.19	2,131,947	8.11	$	2.05	1,090,220	$	2.16
$2.32 – $2.88	1,555,836	7.80	$	2.65	999,711	$	2.60
$2.95 – $3.95	2,145,703	6.87	$	3.60	1,953,703	$	3.64
$4.00 – $4.90	2,075,978	5.83	$	4.62	2,075,978	$	4.62
$4.99 – $115.81	886,335	4.36	$	22.72	886,335	$	22.72
$118.94 – $118.94	3,000	3.57	$	118.94	3,000	$	118.94
$139.25 – $139.25	32,000	3.69	$	139.25	32,000	$	139.25
	13,051,423	7.49	$	4.31	7,861,561	$	6.03

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Stock Option Activity

The Company issues new shares of common stock upon exercise of stock options. Stock option activity for the six months ended December 31, 2008 is summarized below:


	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value, in thousands
Outstanding at July 1, 2008	909,126		$	57.02	5.1	$	269
Granted	450,937		$	1.57
Exercised	—		$	—
Forfeitures and cancellations	(378,596	)	$	50.17

Outstanding at December 31, 2008	981,467		$	34.19	7.6	$	68

Vested and expected to vest at December 31, 2008	780,804		$	41.86	7.1	$	42

Exercisable at December 31, 2008	420,533		$	71.97	5.0	$	—

Aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. During both the three and six months ended December 31, 2008, there were no options exercised under the Company’s stock option plans. During the three and six months ended December 31, 2007, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $0.1 and $0.3 million, respectively. Intrinsic value was determined as of the date of option exercise.

Restricted Stock Unit Activity

The Company issues new shares of common stock upon the vesting of restricted stock units. Restricted stock unit activity for the six months ended December 31, ~~2006~~2008 is summarized below:

	Numberof Shares		Weighted- averageExercisePrice		Weighted-averageRemainingTerm, in Years	Aggregate IntrinsicValue as ofDecember 31,2006
	Number ofShares		Weighted-AverageExercisePrice		Weighted-AverageRemainingContractualTerm inYears	AggregateIntrinsicValue, inthousands		WeightedAverageGrantDate FairValue
Beginning outstanding, July 1, 2006	4,073,502		$	0.001
Outstanding at July 1, 2008	235,260		$	0.015	1.5	$	3,877	$	25.37
Awarded	2603,~~428,820~~782		$	0.001				$	10.49
Released	(1253,~~160,065~~154	)	$	0.001				$	4.30
Forfeited	(~~506~~94,~~874~~956	)	$	0.~~001~~015				$	25.43
Ending outstanding, December 31, 2006	4,835,383		$	0.001	1.59	$	9,141,000
Outstanding at December 31, 2008	490,932		$	0.001	1.2	$	469	$	15.18
Ending vested + expected to vest, December 31, 2006	3,804,838		$	0.001	1.46	$	7,187,000
Vested and expected to vest at December 31, 2008	428,874		$	0.015	1.2	$	409

7Aggregate intrinsic value is calculated as the difference between the exercise price of 41the shares and the quoted price of the Company’s common stock. During the three months ended December 31, 2008 and 2007, the aggregate intrinsic value of restricted stock units vesting was $0.2 million and $1.6 million, respectively. During the six months ended December 31, 2008 and 2007, the aggregate intrinsic value of restricted stock units vesting was $1.1 million and $3.9 million, respectively. Intrinsic value was determined as of the date the restricted stock unit vested.

Employee Stock Purchase Plan (“ESPP”) Activity

During the three months ended December 31, 2008 and 2007, no shares were issued in connection with the Company’s ESPP, and accordingly the aggregate intrinsic value of options exercised under the Company’s ESPP was $0 for both periods. During the six months ended December 31, 2008 and 2007, 16,138 and 14,798 shares were issued at weighted-average purchase prices of $9.77 and $14.18 per share, respectively, in connection with the Company’s ESPP, and the aggregate intrinsic value of shares purchased under the Company’s ESPP was $28,000 and $152,000, respectively.

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~~Aggregate~~Officer ~~intrinsic value is calculated as the difference between the exercise price of the shares~~ and ~~the~~Director ~~quoted~~Share ~~price of~~Purchase ~~the~~Plan ~~Company’s~~(“ODPP”) ~~common~~Activity stock for the 4.8 million of outstanding restricted stock units at December 31, 2006, all of which were in-the-money. During the three months and six months ended December 31, 2006, the aggregate intrinsic value of restricted stock units vesting was $1.2 million and $2.1 million, respectively. Intrinsic value was determined as of the date the restricted stock unit vested.

~~Employee~~The ~~Stock~~ODPP ~~Purchase~~was ~~Plan~~adopted ~~Activity~~in April 2008. During the three months ended December 31, 2008, 12,054 shares were issued at a weighted-average purchase price of $1.40. During the six months ended December 31, 2008, 13,648 shares were issued at a weighted-average purchase price of $2.11.

During the three months ended December 31, 2006 and 2005, no shares were issued in connection with the Company’s employee stock purchase plan (“ESPP”), and so the aggregate intrinsic value of options exercised under the Company’s ESPP was $0 for both periods3. ~~During~~Consolidated ~~the~~Balance ~~six~~Sheet ~~months ended December 31, 2006 and 2005, the aggregate intrinsic value of options exercised under the Company’s ESPP was $94,000 and $54,000, respectively.~~ Detail

3.Cash, ~~Inventories~~Cash Equivalents, and Short-term Investments

The Company generally invests its excess cash in debt instruments of the U.S. Treasury, government agencies, and corporations with strong credit ratings. Such investments are made in accordance with the Company’s investment policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. To date, the Company has not experienced any significant losses on its debt investments.

The table below summarizes all of the Company’s investments with maturity dates of one year or less from the date of purchase, the amortized cost, fair value and gross unrealized gains and losses related to available-for-sale securities, aggregated by security type.

Cash, cash equivalents, and short-term investments consist of the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2008:
Cash	$	9,293						$	9,293
Cash Equivalents - Money Market Funds		4,604							4,604
Restricted cash - Certificates of Deposit and United States Government Agencies		3,803							3,803
Short-term Investments -
Commercial Paper		—							—
United States Government Agencies		19,467	$	83	$	—			19,550

Subtotal, short-term investments		19,467		83		—			19,550

Total cash, cash equivalents and short-term investments	$	37,167	$	83	$	—		$	37,250

June 30, 2008:
Cash	$	10,106						$	10,106
Cash Equivalents - Money Market Funds		4,733							4,733
Restricted cash - Certificates of Deposit and United States Government Agencies		3,776							3,776
Short-term Investments -
Commercial Paper		7,981	$	1	$	—			7,982
United States Government Agencies		32,653		2		(47	)		32,608

Subtotal, short-term investments		40,634		3		(47	)		40,590

Total cash, cash equivalents and short-term investments	$	59,249	$	3	$	(47	)	$	59,205

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Inventories

Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost or market. Cost is computed on a standard basis, which approximates actual costs on a first-in, first-out basis. Inventories consisted of the following (in thousands):

	December 31,		June 30,
	December 31,2008		June 30,2008
		2006		2006
Raw materials	$	8,192	$	7,981
Raw materials	$	8,161	$	6,114
Work-in-process		105		360
Work-in-process		696		974
Finished goods		11,231		7,638
Finished goods		13,036		11,329
	$	19,528	$	15,979
	$	21,893	$	18,417

In the three months ended December 31, ~~2006~~2008 and ~~2005~~2007, the Company recorded charges to cost of revenue for the write-~~down~~off of excess and obsolete inventory of $31.43 million and $2.04 million, respectively, and for the six months ended December 31, ~~2006~~2008 and ~~2005~~2007, the Company recorded charges to cost of revenue for the write-~~down~~off of excess and ~~obsolete~~ obsolete inventory of $62.94 million and $43.08 million, respectively.

Warranties

Changes in the Company’s accrued product warranty liability are as follows (in thousands):


	Three Months Ended December 31,						Six Months Ended December 31,
	2008			2007			2008			2007
Balance at beginning of period	$	476		$	842		$	626		$	873
Accrual for sales during the period		73			47			181			208
Cost of warranty repair		(71	)		(118	)		(113	)		(310	)
Adjustment to prior sales (including expirations and changes in estimates)		(128	)		—			(344	)		—

Balance at end of period	$	350		$	771		$	350		$	771

4.	Restructuring

During the three months ended September 30, 2008, the Company implemented a workforce reduction of 47 employees to reduce costs, streamline operations, and improve its cost structure. In the second quarter of fiscal 2009, the Company closed its Melbourne, Florida facility and transferred the respective product lines, inventory, and fixed assets to either its France, China, or Thailand offices. The costs associated with this restructuring consisted of one-time termination benefits of approximately $2.1 million and facilities-related costs of approximately $0.3 million. The $2.1 million of one-time termination benefits includes $0.7 million of stock compensation charges due to accelerated vesting of restricted stock units.

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A summary of the Company’s accrued restructuring expense and accrued restructuring liability is as follows (in thousands):

Three months ended December 31, ~~2006~~2008:

	Expense for Three Months Ended December 31, 2006					BalanceSeptember 30,2006		Accrued			Paid				Recovered			BalanceDecember 31, 2006
	Expense forThree MonthsEndedDecember 31,2008			BalanceSeptember 30,2008		Accrued		Paid				Recovered				BalanceDecember 31,2008
Non-acquisition Related
Workforce Reduction, fiscal 2009	$	45		$	1,613	$	45	$	(1,613	)		$	—			$	45
Severance benefits
Abandonment of excess facilities		112			7,456		114		(932	)			(2	)			6,636
Fiscal 2004 workforce reduction						$	536	$	-		$	(19	)		$	-		$	517
Total Restructuring	$	157		$	9,069	$	159	$	(2,545	)		$	(2	)		$	6,681
Fiscal 2005 workforce reduction		312					2,612		317			(376	)			-			2,553
Six months ended December 31, 2008:
Fiscal 2006 workforce reduction		(2	)				24		-			(22	)			(2	)		-
	Expense forSix MonthsEndedDecember 31,2008			BalanceJune 30,2008		Accrued		Paid				Recovered				BalanceDecember 31,2008
Total severance benefits		310					3,172		317			(417	)			(2	)		3,070
Workforce Reduction, fiscal 2009	$	2,148		$	—	$	2,148	$	(2,103	)		$	—			$	45
Abandonment of excess facilities		~~126~~328			7,983		~~11,927~~581		~~126~~(1,675	)		~~(703~~	)(253	)		-	6,636		~~11,350~~
Total non-acquisition related		436					15,099		443			(1,120	)			(2	)		14,420
Total Restructuring	$	2,476		$	7,983	$	2,729	$	(3,778	)		$	(253	)		$	6,681
Acquisition-related
Severance benefits							3,131		-			(70	)			-			3,061
Total restructuring	$	436				$	18,230	$	443		$	(1,190	)		$	(2	)	$	17,481

8The liability related to abandoned facilities will be paid out through fiscal 2011, of 41which $3.0 million will be disbursed in the next 12 months.

5.	Acquisition of Essex

On July 2, 2007, the Company purchased certain assets from Essex Corporation (“Essex”), a subsidiary of Northrop Grumman Space and Mission Systems Corporation, for $2.1 million in cash, including $0.2 million of direct transaction costs incurred in connection with the acquisition. The Company acquired the assets relating to the MSA 300-pin transponder and XFP transceiver businesses of the Commercial Communication Products Division of Essex.

The transaction was accounted for as a purchase of assets in accordance with FASB Statement No. 141, “Business Combination”; therefore, the tangible assets acquired were recorded at fair value on the acquisition date. In allocating the purchase price based on estimated fair values, we recorded approximately $1.6 million and $0.5 million of tangible and intangible assets acquired, respectively. The tangible assets consist of $1.1 million of fixed assets, $0.3 million of inventory, and $0.2 million of prepaid rent, while the intangible assets consist of $0.3 million for technology and $0.2 million for a non-compete agreement. The allocation of the purchase price was based upon assessments by management of the fair value of the assets acquired. As part of the Company’s impairment assessment during the quarter ended December 31, 2008, the unamortized value of intangible assets of $0.2 million was written off.

6.	Income Taxes

As of December 31, 2008, the Company’s deferred tax assets are fully offset by a valuation allowance. FASB Statement No. 109, “Accounting for Income Taxes,” provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes Avanex’s historical operating performance and reported cumulative net losses since inception, the Company provided a full valuation allowance against its net deferred tax assets. The Company reassesses the need for its valuation allowance on a quarterly basis. If it is later determined that a portion of the valuation allowance should be reversed it will be a benefit to the income tax provision.

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~~Six~~The ~~months~~Company ~~ended~~has ~~December~~tax benefits receivable of $1.2 million. 31Of the $1.2 million tax benefits receivable, ~~2006:~~the current tax benefits receivable is $0.5 million and the non-current tax benefits receivable is $0.7 million.

	Expense for Six Months Ended December 31, 2006		BalanceJune 30,2006		Accrued		Paid			Recovered			Balance December 31, 2006
Non-acquisition Related
Severance benefits
Fiscal 2004 workforce reduction	$	-	$	542	$	-	$	(25	)	$	-		$	517
Fiscal 2005 workforce reduction		314		2,828		320		(594	)		(1	)		2,553
Fiscal 2006 workforce reduction		5		62		-		(60	)		(2	)		-
Total severance benefits		319		3,432		320		(679	)		(3	)		3,070
Abandonment of excess facilities		54		12,708		126		(1,412	)		(72	)		11,350
Total non-acquisition related		373		16,140		446		(2,091	)		(75	)		14,420
Acquisition-related
Severance benefits		-		3,433		-		(372	)		-			3,061
Total restructuring	$	373	$	19,573	$	446	$	(2,463	)	$	(75	)	$	17,481

The Company recorded an income tax provision of $11,000 for the three months ended December 31, 2008. The Company had a tax benefit of $0.7 million for the six months ended December 31, 2008 which consists of a benefit of $1.1 million related to federal and foreign research tax credits, offset by $0.4 million related to state and foreign income taxes. Of the $0.4 million state and foreign income taxes, there was a one-time discrete provision of $0.2 million related to withholding taxes in the prior year. Of the $1.1 million federal and foreign tax benefits, there was a one-time discrete benefit of $0.8 million in foreign tax credits related to research conducted in the prior year. The Company’s tax provision for the three and six months ended December 31, 2007 was approximately $0.2 million and $0.5 million, respectively, consisting primarily of foreign income taxes.

~~The~~7. ~~accrued~~Net ~~restructuring~~Income ~~liability~~(Loss) atper ~~December 31,~~Share ~~2006~~and isComprehensive ~~classified~~Income ~~as follows~~ (~~in thousands~~Loss):

	Current		Non- current		TOTAL
Accrued severance and LOA		3,288		2,843	$	6,131
Abandonment of excess facilities		3,071		8,279		11,350
	$	6,359	$	11,122	$	17,481

The following table presents the calculation of basic and diluted net income (loss) per share, and comprehensive income (loss) (in thousands, except per share data):

Accrued severance will be paid out through December 2012. The liability related to abandoned facilities will be paid out through 2010.


	Three Months Ended December 31,						Six Months Ended December 31,
	2008			2007			2008			2007
Net income (loss)	$	(16,814	)	$	86		$	(26,455	)	$	131

Shares used to compute basic net income (loss) per share		15,564			15,235			15,460			15,176
Potentially dilutive shares used to compute net income per share on a diluted basis		—			225			—			248

Shares used to compute diluted net income (loss) per share		15,564			15,460			15,460			15,424

Net income (loss) per share:
Basic	$	(1.08	)	$	0.01		$	(1.71	)	$	0.01

Diluted	$	(1.08	)	$	0.01		$	(1.71	)	$	0.01

Net income (loss)	$	(16,814	)	$	86		$	(26,455	)	$	131
Unrealized gain (loss) on investments		135			3			127			11
Amortization of net actuarial loss		(9	)		(8	)		(46	)		(16	)
Cumulative translation adjustment		69			66			(89	)		155

Comprehensive income (loss)	$	(16,619	)	$	147		$	(26,463	)	$	281

9At December 31, 2008, the Company had securities outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of 41diluted net loss per share, as their effect would have been anti-dilutive. At December 31, 2007, the Company had securities outstanding that had exercise prices above the average fair market value of common stock for the three months ended December 31, 2007 that were excluded from the computation of diluted net income (loss) per share as this effect was anti-dilutive. The anti-dilutive securities are as follows:


	Balance at December 31,
	2008	2007
Employee stock options	981,467	769,765
Warrants attached to 8% convertible notes	—	345,663
Warrants granted to landlord	4,000	4,000
Warrants attached to March 2006 equity securities offering	489,315	489,315
Warrants attached to March 2007 equity securities offering	179,917	179,917

	1,654,699	1,788,660

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58. ~~Investment~~Related inParty ~~Paxera Corporation~~ Transactions

InOn ~~September~~July 31, ~~2005~~2003, Alcatel ~~Avanex~~(now ~~acquired~~known ~~shares~~as ofAlcatel-Lucent) ~~preferred~~was ~~stock~~issued ~~and~~28% ~~warrants~~of ~~convertible~~the ~~into~~Company’s common stock ofin ~~Paxera~~connection ~~Corporation,~~with athe ~~privately-held~~acquisitions ~~manufacturer~~of certain businesses of ~~tunable~~Alcatel. ~~lasers~~On October 29, in2007, ~~exchange~~the ~~for~~Pirelli ~~certain~~Group ~~manufacturing~~acquired all the shares of the Company’s ~~equipment.~~common ~~Avanex~~stock ~~assigned~~then aheld ~~fair~~by ~~value~~Alcatel-Lucent. As of ~~$400~~December 31,~~000~~ to2008, the ~~acquired~~Pirelli ~~shares~~Group ofand ~~preferred~~Alcatel-Lucent ~~stock~~owned 12% and ~~warrants~~zero percent, respectively, of the outstanding shares of Avanex common stock. The ~~fair~~Company ~~value~~sells ~~was~~products ~~based~~to onand apurchases ~~recent~~raw materials ~~private~~and ~~round~~components offrom ~~preferred~~the ~~stock~~Pirelli ~~financing~~Group byand ~~Paxera,~~Alcatel-Lucent in ~~which~~the ~~Paxera~~regular ~~received~~course ~~cash~~of ~~from investors~~business.

At various times during 2006, Avanex acquired additional shares of preferred stock and additional warrants convertible into common stock in exchange for $303,000 of product development services performed by Avanex.

In November 2006, Paxera was acquired by NeoPhotonics Corporation, a privately-held manufacturer of active and passive optical components. Avanex’s preferred shares and warrants in Paxera will be exchanged for shares of common and preferred stock in NeoPhotonics and $595,000 in cash for a combined value of $1.2 million.

Avanex recognized a gain of $515,000 during the three months ended December 31, 2006 in connection with this exchange. The gain is included in Interest and Other Income.

6. Warranties

In general, the Company provides a product warranty for one year from the date of shipment. The Company accrues for the estimated costs of product warranties during the period in which revenue is recognized. The Company estimates the costs of its warranty obligations based on its historical experience and expectation of future conditions. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, the Company’s warranty costs will increase resulting in decreases to gross profit. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s accrued product warranty liability are as follows (in thousands):

	Three Months Ended						Six Months Ended
		December 31,						December 31,
	2006			2005			2006			2005
Balance at beginning of period	$	1,745		$	5,243		$	1,799		$	5,268
Accrual for sales during the period		272			321			408			1,063
Cost of warranty repair		(271	)		(116	)		(405	)		(469	)
Adjustment to prior sales (including expirations and changes in estimates)		(4	)		(812	)		(60	)		(1,226	)
Balance at end of period	$	1,742		$	4,636		$	1,742		$	4,636

7. Net Loss per Share and Comprehensive Loss

The following table presents the calculation of basic and diluted net loss per share, and comprehensive loss (in thousands, except per share data):

	Three Months Ended						Six Months Ended
		December 31,						December 31,
	2006			2005			2006			2005
Net loss	$	(8,553	)	$	(18,543	)	$	(18,267	)	$	(35,466	)
Basic and diluted weighted-average number of shares of common stock outstanding		206,873			145,215			206,131			145,199
Basic and dilued net loss per common share	$	(0.04	)	$	(0.13	)	$	(0.09	)	$	(0.24	)
Net loss	$	(8,553	)	$	(18,543	)	$	(18,267	)	$	(35,466	)
Unrealized gain on investments		-			119			25			177
Cumulative translation adjustment		(600	)		350			(721	)		205
Comprehensive loss	$	(9,153	)	$	(18,074	)	$	(18,963	)	$	(35,084	)

During the periods presented, the Company had securities outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive. The anti-dilutive securities are as follows:

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	December 31, 2006	December 31, 2005
Employee stock options	13,051,423	16,328,166
Employee restricted stock units	4,835,383	-
8% convertible notes	5,555,556	38,888,889
Warrants attached to 8% convertible notes	8,737,689	8,677,689
Warrants granted to landlord	60,000	60,000
Warrants attached to March 2006 equity securities offering	7,222,500	-
	39,462,551	63,954,744

8. Consolidated Condensed Balance Sheet Detail

Other Accrued Expenses and Deferred Revenue

Other Accrued Expenses and Deferred Revenue consist of the following (in thousands):

	December 31,		June 30,
	2006		2006
Accrued liability to contract manufacturer	$	1,929	$	12
Accrued outside services		3,176		1,668
Deferred revenue		1,378		402
Other accrued liabilities		2,989		2,385
	$	9,472	$	4,467

9. Related Party Transactions

On July 31, 2003, in connection with the Company’s acquisition of Alcatel’s and Corning’s optical components businesses, Alcatel (now known as Alcatel Lucent) was issued 28% of the Company’s outstanding common stock and Corning was issued 17% of the Company’s common stock on a post-transaction basis. As of December 31, 2006 Alcatel Lucent ** owned 28,295,868 shares representing 14% of the outstanding shares of Avanex common stock and Corning owned zero shares. The Company sells products to and purchases raw materials and components from Alcatel Lucent in the regular course of business. Additionally, Alcatel Lucent provided certain administrative services to the Company.

Amounts sold to and purchased from related parties were as follows (in thousands):

	Three Months Ended December 31,								Six Months Ended December 31,
	Three Months EndedDecember 31,						Six Months EndedDecember 31,
		2006**				2005*				2006**			2005*
	2008*			2007*			2008*		2007*
Related party transactions
Sales to related parties	$	~~15,298~~77		$	$4,852	~~10,650~~	$	138	$	2818,~~835~~166		$	~~23,972~~
Purchases from related parties in cost of revenue		~~159~~295			321	~~920~~		756		~~164~~322			~~2,408~~
Administrative and transitional services purchased from related parties; starting December 31, 2005, amounts include facilities rent credits		(73	)			147				(84	)		1,692
Royalty income		-				-				-			190

11* On October 29, 2007, the Pirelli Group acquired all the shares of 41the Company’s common stock held by Alcatel-Lucent. Thus, related party transactions for the three and six months ended December 31, 2008 are for the Pirelli Group, while the three and six months ended December 31, 2007 include Alcatel-Lucent from October 1, 2007 to October 29, 2007, and the Pirelli Group from October 30, 2007 to December 31, 2007.

* On December 31, 2005, Corning no longer owned shares in Avanex. As a result, we have only included transactions with Corning in the related party disclosure for the three months and six months ended December 31, 2005.

** On November 30, 2006, the merger of Alcatel and Lucent was completed and the combined company was named “Alcatel Lucent”. As a result, we have included December 2006 transactions with Lucent in the related party disclosure for the three months and six months ended December 31, 2006.

Amounts due from and due to related parties (in thousands):

	December 31, 2006**		June 30, 2006
	December 31,2008		June 30,2008
Due from related parties	$	~~17,972~~123	$	~~10,404~~85
Due to related parties		~~4,750~~75		~~4,475~~110

**9. OnDisclosures ~~November~~about ~~30,~~Segments ~~2006, the merger~~ of ~~Alcatel~~an ~~and Lucent was completed and the combined company was named “Alcatel Lucent”. As a result, we have included December 2006 transactions with Lucent in the related party disclosure.~~Enterprise

AsFASB Statement ~~of January~~No. 31131, ~~2007,~~“Disclosures ~~Alcatel~~about ~~Lucent~~Segments ~~owned~~of 28an Enterprise and Related Information,~~295,868~~” ~~shares~~establishes ofstandards ~~Avanex~~for the way public business enterprises report information about operating segments in annual financial statements and ~~common~~requires ~~stock~~that ~~representing~~those ~~approximately~~enterprises ~~14%~~report ofselected ~~the~~information ~~outstanding~~about ~~shares~~operating ofsegments ~~Avanex~~in ~~common~~interim ~~stock~~financial reports. FASB Statement No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers.

10The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (“CEO”). ~~Disclosures~~The ~~about~~CEO ~~Segments~~reviews ofthe anCompany’s ~~Enterprise~~financial information presented on a consolidated basis substantially similar to the accompanying consolidated financial statements. Therefore, the Company has concluded that it operates in one segment and accordingly has provided enterprise-wide disclosures.

~~SFAS~~Customers ~~No. 131,~~who ~~“Disclosures~~represented ~~about~~10% ~~Segments~~or more of ~~an Enterprise and Related Information,” establishes standards for~~ the ~~way~~Company’s ~~public business~~net ~~enterprises~~revenue ~~report~~or ~~information~~accounts ~~about~~receivable ~~operating~~were ~~segments~~as infollows: annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers.

The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (“CEO”). The CEO reviews the Company’s financial information presented on a consolidated basis substantially similar to the accompanying consolidated financial statements. Therefore, the Company has concluded that it operates in one segment, to manufacture and market photonic processors, and accordingly has provided only the required enterprise-wide disclosures. The Company has adopted a matrix management organizational structure whereby management of worldwide activities is on a functional basis.


	Percentage of Net Revenue								Percent of Accounts Receivable at
	Three Months Ended December 31,				Six Months Ended December 31,				Dec. 31,		June 30,
	2008		2007		2008		2007		2008		2008
Company A	33	%	23	%	34	%	24	%	26	%	21	%
Company B	12	%	*		*		*		*		*
Company C	*		22	%	*		19	%	*		17	%

	45	%	45	%	34	%	43	%	26	%	38	%

~~Customers~~* ~~who~~less ~~represented~~than 10% ~~or more of our net revenue (including sales to each customer’s contract manufacturer) or accounts receivable were as follows:~~

	Three Months Ended December 31,		Six Months Ended December 31,
	2006	2005	2006	2005
Company A	27%	29%	29%	31%
Company B	21%	-	16%	-
Company C	10%	-	11%	-
Company D	10%	-	-	11%
	68%	29%	56%	42%

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12 of 41

Revenues by geographical area were as follows (in thousands):

	Three Months EndedDecember 31,				Six Months EndedDecember 31,		~~Six Months EndedDecember 31,~~
		2006		2005				2006			2005
	2008		2007		2008			2007
		Amount		Amount				Amount			Amount
United States	$	10,071	$	19,620	$	23,343		$	37,138
U.S.		39,224		21,388				76,509			48,099
Europe:
France		12,047		14,429				21,418			28,614
Italy		12,027		11,222		27,069			23,866
Italy		4,352		308				8,587			645
Other		3,287		5,140		7,014			9,283
	$	55,623	$	36,125			$	106,514		$	77,358
Asia:
China		5,194		5,053		10,099			8,137
Other		4,574		6,971		9,322			16,378
Rest of world		2,848		4,001		6,428			11,914
Total	$	38,001	$	52,007	$	83,275		$	106,716

~~Long-lived~~10. ~~assets by geographical area were as follows (in thousands):~~ Disposition

	December 31, 2006		June 30, 2006
Property, plant and equipment:
U.S.	$	4,152	$	3,888
Non-U.S.		1,912		1,780
	$	6,064	$	5,668

In April 2007, the Company sold ninety percent (90%) of the share capital and voting rights of its wholly owned subsidiary, Avanex France, which operated the Company’s semiconductor fabs and associated product lines located in Nozay, France to 3S Photonics. The sale resulted in a loss to the Company of approximately $3.2 million.

13In July 2007, the Company and 3S Photonics entered into a Cash Settlement Agreement that finalized the cash payments between the two parties under the share purchase agreement entered into in February 2007. As part of 41the Cash Settlement Agreement, the Company placed in an escrow account the amount of €2 million to provide for payment of certain vendor liabilities claimed by 3S Photonics. In March 2008, the parties finalized the liabilities and the remaining escrow funds of €1,512,506 were returned to the Company and recognized as a gain on the subsidiary sale.

In July 2007, the Company and 3S Photonics entered into an Amendment Agreement to the Global Distributor Agreement whereby the Company distributed products manufactured by 3S Photonics. The Amendment Agreement provided that the Global Distributor Agreement between the Company and 3S Photonics terminated in April 2008. This Amendment was granted in exchange for a cash payment by 3S Photonics to Avanex. 3S Photonics agreed to provide Avanex with free product or cash under the Global Distributor Agreement in the amount of €415,806 per quarter for six quarters. As a result of the Global Distributor Agreement and legal settlement in June 2008, the Company reduced cost of goods sold for this product credit by approximately $3.7 million in fiscal 2008.

On December 27, 2007, the Company filed an arbitration claim against 3S Photonics in New York regarding disputes primarily involving the early termination of the Global Distributor Agreement by 3S Photonics and other payment obligations the Company believed 3S Photonics owes to it. 3S Photonics filed a response and counter-claim to the arbitration in which it denied the Company’s claim and alleged among other matters that the Company had breached certain contractual agreements resulting in damages to 3S Photonics. In March 2008, 3S Photonics instituted legal proceedings against the Company in the Commercial Court of Evry in France. 3S Photonics alleged that the Company disparaged 3S Photonics by, among other things, issuing a press release announcing that the Company had initiated arbitration proceedings against 3S Photonics relating to the early termination of the Global Distributor Agreement. 3S Photonics alleged damages in excess of €21 million.

In June, 2008, the Company and 3S Photonics settled their dispute. While neither side admitted liability, the two parties agreed to a settlement that included payables, receivables and lost profits under the parties’ terminated Global Distributor Agreement, and a release by both parties of all claims asserted against each other. With this resolution, there is no remaining litigation between Avanex and 3S Photonics.

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11. ~~Litigation~~ Contingencies

~~On August 6,~~From ~~2001,~~time ~~Avanex~~to time, ~~certain~~the ofCompany ~~its~~is subject ~~officers~~to ~~and directors, and~~ various ~~underwriters~~legal inproceedings ~~its~~that ~~initial~~arise ~~public~~from ~~offering (“IPO”) were named as defendants in a class action filed in~~ the ~~United~~normal ~~States~~course ~~District Court for the Southern District~~ of ~~New~~business ~~York, captioned Beveridge v~~activities. ~~Avanex~~In ~~Corporation et al.~~addition, ~~Civil~~from ~~Action~~time ~~No. 01-CV-7256.~~to ~~This action and other subsequently filed substantially similar class actions have been consolidated into In re Avanex Corp. Initial Public Offering Securities Litigation~~time, ~~Civil~~third ~~Action~~parties ~~No. 01~~assert ~~Civ.~~patent ~~6890.~~or ~~The~~trademark ~~consolidated~~infringement ~~amended~~claims ~~complaint~~against in the ~~action~~Company ~~generally alleges that various investment bank underwriters engaged~~ in ~~improper and undisclosed activities related to~~ the ~~allocation of~~form ~~shares in Avanex’s IPO. Plaintiffs have brought claims for violation~~ of ~~several~~letters ~~provisions of the federal securities laws against those underwriters,~~ and ~~also~~other ~~against~~forms ~~Avanex and certain~~ of ~~its directors and officers, seeking unspecified~~ ~~damages on behalf of a purported class of purchasers of Avanex’s common stock between February 3, 2000, and December 6, 2000~~communication. ~~Various~~The ~~plaintiffs~~Company ~~have~~does ~~filed~~not ~~similar~~believe ~~actions~~that ~~asserting~~any ~~virtually identical allegations against more than 40 investment banks and 250 other companies. All~~ of these ~~“IPO~~legal ~~allocation” securities class actions currently pending in the Southern District of New York have been assigned to Judge Shira A. Scheindlin for coordinated pretrial~~ proceedings ~~as In~~or ~~re Initial Public Offering Securities Litigation, 21 MC 92. On October 9, 2002, the~~ claims ~~against~~is ~~Avanex’s~~likely ~~directors and officers were dismissed without prejudice pursuant~~ to ahave ~~tolling agreement. The issuer defendants filed~~ a ~~coordinated~~ ~~motion~~material toadverse ~~dismiss~~effect ~~all~~on ~~common~~its ~~pleading~~consolidated ~~issues,~~results which the Court granted in part and denied in part in an order dated February 19, 2003. The Court’s order did not dismiss the Section 10(b) or Section 11 claims against Avanex. In June 2004, a stipulation of ~~settlement for the claims against the issuer defendants~~operations, ~~including~~financial ~~Avanex~~condition, ~~was~~or ~~submitted~~cash ~~to the Court~~flows. ~~On August 31~~However, ~~2005,~~it ~~the~~is ~~Court~~possible ~~granted~~that ~~preliminary approval of the settlement. On April 24, 2006,~~an ~~the~~unfavorable ~~Court~~resolution ~~held a fairness hearing in connection with the motion for final approval~~ of ~~the~~one ~~settlement. The~~or ~~Court did~~more ~~not~~such ~~issue~~proceedings acould ~~ruling on the motion for final approval at the fairness hearing. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the Court’s October 2004 order certifying a class~~ in ~~six test cases that were selected by~~ the ~~underwriter~~future ~~defendants~~materially ~~and~~affect ~~plaintiffs in~~ the ~~coordinated proceeding. Avanex is not one of the test cases and it is unclear what impact this will have on Avanex~~Company’s ~~case.~~future ~~The~~results ~~settlement remains subject to a number~~ of ~~conditions~~operations, ~~including~~cash ~~final approval of the Court. If the settlement does not occur~~flows, ~~and~~or litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert management’s attention and resources, which could seriously harm our business, financial ~~condition,~~position ~~results of operations or cash flow~~ in a particular period.

IPO Class Action Lawsuit

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including Avanex, was submitted to the Court for approval. In August 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. The case involving Avanex is not one of the six test cases. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs filed amended master allegations and amended complaints in the six focus cases. On March 26, 2008, the Court largely denied the defendants’ motion to dismiss the amended complaints. It is uncertain whether there will be any revised or future settlement. If a settlement does not occur, and litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert management’s attention and resources, which could harm the Company’s business, financial condition, results of operations or cash flow in a particular period.

Section 16(b) Demand

On October 3, 2007, a purported Avanex shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s IPO underwriters. The complaint, Vanessa Simmonds v. Morgan Stanley, et al., Case No. C07-01568, filed in District Court for the Western District of Washington, seeks the recovery of short-swing profits. The Company is named as a nominal defendant. No recovery is sought from the Company.

Merger Purported Class Action Lawsuit

On February 3, 2009, a purported class action complaint was filed against Avanex and its directors, Bookham, Inc., and Ultraviolet Acquisition Sub, Inc. in the Superior Court of California, Alameda County by two individuals who purport to be shareholders of Avanex. Plaintiffs purport to bring this action on behalf of all shareholders of Avanex. The complaint alleges that the defendants breached their fiduciary duties by failing to maximize shareholder value in connection with the contemplated merger of Avanex and Bookham. The complaint also alleges that Avanex, Bookham, and Ultraviolet Acquisition Sub aided and abetted the individual defendants’ alleged breach of fiduciary duties. Plaintiffs seek to permanently enjoin the merger with Bookham, monetary damages in an unspecified amount attributable to the alleged breach of duties, and legal fees and expenses. Avanex and the individual defendants intend to defend against the complaint vigorously. If the Company failed to prevail in these legal matters or if these matters were resolved against the Company, the operating results of a particular reporting period could be materially adversely affected or the merger with Bookham could be halted.

12.

Recent Accounting Pronouncements

In ~~June 2006~~ December 2007, the FASB issued ~~interpretation~~SFAS No. ~~48,~~141 ~~“Accounting~~(revised ~~for~~2007), ~~Uncertainty~~Business inCombinations ~~Income Taxes-an interpretation of FASB Statement No. 109~~ (~~FAS No. 109)” (~~“~~FIN~~SFAS 48141R”). SFAS ~~This~~141R ~~interpretation~~establishes ~~prescribes~~the aprinciples ~~recognition threshold~~ and ~~measurement~~requirements ~~attribute~~ for ~~tax~~how ~~positions~~an ~~taken~~acquirer or(i) recognizes ~~expected~~and tomeasures ~~be taken~~ in aits ~~tax return. This interpretation also provides guidance on de-recognition,~~financial ~~classification,~~statements ~~interest~~the ~~and~~identifiable ~~penalties,~~assets ~~accounting in interim periods~~acquired, ~~disclosure and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In~~ the ~~first~~liabilities ~~step~~assumed, ~~recognition,~~and ~~it is determined whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of~~ any ~~related~~noncontrolling ~~appeals~~interest orin ~~litigation processes, based on~~ the ~~technical~~acquiree; ~~merits~~(ii) recognizes ofand ~~the~~measures ~~position. The second step addresses measurement of a tax position that meets~~ the ~~more-likely-than-not~~goodwill ~~criteria.~~acquired ~~The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken~~ in ~~a tax return and amounts recognized in~~ the ~~financial~~business ~~statements~~combination ~~will generally result in a) an increase in a liability for income taxes payable~~ or a ~~reduction~~gain offrom ~~an income tax refund receivable, b)~~ a ~~reduction~~bargain inpurchase; ~~a deferred tax asset or an increase in a~~and ~~deferred tax liability or c~~(iii) determines ~~both~~what ainformation ~~and~~to b.disclose ~~Tax~~to ~~positions~~enable ~~that~~users ~~previously~~of ~~failed to meet~~ the ~~more-~~financial ~~likely-than-not~~statements ~~recognition~~to ~~threshold~~evaluate ~~should be recognized in~~ the ~~first~~nature ~~subsequent~~and financial ~~reporting~~effects ~~period~~of inthe ~~which~~business ~~that threshold is met~~combination. ~~Previously~~ SFAS ~~recognized~~141R ~~tax~~makes ~~positions~~significant ~~that~~changes noto ~~longer~~existing ~~meet~~accounting ~~the~~practices ~~more-likely-than-not~~for acquisitions, ~~recognition~~including ~~threshold should be de-recognized in~~ the ~~first~~requirement ~~subsequent~~to ~~financial~~expense ~~reporting~~transaction ~~period~~costs inand ~~which~~to ~~that~~reflect ~~threshold~~the isfair novalue ~~longer met. Use~~ of acontingent ~~valuation~~purchase ~~allowance as~~price ~~described~~adjustments inat ~~FAS No. 109 is not an appropriate substitute for~~ the ~~de-recognition~~date of ~~a tax position~~acquisition. SFAS ~~The~~141R ~~requirement~~is to ~~assess~~be ~~the~~applied ~~need~~prospectively ~~for~~to abusiness ~~valuation~~combinations consummated ~~allowance~~on ~~for~~or ~~deferred~~after ~~tax~~the ~~assets~~beginning ~~based on sufficiency~~ of ~~future~~the ~~taxable~~first ~~income~~annual ~~is unchanged~~reporting byperiod ~~this~~on ~~interpretation.~~or ~~This Interpretation is effective for fiscal years beginning~~ after December 15, ~~2006~~2008. The WeCompany ~~do not believe that FIN 48~~ will ~~have~~implement athe ~~material~~new ~~impact~~standard oneffective ~~our~~in ~~consolidated~~fiscal ~~balance sheet and statement of operations~~2010.

In16 ~~September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects~~ of ~~Prior~~45 Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the company’s balance sheet and statement of

14 of 41

~~operations~~In ~~financial~~April ~~statements~~2008, ~~and~~ the ~~related~~FASB ~~financial~~issued ~~statement~~Staff ~~disclosures~~Position No. ~~SAB~~FAS ~~108~~142-3, ~~permits~~Determination ~~existing~~of ~~public~~the ~~companies~~Useful toLife ~~record~~of Intangible ~~the~~Assets ~~cumulative~~(“FSP ~~effect~~FAS ~~of initially~~142-3”). ~~applying~~FSP ~~this~~FAS ~~approach~~142-3 inamends the ~~first~~factors ~~year~~that ~~ending~~should ~~after~~be ~~November 15,~~considered ~~2006~~in bydeveloping ~~recording~~renewal ~~the~~or ~~necessary~~extension ~~correcting~~assumptions ~~adjustments~~used to determine the ~~carrying~~useful ~~values~~life of ~~assets~~a recognized intangible asset under SFAS No. 142, Goodwill and ~~liabilities~~Other asIntangible ofAssets ~~the~~(“SFAS ~~beginning~~142”). ofThe ~~that~~intent ~~year~~of ~~with~~FSP ~~the~~FAS ~~offsetting~~142-3 ~~adjustment recorded~~is to improve the ~~opening~~consistency ~~balance~~between the useful life of ~~retained~~a ~~earnings.~~recognized ~~Additionally,~~intangible asset under SFAS 142 and the ~~use~~period of ~~the~~expected ~~cumulative~~cash ~~effect~~flows ~~transition~~used ~~method~~to ~~requires~~measure ~~detailed~~the fair ~~disclosure~~value of the ~~nature~~asset under SFAS 141(R) and ~~amount~~other ofapplicable ~~each~~accounting ~~individual~~literature. ~~error~~FSP ~~being~~FAS ~~corrected~~142-3 ~~through~~is ~~the~~effective ~~cumulative~~for ~~adjustment and~~fiscal ~~how~~years ~~and~~beginning ~~when~~after itDecember 15, ~~arose~~2008. WeAs ~~believe~~of December 31, 2008, the ~~adoption~~Company ofhas ~~SAB~~written ~~108~~off ~~will~~the ~~not~~remaining ~~have~~book value aof ~~material~~$9.6 ~~impact~~million onof ~~our~~goodwill ~~consolidated~~and ~~balance~~intangible ~~sheet~~assets ~~and~~in ~~statement~~the ofthree ~~operations~~months ended December 31, 2008.

13.

Subsequent Event

On January 27, 2009, the Company announced that it had reached a definitive agreement to merge with Bookham, Inc. in an all-stock transaction, in which Avanex stockholders will receive 5.426 shares of Bookham common stock for every share of Avanex common stock and will own approximately 46.75% of the combined company following the closing of the merger. At the closing, each outstanding option to purchase Avanex common stock will be converted into an option to purchase 5.426 shares of Bookham common stock, each outstanding Restricted Stock Unit (RSU) payable for Avanex common stock will be converted into an RSU payable for 5.426 shares of Bookham common stock, and certain outstanding warrants to purchase Avanex common stock will be converted into warrants to purchase 5.426 Bookham common stock.

The merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

The merger is subject to customary closing conditions including shareholder approval by both companies. Both companies will continue to operate their businesses independently until the close of the merger. The merger is expected to be completed within three to six months.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding our liquidity, anticipated cost of revenue, operating expenses, gross margins, anticipated savings from our restructuring and cost reduction plans, and statements regarding our expectations, beliefs, anticipations, commitments, intentions and strategies regarding the future. In some cases forward-looking statements can be identified by terms such as “may,” “could,” “would,” “might,” “will,” “should,” “expect,” “plan,” “intend,” “ forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. Actual results could differ from those projected in any forward-looking statements, which are made as of the date of this Form 10-Q, including but not limited to those presented under “Risk Factors” in Item 1A of Part II and weelsewhere in this Quarterly Report on Form 10-Q. We assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes for the year ended June 30, ~~2006~~2008, included in our Annual Report on Form 10-K filed with the SEC on September 285, ~~2006~~2008.

Recent Development

On January 27, 2009, we announced that we had reached a definitive agreement to merge with Bookham, Inc. in an all-stock transaction, in which Avanex stockholders will receive 5.426 shares of Bookham common stock for every share of Avanex common stock and will own approximately 46.75% of the combined company following the closing of the merger. At the closing, each outstanding option to purchase Avanex common stock will be converted into an option to

17 of 45

purchase 5.426 shares of Bookham common stock, each outstanding Restricted Stock Unit (RSU) payable for Avanex common stock will be converted into an RSU payable for 5.426 shares of Bookham common stock, and certain outstanding warrants to purchase Avanex common stock will be converted into warrants to purchase 5.426 shares of Bookham common stock.

The merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

Overview

We design, manufacture and market fiber optic-based products, ~~known as photonic processors,~~ which ~~are designed to~~ increase the performance of optical networks. We sell our products to telecommunications system integrators and their network carrier customers. We were incorporated in October 1997 in California and reincorporated in Delaware in January 2000,. ~~and~~We began making volume shipments of our products during the quarter ended September 30, 1999.

WeIn ~~acquired~~fiscal ~~the~~2004, ~~optical~~we ~~components~~assumed ~~businesses~~restructuring liabilities with fair values of ~~Alcatel~~$64.1 ~~(now~~million ~~known~~at asthe ~~Alcatel~~date of acquisition of the optical components businesses of Alcatel-Lucent) and Corning, onwhich ~~July 31,~~were ~~2003,~~included in ~~transactions~~the ~~accounted~~purchase ~~for~~price. asSubsequent ato ~~purchase.~~these ~~In addition~~acquisitions, we ~~acquired~~have ~~certain~~continued ~~assets~~to restructure our organization, primarily through the downsizing of ~~Vitesse~~our ~~Semiconductor’s~~workforce ~~Optical~~and the ~~Systems~~abandonment ~~Division~~of onexcess ~~August~~facilities. As of December 2831, ~~2003~~2008, inour aaccrued ~~transaction~~restructuring ~~accounted~~liability ~~for~~balance aswas a$6.7 ~~purchase~~million, consisting primarily of excess facilities costs payable through fiscal 2011.

The ~~telecommunications~~restructurings ~~industry~~have ~~experienced~~resulted ain, ~~significant~~among ~~period~~other ofthings, ~~retraction following~~ a ~~dramatic~~significant ~~slowdown~~reduction in ~~equipment~~the ~~spending~~size inof ~~late~~our ~~2001~~workforce, ~~through~~consolidation ~~2005. Like many~~ of our ~~competitors~~facilities, ~~we continue to be adversely~~and ~~affected~~increased byreliance ~~the~~on ~~downturn~~outsourced, inthird-party ~~the~~manufacturing. ~~telecommunications~~In ~~industry~~March 2005, ~~and~~we ~~restructuring~~announced ~~and~~that ~~cost-cutting~~we ~~measures~~had ~~are~~opened aan ~~significant~~operations ~~focus~~center ~~for~~in ~~us.~~Bangkok, ~~Over~~Thailand ~~the~~to ~~past~~centralize ~~several~~global ~~years,~~manufacturing weand ~~have~~operational ~~implemented~~overhead ~~various~~functions ~~restructuring~~in ~~programs~~a tolower-cost ~~realign~~region. ~~resources~~In July in2005, ~~response to~~we announced the ~~changes~~opening inof ~~the~~a ~~industry~~development and ~~customer~~marketing ~~demand~~office in Shanghai, China. In ~~fiscal~~April ~~2004~~2007, we ~~assumed~~sold ~~restructuring~~ninety ~~liabilities~~percent ~~with fair values~~ (90%) of ~~$64.1~~the ~~million~~share atcapital ~~the~~and ~~date~~voting rights of ~~acquisition~~our ~~through~~wholly ~~the~~owned ~~acquisitions~~subsidiary, ofAvanex ~~the~~France, ~~optical~~which ~~components~~operated ~~businesses~~our semiconductor offabs ~~Alcatel Lucent~~ and ~~Corning,~~ ~~which~~associated ~~were~~product ~~included~~lines located in ~~the~~Nozay, ~~purchase price~~France. ~~Subsequent~~In toSeptember ~~these acquisitions~~2008, we ~~have~~implemented ~~continued~~a toworkforce ~~restructure~~reduction ~~our~~of ~~organization,~~47 ~~primarily~~employees ~~through~~and announced the ~~downsizing~~closure of our ~~workforce~~Melbourne, Florida facility and the ~~abandonment~~transfer of ~~excess~~the ~~facilities.~~respective ~~As of~~product ~~December 31~~lines, ~~2006 our accrued restructuring liability was $17.5 million. Of that amount~~inventory, ~~$6.4~~and ~~million~~fixed isassets ~~expected~~ to beanother ~~paid within the next 12 months~~office.

The restructurings have resulted in, among other things, a significant reduction in the size of our workforce, consolidation of our facilities and increased reliance on outsourced, third-party manufacturing. In March 2005, we announced that we had opened an operations center in Thailand to centralize global manufacturing and operational overhead functions in a lower-cost region. In July 2005, we announced the opening of a development and marketing office in Shanghai, China. Although we have relocated most of our manufacturing operations to reduce our production costs, we expect to ~~undertake~~continuously ~~additional~~take actions to further reduce costs and improve our gross margins. However, there can be no assurance that our cost structure will not increase in the future or that we will be able to align our cost structure with our expectations.

15Following the close of 41market on August 12, 2008, we effected a fifteen-for-one reverse stock split of our common stock. Accordingly, each fifteen shares of issued and outstanding Avanex common stock and equivalents as of the close of market on August 12, 2008 was converted into one share of common stock, and the reverse stock split was reflected in the trading price of Avanex’s common stock at the opening of market on August 13, 2008. Unless indicated otherwise, all share amounts and per share prices appearing in this Quarterly Report on Form 10-Q reflect the reverse stock split for all periods presented.

Net Revenue. The market for optical equipment continues to evolve and the volume and timing of orders is difficult to predict, especially in the current recessionary macro economic environment. A customer’s decision to purchase our products typically involves a commitment of its resources and a lengthy evaluation and product qualification process. This initial evaluation and product qualification process typically takes several months and includes technical evaluation, integration, testing, planning and implementation into the equipment design. Implementation cycles for our products can be lengthy, and the practice of customers in the communications industry to sporadically place orders with short lead time may cause our net revenue, gross margin, operating results and the identity of our largest customers to vary significantly and unexpectedly from quarter to quarter.

To date, a substantial proportion of our sales have been concentrated with a limited number of customers. Two customers accounted for 33% and 12% of our net revenue, respectively, for the three months ended December 31, 2008. Two customers accounted for 23% and 22% of our net revenue, respectively, for the three months ended December 31, 2007. We expect that a substantial portion of our sales will remain concentrated with a limited number of customers, as indicated by the increase in customer concentration.

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Net Revenue. The market for optical equipment continues to evolve and the volume and timing of orders is difficult to predict. A customer’s decision to purchase our products typically involves a commitment of its resources and a lengthy evaluation and product qualification process. This initial evaluation and product qualification process typically takes several months and includes technical evaluation, integration, testing, planning and implementation into the equipment design. Implementation cycles for our products, and the practice of customers in the communications industry to sporadically place orders with short lead times, may cause our net revenues, gross margins, operating results and the identity of our largest customers to vary significantly and unexpectedly from quarter to quarter.

A summary of our net revenues and other financial information by geographic location is found in Note 10 of Notes to Condensed Consolidated Financial Statements.

To date, a substantial proportion of our sales have been concentrated with a limited number of customers. Four customers (including sales to their contract manufacturers) accounted for an aggregate of 27%, 21%, 10% and 10% of our net revenue, respectively, for the three months ended December 31, 2006. One customer (including sales to its contract manufacturers) accounted for 29% of our net revenue for the three months ended December 31, 2005. We expect that a substantial portion of our sales will remain concentrated with a limited number of customers, although the level of customer concentration has been declining.

Cost of Revenue. Our cost of revenue consists of costs of components and raw materials, direct labor, warranty, manufacturing overhead, payments to our contract manufacturers and inventory write-offs for obsolete and excess inventory. We rely on a single or limited number of suppliers to manufacture some key components and raw materials used in our products, and we rely on the outsourcing of some turnkey solutions.

We write off the cost of inventory that we specifically identify and consider obsolete or in excess of future sales estimates. We define obsolete inventory as products that we no longer market, for which there is no demand, or inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using management’s best estimate of future demand at the time, based upon information then available to us. ~~For~~The ~~the~~combined ~~three~~cost ~~months~~of ~~and~~write-offs ~~six~~of ~~months~~excess and ~~ended~~obsolete ~~December 31, 2006, we recorded~~ inventory ~~write-downs~~and tolosses ~~cost~~from ofpurchase ~~revenue~~commitments of was $32.43 million and $61.98 million in the three months ended December 31, 2008 and 2007, respectively, and $23.09 million and $43.01 million ~~for~~in the ~~three months and~~ six months ended December 31, ~~2005~~2008 and 2007, respectively.

Gross ~~Margin~~Profit. Gross ~~margin~~profit represents revenue less cost of revenue. During the three months ~~and six months~~ ended December 31, ~~2006~~2008, gross margin ~~increased~~decreased to ~~19% and~~ 15% of revenue, ~~respectively,~~which ~~compared~~was to a decrease in gross margin of ~~8% and~~16 7percentage points over our gross margin of 31% ~~for~~in the three months ~~and~~ended December 31, 2007. During the six months ended December 31, ~~2005.~~2008, ~~The~~gross ~~increase~~margin ~~was~~decreased ~~due~~ to 16% of revenue, which was a ~~more~~decrease ~~profitable~~in ~~mix~~gross margin of ~~products~~13 ~~sold~~percentage topoints over our ~~customers,~~gross ~~manufacturing~~margin ~~overhead~~of ~~cost~~29% ~~reductions~~in ~~resulting~~the ~~from~~six ~~outsourcing~~months ~~most~~ended ofDecember 31, ~~our~~2007. ~~manufacturing~~The todecline in gross margin percentage was ~~lower-cost~~primarily ~~contract~~due ~~manufacturers~~to a decrease in revenue, an increase in the write off of excess and ~~higher-priced~~obsolete ~~newly~~inventory, ~~introduced~~and a mix shift to products with lower gross margins.

Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, costs of allocated facilities, non-recurring engineering charges, and prototype costs related to the design, development, testing, pre-manufacturing of new products, and significant ~~improvement~~improvements ofto our existing products. We expense our research and development costs as they are incurred. We believe that research and development is critical to our strategic product development objectives. We further believe that, in order to meet the changing requirements of our customers, we must continue to fund investments in several development projects in parallel.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions, and related personnel costs of employees in sales, marketing, customer service, and application engineering functions, costs of allocated facilities, and promotional and other marketing expenses.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive, finance, accounting, legal, and human resources personnel, costs of allocated facilities, recruiting expenses, professional fees, ~~legal, accounting~~ and ~~consulting expenses incurred in connection with transactions that were not completed and~~ other corporate expenses.

Amortization of Intangible Assets. A portion of the purchase price in a business combination is allocated to goodwill and intangibles. Goodwill is not amortized, but rather is assessed for impairment at least annually. Intangible assets with definite lives continue to be amortized over their estimated useful lives.

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Restructuring. Restructuring expense generally includes employee severance costs and the costs of excess facilities associated with formal restructuring plans.

~~Gain~~Impairment ~~on Disposal~~ of ~~Property~~Goodwill and ~~Equipment~~Intangibles. ~~Gain~~Impairment oncharges ~~disposals~~consist ~~includes~~of ~~gains~~the ~~incurred~~write asoff ~~a result~~ of ~~disposal~~goodwill ofand ~~property,~~intangible ~~plant~~assets. orGoodwill ~~equipment~~is assessed for animpairment ~~amount~~at ~~greater~~least ~~than~~annually, ~~the~~or ~~net~~if ~~book~~there ~~value~~are indications of impairment.

Interest and Other Income (Expense), Net. Interest and other income consist primarily of interest earned from the investment of our cash and cash equivalents, short-term investments, and ~~long-term~~foreign ~~investments.~~currency ~~Other~~exchange ~~income~~rate ~~consists~~loss. ~~primarily~~Interest ofand aother ~~gain~~expense ~~realized~~consist inprimarily ~~connection~~of ~~with~~interest ~~our~~expense ~~investment~~associated inwith ~~Paxera,~~borrowings ~~Inc,~~under ~~a privately-held~~our ~~photonics~~capital ~~company~~lease obligations.

~~Interest~~Income ~~and~~Taxes. ~~Other~~In ~~Expense~~accordance with Financial Accounting Standard Board (“FASB”) Statement No. 109, ~~Interest~~“Accounting for Income Taxes”, we recognize income taxes using an asset and ~~other~~liability ~~expense~~approach. ~~consists~~This ~~primarily~~approach requires the recognition of ~~interest~~taxes ~~expense~~payable ~~associated~~or ~~with~~refundable for the current year and deferred tax liabilities and assets for the future tax consequences of ~~borrowings~~events ~~under~~that have been recognized in our ~~line~~consolidated financial statements or tax returns. The measurement of ~~credit,~~current ~~senior~~and ~~secured~~deferred ~~convertible~~taxes ~~notes,~~is ~~capital~~based ~~lease~~on ~~obligations,~~provisions ~~equipment~~of ~~loans~~the enacted tax law, and ~~foreign~~the ~~currency~~effects ~~exchange~~of ~~rate~~future ~~loss~~changes in tax laws or rates are not anticipated.

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Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and related disclosures. We believe our estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

~~Revenue Recognition~~Liquidity. ~~Our~~During ~~revenue~~the ~~recognition~~six ~~policy~~months ~~complies~~ended ~~with SEC Staff Accounting Bulletin No.~~December ~~104~~31, ~~“Revenue~~2008, ~~Recognition”.~~we Weincurred ~~recognize~~a ~~product~~net ~~revenue~~loss ~~when~~of ~~persuasive~~$26.5 ~~evidence~~million, ofand anour ~~arrangement~~balance ~~exists~~of unrestricted cash, ~~the~~cash ~~product~~equivalents ~~has~~and ~~been~~short-term ~~shipped,~~investments ~~risk~~declined offrom ~~loss~~$55.4 ~~has~~million ~~been~~at ~~transferred~~June 30, ~~collectibility~~2008 isto ~~reasonably~~$33.4 ~~assured~~million at December 31, ~~fees~~2008. ~~are fixed~~We orexpect ~~determinable~~these ~~and~~balances ~~there~~of ~~are~~cash, nocash ~~uncertainties~~equivalents, ~~with~~and ~~respect~~investments to ~~customer~~continue ~~acceptance.~~to Wedecline in ~~record~~future aperiods.These ~~provision~~factors ~~for~~cast ~~estimated~~substantial ~~sales~~uncertainty ~~returns~~on ~~and~~our ~~price~~ability ~~adjustments~~to incontinue ~~the~~as ~~same~~an ~~period~~ongoing asenterprise ~~when~~for ~~the~~a ~~related~~reasonable ~~revenues~~period ~~are~~of ~~recorded~~time. ~~These~~Our ~~estimates~~ability ~~are~~to ~~based on~~continue ~~historical~~as ~~sales~~an ~~returns~~ongoing ~~and~~enterprise ~~adjustments,~~is ~~other~~dependent ~~known~~on ~~factors and~~ our ~~return~~improving ~~policy.~~operational Ifcash ~~future~~flow and ~~sales~~securing ~~returns~~additional funding or ~~price~~consummating ~~adjustment~~the ~~levels~~proposed ~~differ~~merger ~~from~~with ~~the~~Bookham ~~historical~~Inc ~~data~~announced weon ~~use~~January 27, to2009. ~~calculate~~We ~~these~~are ~~estimates,~~pursuing ~~changes~~opportunities to ~~the~~streamline ~~provision~~development ~~may~~efforts, bereduce ~~required. We~~inventory ~~generally~~levels doand ~~not~~simplify ~~accept~~our ~~product~~operating ~~returns~~structure, while ~~from~~maintaining ~~customers;~~customer ~~however,~~satisfaction. weThe financial statements do ~~sell~~not ~~our~~include ~~products~~any ~~under~~adjustments ~~warranty.~~relating ~~The~~to ~~specific~~the ~~terms~~recoverability and ~~conditions~~classification of ~~our~~recorded ~~warranties~~asset ~~vary~~amounts byor ~~customer~~the amounts and ~~region~~classification inof ~~which~~liabilities wethat domight ~~business;~~be ~~however,~~necessary should ~~the~~we ~~warranty~~be ~~period~~unable ~~is generally~~to ~~one~~continue ~~year~~as an ongoing enterprise.

~~Allowance~~Revenue ~~for~~Recognition. ~~Doubtful~~Our ~~Accounts.~~revenue Inrecognition ~~the~~policy ~~last~~complies ~~three~~with ~~years~~SEC Staff Accounting Bulletin (“SAB”) No. 104, ~~our~~“Revenue ~~uncollectible~~Recognition.” ~~accounts~~We ~~experience~~recognize product revenue when persuasive evidence of an arrangement exists, the product has been ~~almost~~shipped, ~~zero.~~risk ~~When~~of weloss has been transferred, ~~become~~collectibility ~~aware~~is reasonably assured, ~~subsequent~~fees are fixed or determinable and there are no uncertainties with respect to ~~delivery,~~customer acceptance. Deferred revenue consists of ashipped ~~customer’s~~products ~~potential~~where ~~inability~~risk toof ~~meet~~loss ~~its~~has ~~obligations,~~not wetransferred. We record a ~~specific~~provision ~~allowance~~ for estimated ~~doubtful~~sales ~~accounts.~~returns Ifand price adjustments in the ~~financial~~same ~~condition~~period ofas ~~our~~when ~~customers~~the ~~were~~related torevenues ~~deteriorate~~are recorded. These estimates are based on historical sales returns and adjustments, ~~resulting~~other inknown anfactors, ~~impairment~~and our return policy. If future sales returns or ofprice ~~their~~adjustment ~~ability~~levels differ from the historical data we use to ~~make~~calculate ~~payments~~these estimates, ~~additional~~changes ~~allowances~~to the provision may be required. ~~Such~~We angenerally ~~allowance~~do ~~may~~not beaccept ~~magnified~~product ~~due~~returns tofrom ~~the~~customers; ~~concentration~~however, ofwe do sell our ~~sales~~products tounder awarranty. ~~limited~~The specific ~~number~~terms ofand ~~customers.~~conditions Atof ~~December 31,~~our ~~2006,~~warranties wevary ~~determined~~by ~~that~~customer anand ~~allowance~~region ~~of $55,000~~in ~~was~~which ~~required~~we ~~due~~do tobusiness; the ~~uncertainty~~warranty ofperiod ~~collections~~is ~~from~~generally one ~~customer~~year.

~~Excess~~Allowance ~~and~~for ~~Obsolete~~Doubtful ~~Inventory~~Accounts. WeIn ~~write~~the ~~off~~last ~~the~~three ~~cost~~years, ofour ~~inventory that~~uncollectible weaccounts ~~specifically~~experience ~~identify~~has ~~and~~been ~~consider~~almost ~~obsolete~~zero. orWhen ~~excessive~~we tobecome ~~fulfill~~aware, ~~future~~subsequent ~~sales~~to ~~estimates.~~delivery, Weof ~~define~~a ~~obsolete~~customer’s ~~inventory~~potential asinability ~~products~~to ~~that~~meet its obligations, we record noa ~~longer~~specific ~~market~~allowance for ~~which~~doubtful ~~there~~accounts. isIf nothe ~~demand~~financial condition of our customers were to deteriorate, orresulting ~~inventory~~in ~~that~~an ~~will~~impairment noof ~~longer~~their ability to make payments, additional allowances may be ~~used~~required. inSuch ~~the~~an allowance may be ~~manufacturing~~magnified ~~process.~~due ~~Excess~~to ~~inventory~~the isconcentration ~~generally~~of ~~defined~~our assales ~~inventory~~to ina ~~excess~~limited number of ~~projected~~customers. ~~usage~~At December 31, ~~and~~2008, iswe determined ~~using~~that ~~management’s~~an ~~best~~allowance ~~estimate~~ of ~~future~~$0.2 ~~demand~~million atwas ~~the~~required ~~time,~~due ~~based~~to ~~upon~~a ~~information~~customer ~~then~~filing ~~available~~for tobankruptcy usprotection in January 2009.

InExcess ~~estimating~~and ~~excess~~Obsolete ~~inventory,~~Inventory. weWe ~~use~~write aoff ~~range~~the cost of ~~six-month~~inventory tothat ~~twelve-month demand forecast. In addition,~~ we ~~assess~~specifically ~~inventory~~identify ~~on a quarterly basis~~ and ~~write-down~~consider ~~those inventories which are~~ obsolete or inexcessive ~~excess of our forecasted usage~~ to ~~their~~fulfill future ~~estimated~~sales ~~realizable value~~estimates. ~~Our~~We ~~estimates~~define ofobsolete ~~realizable~~inventory ~~value~~as ~~are~~products ~~based~~that ~~upon~~we ~~our~~no ~~analysis~~longer ~~including,~~market ~~but~~or ~~not~~for ~~limited~~which tothere ~~forecasted~~is ~~sales~~no ~~levels~~demand, byor ~~product,~~inventory ~~expected~~that ~~product life~~will ~~cycle,~~no ~~product~~longer ~~development~~be ~~plans~~used ~~and~~in ~~future~~the ~~demand~~manufacturing ~~requirements~~process. ~~Our~~Excess ~~marketing~~inventory ~~department~~is ~~plays~~generally adefined ~~key~~as ~~role~~inventory in ~~our~~ excess ~~review~~of ~~process~~projected ~~by providing updated sales forecasts~~usage, ~~managing product rollovers~~ and ~~working~~is ~~with~~determined ~~sub-contract~~using ~~manufacturing to~~management’s ~~maximize~~best ~~recovery~~estimate of ~~excess~~future ~~inventory. If actual market conditions are less favorable than our forecasts or actual~~ demand ~~from~~at ~~our~~the ~~customers~~time, isbased ~~lower~~upon ~~than~~information ~~our~~then ~~estimates,~~available ~~we maybe required~~ to ~~record additional inventory write downs~~us. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold resulting in lower cost of sales and higher income from operations than expected in that period.

17In estimating excess inventory, we use a twelve-month demand forecast. We assess inventory on a quarterly basis and write-down those inventories which are obsolete or in excess of 41our forecasted usage to their estimated realizable value. Our estimates of realizable value are based upon our analysis including, but not limited to forecasted sales levels by product, expected product life cycle, product development plans, and future demand requirements. If actual market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we may be required to record additional inventory write downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.

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Stock-based Compensation Expense. We account for employee stock-based compensation costs in accordance with ~~Statement~~ ofFASB ~~Financial~~Statement ~~Accounting Standards (“SFAS”)~~ No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) and ~~Staff~~SAB ~~Accounting Bulletin~~ No. 107, “Share-Based Payment” (“SAB 107”). We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock-based compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical volatility was used in estimating the fair value of our stock-based awards, and the expected life was estimated to be 6.25 years using the simplified method permitted under SAB 107 through December 31, 2007. Beginning January 1, 2008, we have estimated the time-to-exercise based on historical exercise patterns of employee and director populations. Further, as required under SFAS 123(R), we now estimate forfeitures for options granted that are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. The estimated fair value is charged to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having no vesting restrictions and being fully transferable. Accordingly, our estimate of fair value may not represent the value assigned by a third-party in an arms-length transaction. While our estimate of fair value and the associated charge to earnings materially impacts our results of operations, it has no impact on our cash position.

Goodwill. IfSFAS ~~the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill~~No. 142, an“Goodwill ~~impairment~~and ~~loss~~Other isIntangible ~~recorded~~Assets” ~~in net income~~ (~~loss~~“SFAS 142”). Weprescribes ~~operate~~a intwo-step ~~one~~process ~~segment,~~for ~~which~~impairment wetesting ~~consider~~of ~~our sole operating unit~~goodwill. ~~Measurement~~The offirst ~~the~~step ~~fair~~screens ~~value of the reporting unit in our annual test~~ for impairment ~~is determined using~~, while the ~~market~~second ~~capitalization~~step, ~~approach.~~measures ~~The capitalization approach focuses on~~ the ~~fair~~impairment, ~~value~~if ofany. ~~the~~SFAS ~~enterprise,~~142 ~~which~~requires ~~was~~impairment ~~determined~~testing based on ~~our~~reporting ~~current market capitalization, and goodwill was determined not to be impaired at December 31, 2006~~units.

~~Impairment~~The first step is a comparison of ~~Long-lived~~each ~~Assets.~~reporting unit’s fair value to its carrying value. We ~~evaluate~~estimate fair value using the ~~recoverability~~best ofinformation ~~long-lived~~available, ~~assets~~including inmarket ~~accordance~~information ~~with~~and ~~SFAS~~discounted ~~144,~~cash ~~“Accounting~~flow ~~for~~projections also referred to as the income ~~Impairment~~approach. If orthe ~~Disposal~~carrying value of ~~Long-lived~~the ~~Assets.”~~reporting ~~When~~unit ~~events~~is orhigher ~~changes~~than inits ~~circumstances~~fair ~~indicate~~value, there is an indication that impairment may exist and the ~~carrying~~second step must be performed to measure the amount of ~~long-lived~~impairment ~~assets~~loss. ~~may~~The ~~not~~amount beof ~~recoverable~~impairment weis determined ~~recognize~~by ~~such~~comparing ~~impairment~~the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the ~~event~~same manner as if the ~~net~~reporting ~~book~~unit was being acquired in a business combination. If the implied fair value of ~~such~~goodwill ~~assets~~is less ~~exceeds~~than the ~~future~~recorded ~~undiscounted~~goodwill, ~~cash~~we ~~flows~~would ~~attributable~~record toan ~~such~~impairment ~~assets~~charge for the difference.

As of December 31, 2008, we continued to evaluate goodwill due to indications of impairment including the current economic environment, our operating results, a sustained decline in our market capitalization, changes in management, and a decline in the forecasted revenue for the remainder of fiscal 2009. We operate in one reporting unit. The Step 2 analysis concluded that there had been an impairment of the recorded goodwill. This conclusion is supported by the fair value implied by the proposed merger with Bookham, Inc. announced on January 27, 2009. As such, we have written off the book value of $9.4 million of goodwill as of December 31, 2008.

Impairment of Long-lived Assets. We evaluate the recoverability of long-lived assets in accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (SFAS 144)”. Recoverability of the asset is measured by comparison of its carrying amount to the undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. As of December 31, 2008, we performed a SFAS 144 analysis and concluded that the intangible assets are impaired. We wrote off the remaining book value of $0.2 million as of December 31, 2008.

Warranties. In general, we provide a product warranty for one year from the date of shipment. We accrue for the estimated cost to provide warranty services at the time revenue is recognized. The specific terms and conditions of our warranties vary by customer and region in which we do business. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty costs will increase resulting in decreases to gross profit. Conversely, to the extent we experience decreased warranty claim activity, or decreased costs associated with servicing those claims, our warranty costs will decrease resulting in increases to gross profit. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Restructuring. During the past few years we have recorded significant accruals in connection with restructuring programs. Given the significance and complexity of restructuring activities, and the timing of the execution of such activities, the restructuring accrual process involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. Although we believe that these estimates accurately reflect the costs of the restructuring programs, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

~~Contingencies.~~21 We are or have been subject to proceedings, lawsuits and other claims related to our initial public offering and other matters. We evaluate contingent liabilities including threatened or pending litigation in accordance with Statement of ~~Financial~~45 Accounting Standards No. 5 (“SFAS 5”), “Accounting for Contingencies.” If the potential loss from any claim or legal proceedings is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based upon management’s judgment and the best information available to management at the time. As additional information becomes available, we reassess the potential liability related to its pending claims and litigation and may revise its estimates.

In addition to product warranties, we, from time to time, in the normal course of business, indemnify certain customers with whom we enter into contractual relationships. We have agreed to hold the other party harmless against third-party claims that our products, when used for their intended purpose, infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. The estimated fair value of these indemnification provisions is minimal. To date, we have not incurred any costs related to claims under these provisions, and no amounts have been accrued in the accompanying financial statements.

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Contingencies. We are or have been subject to proceedings, lawsuits and other claims related to our initial public offering and other matters. We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, “Accounting for Contingencies”. If the potential loss from any claim or legal proceedings is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based upon management’s judgment and the best information available to management at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates.

In addition to product warranties, we, from time to time, in the normal course of business, indemnify certain customers with whom we enter into contractual relationships. We have agreed to hold the other party harmless against third party claims that our products, when used for their intended purpose, infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. The estimated fair value of these indemnification provisions is minimal. To date, we have not incurred any costs related to claims under these provisions, and no amounts have been accrued in our financial statements.

Income Taxes. We account for income taxes under the liability method, which recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for net operating loss and tax credit carry forwards. We record a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized.

While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the allowance for the deferred tax assets would increase income in the period such determination was made.

In July 2007, we adopted FABS Interpretation (“FIN”) No. 48, which creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 establishes a two-step approach for evaluating tax positions. The first step, recognition, occurs when a company concludes (based solely on the technical aspects of the tax matter) that a tax position is more likely than not to be sustained on examination by a taxing authority. The second step, measurement, is only considered after step one has been satisfied and measures any tax benefit at the largest amount that is deemed more likely than not to be realized upon ultimate settlement of the uncertainty. Tax positions that fail to qualify for initial recognition are recognized in the first subsequent interim period that they meet the more likely than not standard, when they are resolved through negotiation or litigation with the taxing authority or upon the expiration of the statute of limitations. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities.

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Results of Operations

The following table sets forth, for the periods indicated, our Condensed Consolidated Statements of Operations, expressed as amounts in thousands and as percentages of net revenue. ~~Our historical operating results are not necessarily indicative of our results for any future period.~~

	Three Months Ended December 31,												Six Months Ended December 31,			~~Six Months Ended December 31,~~
		Amounts							% of Revenue								Amounts							% of Revenue
	2008			2007			2008			2007			2008			2007			2008			2007
		2006			2005				2006			2005					2006			2005				2006		2005
	Amounts						% of Net Rev.						Amounts						% of Net Rev.
Net revenue	$	5538,~~623~~001		$	3652,~~125~~007		100	%	~~100~~	%100	%	~~100~~	%$	83,275		$	106,~~514~~716		$100	~~77,358~~%		100	%	~~100~~	%	~~100~~	%
Cost of revenue		4532,~~127~~159			3335,~~207~~888		85	%	81	%69	%	92	%	69,660			9075,~~706~~405		84	~~72,314~~%		71	%	85	%	93	%
Gross profit		105,~~496~~842			216,~~918~~119		15	%	19	%31	%	8	%	13,615			1531,~~808~~311		16	~~5,044~~%		29	%	15	%	7	%
Operating expenses:
Research and development		56,~~832~~037			57,~~452~~604		16	%	10	%15	%	15	%	12,722			1114,~~457~~378		15	~~12,579~~%		13	%	11	%	16	%
Sales and marketing		32,~~891~~827			24,~~783~~202		8	%	7	%8	%	8	%	6,879			78,~~439~~117		8	~~6,571~~%		7	%	7	%	8	%
General and administrative		93,~~075~~777			34,~~841~~980		10	%	16	%9	%	11	%	8,665			149,~~726~~455		10	~~9,115~~%		9	%	14	%	12	%
Amortization of intangibles		~~656~~53			~~1,385~~101		0	%	1	%0	%	4	%	107			~~1,508~~660		0	~~3,150~~%		1	%	1	%	4	%
Restructuring		~~436~~157			2~~,942~~		0	%	1	%0	%	8	%	2,476			~~373~~(333	)	3	~~2,982~~%		0	%	0	%	4	%
Gain on disposal of property and equipment		(28	)		(775	)			(0	%)		(2	%)				(48	)		(768	)			(0	%)	(1	%)
Impairment of goodwill and intangibles		9,615			—		25	%		0	%			9,615			—		12	%		0	%
Total operating expenses		1922,~~862~~466			1516,~~628~~889		59	%	36	%32	%	43	%	40,464			3532,~~455~~277		48	~~33,629~~%		30	%	33	%	43	%
Loss from operations		(916,~~366~~624	)		(~~12,710~~770	)	-44	%	~~(17~~	%)-1	%	~~(35~~	%)	(26,849	)		(~~19,647~~966	)	-32	~~(28,585~~%	)	-1	%	~~(18~~	%)	~~(37~~	%)
Interest and other income		1,121			379				2	%		1	%				1,960			930				2	%	1	%
Interest and other income (expense), net		(179	)		1,083		0	%		2	%			(351	)		1,598		-1	%		2	%
Interest and other expense		(308	)		(6,212	)			(1	%)		(17	%)				(580	)		(7,811	)			(1	%)	(10	%)
Income (loss) before income taxes		(16,803	)		313		-44	%		1	%			(27,200	)		632		-33	%		1	%
Net loss	$	(8,553	)	$	(18,543	)			(15	%)		(51	%)			$	(18,267	)	$	(35,466	)			(17	%)	(46	%)
Income tax benefit (provision)		(11	)		(227	)	0	%		-1	%			745			(501	)	1	%		-1	%
Net income (loss)	$	(16,814	)	$	86		-44	%		0	%		$	(26,455	)	$	131		-32	%		0	%

Net Revenue

Net revenue for the three months ended December 31, ~~2006~~2008 was $5538.60 million, which represents ana ~~increase~~decrease of $1914.50 million, or 5427%, from net revenue of $3652.10 million for the three months ended December 31, 2007. ~~2005~~Net revenue for the six months ended December 31, 2008 was $83.3 million, which represents a decrease of $23.4 million, or 22%, from net revenue of $106.7 million for the six months ended December 31, 2007. The ~~increase~~decrease in net revenue for both the three and six month periods ended December 31, 2008 was primarily attributable to anthe ~~overall~~current ~~increase~~recessionary macro economic environment, as well as a decrease in ~~demand~~revenue due to the termination of the Global Distributor Agreement with 3S Photonics, consisting of $3.2 million and $10.1 million for ~~our~~the three and six months ended December 31, 2007, respectively. In addition, revenue for the three and six months ended December 31, 2008 excludes $0.4 million for products ~~from~~shipped ~~existing~~to ~~customers~~a customer now in bankruptcy.

~~Net~~To ~~revenue for the six months ended December 31~~date, ~~2006~~ ~~was~~a ~~$106.5~~substantial ~~million,~~portion ~~which represents an increase~~ of ~~$29.1~~our ~~million,~~sales orhas ~~38%,~~been ~~from~~concentrated ~~net~~with ~~revenue~~a limited number of ~~$77~~customers.4 ~~million~~For ~~for~~ the three and six months ended December 31, ~~2005.~~2008 ~~The~~and ~~increase~~2007, insales ~~net~~to ~~revenue~~customers ~~was~~that ~~attributable~~each tocomprised an10% ~~overall~~or ~~increase~~more inof ~~demand~~net ~~for~~revenue ~~our products~~were ~~from~~as ~~existing~~follows: ~~customers.~~

To date, a substantial portion of our sales has been concentrated with a limited number of customers, although the level of concentration has been declining. For the three months and six months ended December 31, 2006 and 2005, sales to customers (including sales to each customer’s contract manufacturer) that each comprised 10% or more of net revenue were as follows:


	Percentage of Net Revenue
	Three Months Ended December 31,				Six Months Ended December 31,
	2008		2007		2008		2007
Company A	33	%	23	%	34	%	24	%
Company B	12	%	*		*		*
Company C	*		22	%	*		19	%

	45	%	45	%	34	%	43	%

	Three Months Ended December 31,				Six Months Ended December 31,
	2006		2005		2006		2005
Company A	27	%	29	%	29	%	31	%
Company B	21	%	-		16	%	-
Company C	10	%	-		11	%	-
Company D	10	%	-		-		11	%
	68	%	29	%	56	%	42	%

*	less than 10%

19While we have substantially diversified our customer base, we expect that a substantial portion of 41our sales will remain concentrated with a limited number of customers. Sales to our major customers vary significantly from period to period, and we do not have the ability to predict future sales to these customers.

Net revenue from customers outside the United States accounted for $27.9 million and $32.4 million of total net revenue, or 73% and 62%, for the three months ended December 31, 2008 and 2007, respectively, and accounted for $59.9 million and $69.6 million of total net revenue, or 72% or 65%, for the six months ended December 31, 2008 and 2007, respectively. The current recessionary macro economic environment impacted our U.S. customers more than our international customers.

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While we have substantially diversified our customer base, we expect that a substantial portion of our sales will remain concentrated with a limited number of customers. Sales to our major customers vary significantly from period to period, and we do not have the ability to predict sales to these customers.

Net revenue from customers outside the United States accounted for $16.4 million and $14.7 million of total net revenue, or 29% and 41%, for the three months ended December 31, 2006 and 2005, respectively, and accounted for $30.0 million and $29.3 million of total net revenue, or 28% and 38%, for the six months ended December 31, 2006 and 2005, respectively.

Cost of Revenue and Gross Margin

Cost of revenue for the three months ended December 31, ~~2006~~2008 was $4532.12 million, compared to $3335.29 million for the three months ended December 31, ~~2005~~2007, ana ~~increase~~decrease of $113.97 million. ~~The~~Cost ~~increase~~of revenue for the six months ended December 31, 2008 was ~~due~~$69.7 million, compared to ~~increased~~$75.4 ~~product~~million ~~shipments~~for ~~partially~~the ~~offset~~six bymonths ~~reduced~~ended ~~cost~~December 31, 2007, a decrease of ~~goods~~ as$5.7 million. This decrease was primarily due to a ~~percentage~~decrease ofin revenue., ~~The~~partially ~~reduction~~offset by an increase in ~~this~~excess ~~percentage~~and obsolete inventory. In addition, cost of revenue ~~was~~for ~~due~~the tothree ~~the~~and ~~outsourcing~~six ofmonths ~~most~~ended ofDecember 31, ~~our~~2008 ~~manufacturing~~includes $0.3 million for products shipped to ~~contract~~a ~~manufacturers,~~customer ~~which~~now ~~reduced~~in ~~our~~bankruptcy, ~~direct~~but ~~labor~~for ~~and~~which ~~manufacturing~~we ~~overhead~~recognized ~~costs~~no revenue.

~~Cost~~The combined cost of ~~revenue~~write-offs of excess and obsolete inventory and losses from purchase commitments was $2.3 million and $1.8 million for the ~~six~~ three months ended December 31, ~~2006~~2008 ~~was~~and 2007, respectively, and $903.79 million, ~~compared~~and to $~~72.~~3.1 million for the six months ended December 31, ~~2005~~2008 and 2007, anrespectively. ~~increase~~This write-off was primarily due to lower demand for certain products and lower expected usage of previously purchased inventory. For the three months ended December 31, 2008 and 2007, we sold inventory previously written-off with original costs totaling $180.43 million and $0.9 ~~The~~million, ~~increase~~respectively, ~~was~~and for the six months ended December 31, 2008 and 2007, we sold inventory previously written-off with original costs totaling $0.5 million and $1.2 million, respectively, due to ~~increased~~unforeseen ~~product~~demand ~~shipments~~for ~~partially~~such ~~offset~~inventory. byAs ~~reduced~~a result, cost of ~~goods~~revenue asassociated awith ~~percentage~~the sale of ~~revenue~~this inventory was zero. There can be no assurance that there will not be additional excess and obsolete inventory write-offs in the future.

~~For~~Cost ~~the~~of ~~three months~~revenue ~~ended~~as ~~December 31,~~a ~~2006~~percentage ~~and~~of ~~2005,~~net werevenue ~~sold~~increased ~~inventory~~from ~~previously~~both ~~written-off~~the ~~with~~three ~~original~~and ~~costs~~six ~~totaling~~months ~~$156,000~~ended ~~and $22~~December 31,~~000,~~ ~~respectively,~~2007 ~~due~~ to ~~unforeseen~~the ~~demand~~three ~~for~~and ~~such inventory. For the~~ six months ended December 31, ~~2006~~2008 ~~and 2005,~~due weto ~~sold~~an ~~inventory~~increase ~~previously~~in ~~written-off~~manufacturing overhead ~~with~~and ~~original~~direct manufacturing costs ~~totaling~~as ~~$357,000~~a ~~and~~percentage ~~$270~~of net revenue,~~000,~~ ~~respectively.~~combined Aswith ahigher ~~result~~write-offs of excess and obsolete inventory. Consequently, ~~cost~~our ofgross ~~revenue~~margin ~~associated~~percentage ~~with~~decreased ~~the~~from ~~sale~~31% offor ~~this~~the ~~inventory~~three ~~was~~months ~~zero.~~ended ~~The~~December 31, ~~selling~~2007 to ~~price~~15% offor the ~~finished~~three ~~goods~~months ~~that~~ended ~~included these~~December 31, ~~components~~2008, ~~was~~and ~~similar~~from to29% for the ~~selling~~six ~~price~~months ofended ~~products~~December 31, ~~that~~2007 ~~did~~to ~~not~~16% ~~include~~for ~~components~~the ~~that~~six ~~were~~months ~~written-off~~ended December 31, 2008. ~~These~~The ~~items~~decline ~~were~~in ~~subsequently~~gross ~~used~~margin ~~and~~percentage ~~sold~~was ~~because~~primarily ~~customers~~due ~~ordered~~to ~~products~~a ~~that~~decrease ~~included~~in revenue, ~~these~~an ~~components~~increase in excess ofand ~~our estimates~~obsolete inventory, and a mix shift to products with lower gross margins.

~~Cost~~Our ofgross ~~revenue~~margins asare ~~a percentage of net revenue improved from the three months~~ and ~~six months ended December 31, 2005 to the three months~~ ~~and~~will ~~six~~be ~~months~~primarily ~~ended~~affected ~~2006~~by ~~due~~changes toin amix ~~number~~ of ~~factors.~~products ~~Manufacturing~~sold, ~~overhead as a percentage of net revenue decreased as we outsourced our~~ manufacturing tovolume, ~~contract~~changes ~~manufacturers~~ in ~~lower-cost~~sales ~~regions. Also~~prices, ~~direct~~product ~~manufacturing~~demand, ~~costs~~inventory aswrite-downs, ~~a percentage~~sales of ~~net~~previously ~~revenue~~written-off ~~decreased~~inventory, ~~due~~warranty tocosts, ~~the lower cost of direct labor in these lower cost regions~~ and ~~improvement~~product ~~in our supply chain management~~yields. ~~These~~We ~~favorable~~expect ~~factors~~cost ~~were partially offset by higher write-offs~~ of ~~excess and obsolete inventory~~ ~~which~~revenue, ~~increased~~as ~~from~~a ~~$2.0~~percentage ~~million~~of ~~and~~net ~~$4.0 million for the three months and six months ended December 31~~revenue, ~~2005, respectively,~~ to ~~$3.4~~fluctuate ~~million~~from ~~and~~period ~~$6.9~~to ~~million for the three months and six months ended December 31, 2006, respectively~~period. ~~Consequently,~~ ~~our~~We expect gross margin ~~percentage~~in ~~improved~~fiscal ~~from~~2009 8%to ~~and~~decline 7%as ~~for~~compared ~~the~~to ~~three~~fiscal ~~months~~2008 ~~and~~due ~~six months ended December 31, 2005, respectively,~~ to ~~19% and 15% for~~ the ~~three~~expected ~~months~~decrease ~~and~~in ~~six months ended December 31, 2006, respectively~~revenue.

The increase in inventory write-downs was due to excess inventory resulting from lower demand than we had previously expected for some of our products. For the three and six months ended December 31, 2006 we incurred expenses of $528,000 and $1.9 million, respectively, resulting from the contractual repurchase of obsolete inventory from our contract manufacturers. For the three months and six months ended December 31, 2006, we also recorded a charge of $221,000 and $1.6 million, respectively, to cost of revenue in connection with book-to-physical inventory adjustments.

Our gross margins are and will be primarily affected by changes in mix of products sold, manufacturing volume, changes in sales prices, product demand, inventory write-downs, sales of previously written-off inventory, warranty costs, and product yields.

Research and Development

Research and development expenses ~~increased~~decreased by $~~380,000~~1.6 million to $56.80 million for the three months ended December 31, ~~2006~~2008 from $57.56 million for the three months ended December 31, ~~2005~~2007. ~~The~~As ~~increase~~a ~~was~~percentage ~~primarily~~of ~~due~~net torevenue, ~~increase~~research inand development expenses increased to ~~headcount~~16% atfor ~~our~~the ~~development~~three ~~center~~months ended December 31, 2008 from 15% for the three months ended December 31, 2007 due to the decrease in ~~Shanghai~~revenue. In ~~addition~~the three months ended December 31, 2008, the ~~lower~~decrease in research and development expenses ~~last~~was primarily ~~year~~due ~~were~~to decreased personnel costs of $1.2 million due to ~~government~~lower ~~research~~headcount ~~reimbursements~~(largely ~~received~~due byto the closure of our ~~San~~Melbourne, ~~Donato~~Florida ~~site.~~facility), Asas awell ~~percentage~~as lower consulting expenses of ~~net~~$0.2 ~~revenue~~million. For the six months ended December 31, 2008, research and development expenses decreased by $1.7 million to ~~10%~~$12.7 ~~for~~million from $14.4 million in the ~~three~~six months ended December 31, ~~2006~~2007. ~~from~~As a percentage of net revenue, research and development expenses increased to 15% from 13% for the ~~three~~same period ~~months~~last ~~ended December 31, 2005~~year. ~~For~~In the six months ended December 31, ~~2006~~2008, the decrease in research and development expenses was primarily due to decreased personnel costs of $1.1 million due to lower headcount, decreased prototype spending of $110.53 million, and ~~from~~decreased consulting expenses of $120.62 million. ~~for~~We ~~the~~expect ~~six~~our ~~months~~research ~~ended~~and ~~December 31,~~development ~~2005.~~expenses ~~The~~to decrease ~~was~~in ~~primarily~~absolute dollars in fiscal 2009 as compared to fiscal 2008. Despite our continued efforts to reduce expenses, there can be no assurance that our research and development expenses will not increase in the future.

20 of 41

due to a reduction in headcount expense in the US as we transitioned our research and development capability to a new facility in Shanghai, China. As a percentage of net revenue, research and development expenses decreased to 11% from 16% for the same period last year. We expect our research and development expenses to maintain at current levels as a percentage of net revenue in the current fiscal year, although there can be no assurance that our research and development expenses will not increase in the future.

Sales and Marketing

For the three months ended December 31, ~~2006~~2008, sales and marketing expenses ~~increased~~decreased by $1.14 million to $32.98 million from $24.82 million for the three months ended December 31, ~~2005~~2007. As a percentage of net revenue, sales and marketing expenses ~~decreased~~remained tolevel 7%at ~~for the three months ended December 31, 2006 from~~ 8% for the three months ended December 31, ~~2005~~2008 and 2007. For the six months ended December 31, ~~2006~~2008, sales and marketing expenses ~~increased~~decreased by $~~868,000~~1.2 million to $76.49 million from $68.61 million for the six months ended December 31, ~~2005~~2007. As a percentage of net revenue, sales and marketing expenses ~~decreased~~increased to ~~7% from~~ 8% for the ~~same~~ ~~period~~six ~~last~~months ~~year.~~ended ~~The~~December 31, ~~increase~~2008 infrom 7% ~~sales~~for ~~and~~the ~~marketing~~six ~~expense~~months ~~was~~ended ~~primarily~~December 31, 2007 due to ~~annual salary increases and increased sales commission as a result of higher revenue. We expect our sales and marketing expenses to maintain at current levels as a percentage of net revenue in~~ the ~~current~~decrease ~~fiscal year, although there can be no assurance that our sales and marketing expenses will not increase~~ in ~~the future.~~

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revenue. In the three and six months ended December 31, 2008, the decrease in sales and marketing expenses was primarily due to decreased personnel costs due to lower headcount. We expect our sales and marketing expenses to decrease in absolute dollars in fiscal 2009 as compared to fiscal 2008. Despite our continued efforts to reduce expenses, there can be no assurance that our sales and marketing expenses will not increase in the future.

General and Administrative

General and administrative expenses were $93.18 million for the three months ended December 31, ~~2006~~2008, ~~an increase~~a decrease of $51.2 million from expenses of $35.8 0 million for the three months ended December 31, ~~2005~~2007. AsIn ~~a percentage of net revenue, general and administrative expenses increased to 16% in~~ the three months ended December 31, ~~2006~~2008, ~~from~~the ~~11%~~ decrease in ~~the~~general ~~three~~and ~~months~~administrative ~~ended~~expenses ~~December 31,~~was ~~2005.~~primarily ~~General~~driven ~~and~~by ~~administrative~~decreased ~~expenses~~personnel ~~were~~costs of $141.71 million ~~for~~due ~~the~~to ~~six~~lower headcount, ~~months~~and ~~ended~~decreased ~~December 31,~~outside ~~2006,~~services anand ~~increase~~consulting expenses of $50.63 million, ~~from~~offset ~~expenses~~by bad debt expense of $90.12 million. ~~for~~For the six months ended December 31, ~~2005. As a percentage of net revenue~~2008, general and administrative expenses ~~increased~~decreased toby ~~14%~~$0.8 inmillion ~~the~~to ~~six~~$8.7 million ~~months ended December 31, 2006~~ from ~~12%~~$9.5 inmillion for the six months ended December 31, ~~2005~~2007. ~~The~~In ~~increase in general and administrative expenses for~~ the ~~three and~~ six months ended December 31, ~~2006~~2008, ~~from~~ the ~~same~~decrease ~~period~~ in ~~the~~general ~~prior~~and ~~year~~administrative expenses was primarily ~~driven~~due byto ~~legal,~~decreased ~~accounting~~personnel ~~and~~costs ~~consulting~~ due ~~diligence~~to ~~fees~~lower ~~of $2~~headcount.1 ~~million~~As a ~~related~~percentage toof anet ~~potential~~revenue, ~~acquisition in~~general ~~which~~and ~~Avanex~~administrative ~~decided~~expenses ~~not~~increased to ~~proceed~~10% ~~further~~ in both the three and six months ended December 31, ~~2006,~~2008 ~~increased~~from ~~share-based~~9% ~~compensation expenses of $947,000, unanticipated increase~~ in ~~audit~~the ~~fees~~same ofperiods ~~$750,000 related to~~ the prior year~~-end~~ ~~audit,~~due ~~unanticipated increase of $800,000 in consulting fees related~~ to ~~Sarbanes-Oxley~~the ~~compliance~~decrease ~~and other year-end financial close activities, and general increase~~ in ~~employee salaries related to annual salary increases~~revenue. We expect our general and ~~administrative~~ administrative expenses to decrease in ~~subsequent~~absolute ~~quarters~~dollars ~~primarily as a result of decreases~~ in ~~legal,~~fiscal ~~accounting~~2009 ~~and~~as ~~consulting~~compared ~~due~~to ~~diligence~~fiscal ~~fees~~2008. Despite our continued efforts to reduce ~~the level of our general and administrative~~ expenses, there can be no assurance that our general and administrative expenses will not increase in the future.

Amortization of Intangible Assets

Amortization of intangible assets ~~decreased~~remained bylevel ~~$729,000~~at to $~~656,000~~0.1 million for the three months ended December 31, ~~2006~~2008 and 2007, ~~from~~and was $10.41 million ~~for~~and ~~three~~$0.7 ~~months ended December 31~~million, ~~2005.~~for ~~For~~ the six months ended December 31, ~~2006,~~2008 ~~amortization~~and of2007, ~~intangible assets decreased by $1~~respectively.7 While ~~million~~a tosignificant ~~$1.5~~portion ~~million~~of ~~from~~our ~~$3.2 million in the year earlier period. These decreases were primarily attributable to the fact that certain specific~~ intangible assets ~~had~~became ~~become~~ fully amortized. ~~These~~in ~~intangible~~fiscal ~~assets~~2008, ~~were~~we ~~purchased~~wrote-off in the ~~acquisitions~~remaining ofbalance ~~the~~as ~~optical components businesses~~ of ~~Alcatel Lucent~~December 31, ~~Corning and Vitesse in fiscal 2004~~2008.

Restructuring

Over the past several years, we have implemented various restructuring programs to realign resources in response to the changes in our industry and customer demand, as well as integration of acquired businesses, and we continue to assess our current and future operating requirements accordingly.

For the three ~~month~~months ~~periods~~ ended December 31, ~~2006~~2008 and ~~2005~~2007, restructuring expenses were $~~436,000~~0.2 million and $~~2.9 million~~0, respectively, and for the six ~~month~~months ~~periods~~ ended December 31, ~~2006~~2008 and ~~2005~~2007, restructuring expenses were $~~373,000~~2.5 million and ($3.0.3) million~~, respectively~~. The ~~reduction~~recovery in restructuring ~~expenses~~expense ~~resulted~~in ~~primarily~~the ~~from~~first ~~our~~quarter ~~not~~of ~~having~~fiscal ~~initiated~~2008 ~~restructuring~~was ~~programs~~due ~~during~~to ~~the~~our ~~three~~ability ~~and~~to ~~six month~~sublease ~~periods~~excess ~~ended~~facilities ~~December 31,~~at ~~2006.~~our Fremont site.

21In the three months ended September 30, 2008, we implemented a workforce reduction of 4147 employees to reduce costs, streamline operations, and improve our cost structure. In the second quarter of fiscal 2009, we closed our Melbourne, Florida facility and transferred the respective product lines, inventory, and fixed assets to either our France, China, or Thailand offices. The costs associated with this restructuring consist of one-time termination benefits of approximately $2.1 million and facilities-related costs of approximately $0.3 million. The $2.1 million of one-time termination benefits includes $0.7 million of stock compensation charges due to accelerated vesting of restricted stock units.

Impairment of Goodwill and Intangibles

As of December 31, 2008, we continued to evaluate goodwill due to indications of impairment including the current economic environment, our operating results, a sustained decline in our market capitalization, changes in management, and a decline in our forecasted revenue for the remainder of fiscal 2009. We operate in one reporting unit. The Step 2 analysis concluded that there had been an impairment of the recorded goodwill. This conclusion is supported by the fair value implied by the proposed merger with Bookham, Inc. announced on January 27, 2009. As such, we wrote off the book value of $9.4 million of goodwill and $0.2 million of intangible assets as of December 31, 2008.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, decreased by $1.3 million to ($0.2) million in the three months ended December 31, 2008 from $1.1 million in the three months ended December 31, 2007. For the six months ended December 31, 2008, interest and other income (expense), net decreased by $2.0 million to ($0.4) million from $1.6 million in the same period last year. These decreases were primarily due to higher foreign exchange losses.

25 of 45

~~Stock-based~~Provision ~~Compensation~~for Income Taxes

~~Stock-based~~We ~~compensation~~recorded ~~expense~~an ~~was~~income ~~$1.8~~tax ~~million~~provision inof $11,000 for the three months ended December 31, ~~2006,~~2008. ~~compared~~We tohad ~~$618,000~~a intax ~~the~~benefit ~~year~~of ~~earlier period~~$0.7 ~~For~~million for the six ~~month~~months ~~period~~ ended December 31, ~~2006,~~2008. ~~stock-based~~The ~~compensation~~six ~~expense~~month ~~was~~provision consists of $30.74 million, ~~compared~~related to state and foreign income taxes, and a benefit of $1.1 million inrelated ~~the~~to ~~year~~federal ~~earlier~~and ~~period~~foreign research tax credits. ~~These~~Of ~~increases~~the ~~were~~$0.4 ~~primarily~~million ~~due~~state and foreign income taxes, there was a one-time discrete provision of $0.2 million related to withholding taxes in the ~~expense~~prior ~~associated~~year. ~~with~~Of the ~~issuance~~$1.1 million federal and foreign tax benefits, there was a one-time discrete benefit of ~~restricted~~$0.8 ~~stock~~million ~~units~~in ~~for~~foreign tax credits related to research conducted in the ~~three~~prior ~~months~~year. Our tax provision for the three and six months ended December 31, ~~2006.~~2007 ~~See~~was ~~Note~~approximately $0.2 million and $0.5 million, respectively, consisting primarily of foreign income taxes. We maintained a full valuation allowance on our net deferred tax assets as of December 31, 2008. The valuation allowance was determined in accordance with the provisions of ~~Notes~~Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, or SFAS No. 109, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. We intend to ~~Condensed~~maintain ~~Consolidated~~a ~~Financial~~full ~~Statements~~valuation allowance on the deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

Gain on disposal of property and equipment

Gain or loss on disposal of property and equipment for the three months and six months ended December 31, 2006 was $28,000 and $48,000, respectively. Gain or loss on disposal of property and equipment for the three months and six months ended December 31, 2005 was $775,000 and $768,000, respectively.

Interest and Other Income

Interest and other income increased by $742,000 to $1.1 million in the three months ended December 31, 2006 from $379,000 in the three months ended December 31, 2005. Interest and other income increased by $1.0 million to $2.0 million in the six months ended December 31, 2006 from $930,000 in the six months ended December 31, 2005. This increase was primarily due to a $515,000 gain realized in the three months ended December 31, 2006 in connection with our investment in Paxera, Inc, a privately-held photonics company as discussed in Note 5 of Notes to Condensed Consolidated Financial Statements.

Interest and Other Expense

Interest and other expense decreased by $5.9 million to $308,000 in the three months ended December 31, 2006 from $6.2 million in the three months ended December 31, 2005. Interest and other expense decreased by $7.2 million to $580,000 for the six months ended December 31, 2006 from $7.8 million in the six months ended December 31, 2005. These decreases were primarily due to incurring a $4.5 million loss in connection with modifications to our 8% senior convertible notes in November 2005, and interest expense on higher principal balances of our borrowings in the three and six month periods ended December 31, 2005.

Liquidity and Capital Resources

~~In February 2000, we received net proceeds of approximately $238.0 million from the initial public offering of our common stock and a concurrent sale of stock to corporate investors.~~ Subsequent to our initial public offering in February 2000, we have financed our operations through the sale of equity securities, issuance of convertible notes and warrants, bank borrowings, equipment lease financing and acquisitions. Financing activities for prior fiscal years are summarized in ~~the~~our ~~annual~~Annual ~~report~~Report on Form 10-K as filed with the SEC on September 285, ~~2006~~2008.

As of December 31, ~~2006~~2008, Avanex had cash and cash equivalents of $3713.49 million and short-term investments of $1419.65 million for an aggregate of $5233.04 million, excluding restricted cash of $53.98 million.

AsNet cash used by operating activities of ~~June~~$19.0 million for the six months ended December 3031, ~~2006,~~2008 ~~Avanex~~was ~~had~~due ~~cash~~primarily ~~and~~to ~~cash~~a ~~equivalents~~net loss of $2926.05 million, ~~and~~partially ~~short-term~~offset ~~investments~~by of $3817.7 million ~~for~~of annon-cash ~~aggregate~~charges (consisting primarily of the impairment to goodwill and intangibles assets of $679.76 million,). ~~excluding~~Changes ~~restricted~~in operating ~~cash~~assets ofand liabilities during the six months ended December 31, 2008 used $610.72 million of cash.

Net cash ~~used~~provided inby investing ~~operating~~ activities ofduring ~~$15.4 million for~~ the six months ended December 31, ~~2006~~2008 was ~~due primarily to a net loss of~~ $1817.39 million, anwhich ~~increase~~was ofprimarily ~~$10.2~~due ~~million~~to innet ~~inventories,~~maturities ~~an increase~~ of ~~$7.3~~short-term ~~million~~investments ~~in accounts receivable and an increase~~ of $721.32 million ~~in related party receivables~~, partially offset by ancapital ~~increase~~expenditures ~~in accounts payable~~ of $~~8.9 million, an increase of $~~3.3 million indue ~~other~~to ~~accrued~~the expansion ~~expenses and deferred revenues, and non-cash charges including stock-based compensation~~ of ~~$3.7~~our ~~million,~~contract ~~inventory~~manufacturing ~~write-downs~~capabilities ofin $6Thailand.~~9 million~~ ~~and other changes to working capital.~~

Net cash provided by ~~investing~~financing activities was $0.1 million during the six months ended December 31, ~~2006 was $23.4 million~~2008, which was ~~primarily~~ the result of ~~net~~proceeds ~~maturities~~generated ofthrough ~~short-term~~the ~~investments~~sale of ~~$24.1~~common ~~million~~stock ~~and~~through athe ~~decrease~~Employee inStock ~~restricted~~Purchase ~~cash of $785,000, partially offset by capital expenditures of $1~~Plan.6 ~~million.~~

22Our contractual obligations and commercial commitments have not materially changed from those reported in Management’s Discussion and Analysis of 41Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on September 5, 2008. As of December 31, 2008, we do not have any off-balance sheet arrangements.

During the six months ended December 31, 2008, we incurred a net loss of $26.5 million, and our balance of unrestricted cash, cash equivalents and short-term investments declined from $55.4 million at June 30, 2008 to $33.4 million at December 31, 2008. We expect these balances of cash, cash equivalents, and investments to continue to decline in future periods. These factors cast substantial uncertainty on our ability to continue as an ongoing enterprise for a reasonable period of time. Our ability to continue as an ongoing enterprise is dependent on our improving operational cash flow and securing additional funding or consummating the proposed merger with Bookham, Inc. announced on January 27, 2009. The Company’s management is pursuing opportunities to streamline development efforts, reduce inventory levels and simplify its operating structure, while maintaining customer satisfaction. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as an ongoing enterprise.

26 of 45

Net cash provided by financing activities was $146,000 during the six months ended December 31, 2006, which was the result of proceeds generated through the sale of common stock of $858,000 upon exercise of stock options and the sale of common stock through the Employee Stock Purchase Plan, partially offset by payments on capital lease obligations of $712,000.

Recent Accounting Pronouncements

In ~~June 2006, FASB issued interpretation No.~~December 482007, ~~“Accounting~~the ~~for Uncertainty in Income Taxes-an interpretation of~~ FASB ~~Statement~~issued SFAS No. ~~109~~141 (~~FAS~~revised ~~No. 109~~2007)”, Business Combinations (“~~FIN~~SFAS 48141R”). SFAS ~~This~~141R ~~interpretation~~establishes ~~prescribes~~the aprinciples ~~recognition threshold~~ and ~~measurement~~ ~~attribute~~requirements for ~~tax~~how ~~positions~~an ~~taken~~acquirer (i) recognizes ~~or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest~~ and ~~penalties,~~measures ~~accounting~~ in ~~interim~~its ~~periods,~~financial ~~disclosure~~statements ~~and transition. The evaluation of a tax position in accordance with this interpretation is a two-step process. In~~ the ~~first~~identifiable ~~step,~~assets ~~recognition~~acquired, itthe isliabilities ~~determined whether it is more-likely-than-not that a tax position will be sustained upon examination~~assumed, ~~including resolution~~and of any ~~related~~noncontrolling ~~appeals~~interest orin ~~litigation processes, based on~~ the ~~technical~~acquiree; ~~merits~~(ii) recognizes ofand ~~the~~measures ~~position. The second step addresses measurement of a tax position that meets~~ the ~~more-likely-than-not~~goodwill ~~criteria.~~acquired ~~The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken~~ in ~~a tax return and amounts recognized in~~ the ~~financial statements will generally result in a) an~~business ~~increase~~combination ~~in a liability for income taxes payable~~ or a ~~reduction~~gain offrom ~~an income tax refund receivable, b)~~ a ~~reduction~~bargain inpurchase; aand ~~deferred tax asset or an increase in a deferred tax liability or c~~(iii) determines ~~both~~what ainformation ~~and~~to b.disclose ~~Tax~~to ~~positions~~enable ~~that~~users ~~previously~~of ~~failed to meet~~ the ~~more-likely-than-not~~financial ~~recognition~~statements ~~threshold~~to ~~should~~evaluate ~~be recognized in~~ the ~~first~~nature ~~subsequent~~and financial ~~reporting~~effects ~~period~~of inthe ~~which~~business ~~that threshold is met~~combination. SFAS ~~Previously~~141R ~~recognized~~makes significant ~~tax~~changes ~~positions~~to ~~that~~existing noaccounting ~~longer~~practices ~~meet~~for ~~the~~acquisitions, ~~more-likely-than-not~~including ~~recognition threshold should be de-recognized in~~ the ~~first~~requirement ~~subsequent~~to ~~financial~~expense ~~reporting~~transaction ~~period~~costs inand ~~which~~to ~~that~~reflect ~~threshold~~the isfair novalue ~~longer met. Use~~ of acontingent ~~valuation~~purchase ~~allowance~~price asadjustments ~~described~~at ~~in FAS No. 109 is not an appropriate substitute for~~ the ~~de-recognition~~date of ~~a tax position~~acquisition. SFAS ~~The~~141R ~~requirement~~is to ~~assess~~be applied ~~the~~prospectively ~~need~~to ~~for~~business acombinations ~~valuation~~consummated ~~allowance~~on ~~for~~or ~~deferred~~after ~~tax~~the ~~assets~~beginning ~~based on sufficiency~~ of ~~future~~the ~~taxable~~first ~~income~~annual isreporting ~~unchanged~~period byon ~~this~~or ~~interpretation. This Interpretation is effective for fiscal years beginning~~ after December 15, ~~2006~~2008. We ~~do not believe that FIN 48~~ will ~~have~~implement athe ~~material~~new ~~impact~~standard oneffective ~~our~~in ~~consolidated~~fiscal ~~balance sheet and statement of operations~~2010.

In ~~September~~ ~~2006~~April 2008, the ~~United~~FASB ~~States Securities and Exchange Commission (SEC)~~ issued Staff ~~Accounting~~Position ~~Bulletin (SAB)~~ No. ~~108,~~ ~~“Considering~~FAS ~~the~~142-3, ~~Effects~~Determination of ~~Prior~~the ~~Year~~Useful ~~Misstatements~~Life ~~when~~of ~~Quantifying~~Intangible ~~Misstatements~~Assets in(“FSP ~~Current~~FAS ~~Year Financial Statements.~~142-3”). ~~SAB~~FSP ~~108~~FAS 142-3 ~~provides~~amends ~~guidance on~~ the ~~consideration~~factors ofthat ~~the~~should ~~effects~~be ofconsidered ~~prior~~in ~~year~~developing ~~misstatements~~renewal inor ~~quantifying~~extension ~~current~~assumptions ~~year~~used ~~misstatements~~to ~~for~~determine the ~~purpose~~useful life of a ~~materiality~~recognized ~~assessment.~~intangible ~~SAB~~asset ~~108~~under ~~establishes~~SFAS anNo. 142, ~~approach~~Goodwill ~~that~~and ~~requires quantification~~Other ofIntangible ~~financial~~Assets ~~statement~~(“SFAS 142”). ~~errors~~The ~~based~~intent ~~on the effects~~ of ~~each~~FSP ofFAS ~~the~~142-3 ~~company’s~~is ~~balance~~to ~~sheet~~improve ~~and~~the ~~statement~~consistency ofbetween ~~operations financial statements and~~ the ~~related~~useful ~~financial~~life ~~statement~~of ~~disclosures.~~a ~~SAB~~recognized ~~108~~intangible ~~permits~~asset ~~existing~~under ~~public~~SFAS ~~companies to~~142 ~~record~~and the ~~cumulative~~period ~~effect~~ of ~~initially~~expected ~~applying~~cash ~~this~~flows ~~approach~~used into ~~the~~measure ~~first year ending after November 15, 2006 by recording~~ the ~~necessary~~fair ~~correcting~~value ~~adjustments~~of to the ~~carrying~~asset ~~values~~under ofSFAS ~~assets~~141(R) and other ~~liabilities~~applicable asaccounting ofliterature. ~~the~~FSP ~~beginning~~FAS of142-3 ~~that year~~is ~~with~~effective ~~the~~for ~~offsetting~~fiscal ~~adjustment~~years ~~recorded~~beginning toafter ~~the~~December 15, ~~opening~~2008. ~~balance~~As of ~~retained~~December 31, ~~earnings. Additionally~~2008, the ~~use~~Company ofhas ~~the~~written ~~cumulative~~off ~~effect~~the ~~transition~~remaining ~~method~~book ~~requires~~value ~~detailed disclosure~~ of ~~the~~$9.6 ~~nature~~million ~~and amount~~ of ~~each~~goodwill ~~individual~~and ~~error being corrected~~intangible ~~through~~assets ~~the~~in ~~cumulative adjustment and how and when it arose. We believe~~ the ~~adoption~~three ofmonths ~~SAB~~ended ~~108~~December 31, ~~will not have a material impact on our consolidated balance sheet and statement of operations~~2008.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The objectives of our investment activities are preservation and safety of principal; maintenance of adequate liquidity to meet cash flow requirements; attainment of a competitive market rate of return on investments; minimization of risk on all investments; and avoidance of inappropriate concentrations of investments.

We place our investments with high quality credit issuers in short-term ~~and long-term~~ securities, and maturities can range from overnight to 36 months. The average maturity of the portfolio ~~will~~does not exceed 18 months. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We do not have any derivative financial instruments. ~~Accordingly,~~ weWe ~~do not~~ believe ~~that~~ our ~~investments have significant exposure to~~ interest rate risk is immaterial.

23The following table summarizes average interest rate and fair market value of 41the short-term securities and restricted cash and investments held by Avanex (in thousands), which were classified as available-for-sale at December 31, 2008 and June 30, 2008:


	December 31, 2008			June 30, 2008
Amortized cost	$	27,706		$	48,969
Fair market value	$	27,957		$	49,099
Average interest rate		2.52	%		4.09	%

The following table summarizes average interest rate and fair market value of the short-term securities and restricted cash and investments held by Avanex (in thousands), which were classified as available-for-sale at December 31, 2006 and June 30, 2006:

	December 31,2006	June 30,2006
Amortized cost	$20,529	$ 45,210
Fair market value	$20,529	45,372
Average interest rate	5.31%	3.09%

The interest rate on our outstanding $5 million principal amount convertible notes due 2008 is fixed at 8.0%. Accordingly, we believe that we have an insignificant interest rate risk exposure on this security.

Exchange Rate Risk

Our international business is subject to normal international business risks including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors.

We27 have operations in the United States, China, Thailand, France and Italy. Accordingly, we have sales and expenses that are denominated in currencies other than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business could cause foreign currency translation gains or losses that we would recognize in the period incurred. A 10% fluctuation in the dollar at December 31, 2006 would have led to an additional profit of ~~approximately~~45 $4.8 million (dollar strengthening), or an additional loss of approximately $4.8 million (dollar weakening) on our net dollar position in outstanding assets and liabilities. We cannot predict the effect of exchange rate fluctuations on our future operating results because of the variability of currency exposure and the potential volatility of currency exchange rates. Currently, we do not hedge our exposure to translation gains and losses related to foreign currency net asset exposures.

We have operations in the United States, China, Thailand, France, and Italy. Accordingly, we have sales and expenses that are denominated in currencies other than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business could cause foreign currency translation gains or losses that we would recognize in the period incurred. A 10% fluctuation in the dollar at December 31, 2008 would have led to an additional profit of approximately $2.8 million (dollar weakening), or an additional loss of approximately $2.8 million (dollar strengthening) on our net cash position in outstanding assets and liabilities. We cannot predict the effect of exchange rate fluctuations on our future operating results because of the variability of currency exposure and the potential volatility of currency exchange rates. It has not been our practice to engage in the hedging of foreign currency transactions to mitigate for foreign currency risk, and currently, we do not hedge our exposure to translation gains and losses related to foreign currency net asset exposures.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, ~~2006~~2008. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2008 because of the material weakness discussed below.

As discussed in more detail in our ~~2006~~Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 5, 2008, as of June 30, ~~2006~~2008, our management concluded that controls over the review of journal entries for inventory and taxes related to certain foreign subsidiaries were inadequately designed, resulting in a material weakness in internal control over financial reporting. During the six month period ended December 31, 2008, we ~~did~~began remediating the material weakness described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 5, 2008. However, as of December 31, 2008, we have not ~~maintain~~completed ~~effective~~the ~~controls~~remediation ~~over~~of the ~~following:~~material weakness.

• Company-level controls. The finance group continued to experience turnover such that there was insufficient familiarity with historical accounting entries, and the supervision of the accounting processes was not effective. In addition, during fiscal 2006, we transitioned the majority of our manufacturing operations to contract manufacturers, and these transitions contributed to a number of accounting errors that required post-close journal entries during our year-end close process. Also, controls were not in place to adequately restrict access to the accounting systems. In addition, our assessments related to the risk of financial fraud were not completed until after year end and certain controls in the assessment process were found to be ineffective.

• Preparation and review procedures over account reconciliations and related journal entries. The controls over the preparation and review of account reconciliations and related journal entries both in our Fremont and Nozay facilities were initially inadequate and led to a lack of control over our closing and reporting processes, which were corrected in the audit process.

• Controls over accounts receivable and warranty reserves. Accounts receivable reserves did not initially adequately consider our recent collection performance and warranty reserves initially did not adequately consider our recent performance in the contract manufacturing environment and were corrected in the audit process.

• Controls over inventory. Inadequate controls around our inventory values, including transactions with our contract manufacturer and inter-company shipments, resulted in errors in our ending inventory in both the Fremont and Nozay facilities, which required adjustment in the audit process. Accounting records were not adjusted to physical counts in a timely manner, and inventory reserves did not initially adequately consider recent historical performance, which were corrected in the audit process.

• Controls over pension accounting. Lack of personnel with the requisite level of knowledge of our French subsidiary’s pension plan initially resulted in errors in accounting for our pension obligation, which were corrected in the audit process.

• Controls over stock-based compensation. Lack of personnel with the requisite level of knowledge of stock-based compensation accounting initially resulted in errors in the recorded expense, which were corrected in the audit process.

Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2006 because we have not completed the remediation of the material weaknesses discussed in Item 9A of our Annual Report on Form 10-K for the year ended June 30, 2006 (“2006 Form 10-K”) and the material weakness described below.

During the six month period ended December 31, 2006, we began remediating the material weaknesses described in our 2006 Form 10-K. However, as of December 31, 2006 we have not completed the remediation of any of these material weaknesses.

Changes in internal controls over financial reporting

~~Our~~During ~~management is~~the ~~treating~~six ~~outstanding~~months ~~material~~ended ~~weaknesses~~December 31, as2008, ~~well~~there aswere ~~the~~no changes in our internal control ~~environment,~~over ~~seriously~~financial ~~and~~reporting that ~~has~~have ~~implemented~~materially affected, or ~~intends~~are likely to ~~implement~~materially ~~the~~affect, ~~following~~our ~~actions~~internal tocontrol ~~remediate~~over ~~them:~~financial reporting.

•PART ~~Enhancement~~II of– ~~controls~~OTHER ~~over~~INFORMATION the accounting close process; increase in the supervision of the accounting department; increase in the automation and integration of our accounting systems; reduction of our dependency on consultants; quarterly review of access rights to the accounting systems and implementation of controls designed to reduce the risk of financial fraud;

•ITEM ~~Implementation~~1. ofLEGAL ~~enhanced preparation and review procedures over account reconciliations and related journal entries;~~PROCEEDINGS

24From time to time, we are subject to various legal proceedings that arise from the normal course of 41business activities. In addition, from time to time, third parties assert patent or trademark infringement claims against us in the form of letters and other forms of communication. We do not believe that any of these legal proceedings or claims is likely to have a material adverse effect on our consolidated results of operations, financial condition, or cash flows. However, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially affect our future results of operations, cash flows, or financial position in a particular period.

• Implementation of additional controls and improved analysis to evaluate accounts receivable and warranty reserves fully considering historical experience;

• Implementation of enhanced quarterly controls over the recording of inventory values and transactions, the reconciliation of physical counts of inventory, and the detailed review of inventory reserves;

• Implementation of improved review procedures over the accounting for our French subsidiary’s pension plan;

• Implementation of improved review procedures over stock-based compensation accounting; and

• Implementation of improved review procedures over revenue recognition.

During the three months ended December 31, 2006, management concluded that there was a material weakness resulting from design deficiencies in controls over revenue recognition from drop shipments to international customers resulting in a more than remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. These control deficiencies existed during the period of migration from the SAP system used by our Nozay facility to a common integrated SAP platform used by all of Avanex. Management believes that the transition to the common SAP platform is now substantially complete.

Part II – OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

From time to time, we are subject to various legal proceedings that arise from the normal course of business activities. In addition, from time to time, third parties assert patent or trademark infringement claims against us in the form of letters and other forms of communication. We do not believe that any of these legal proceedings or claims is likely to have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially affect our future results of operations, cash flows or financial position in a particular period.

IPO Class Action Lawsuit

On August 6, 2001, Avanex, certain of its officers and directors, and various underwriters in its initial public offering (“IPO”) were named as defendants in a class action filed in the United States District Court for the Southern District of New York, captioned Beveridge v. Avanex Corporation et al., Civil Action No. 01-CV-7256. This action and other subsequently filed substantially similar class actions have been consolidated into In re Avanex Corp. Initial Public Offering Securities Litigation, Civil Action No. 01 Civ. 6890. The consolidated amended complaint in the action generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in Avanex’s IPO. Plaintiffs have brought claims for violation of several provisions of the federal securities laws against those underwriters, and also against Avanex and certain of its directors and officers, seeking unspecified damages on behalf of a purported class of purchasers of Avanex’s common stock between February 3, 2000, and December 6, 2000. Various plaintiffs have filed similar actions asserting virtually identical allegations against more than 40 investment banks and 250 other companies. All of these “IPO allocation” securities class actions currently pending in the Southern District of ~~New York have been assigned to Judge Shira A. Scheindlin for coordinated pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. On October 9, 2002, the claims against~~ Avanex’s directors and officers were dismissed without prejudice pursuant to a tolling agreement. The issuer defendants filed a coordinated motion to dismiss all common pleading issues, which the Court granted in part and denied in part in an order dated February 19, 2003. The Court’s order did not dismiss the Section 10(b) or Section 11 claims against Avanex. In June 2004, a stipulation of settlement for the claims against the issuer defendants, including Avanex, was submitted to the Court. On August 31, 2005, the Court granted preliminary approval of the settlement. On April 24, 2006, the Court held a fairness hearing in connection with the motion for final approval of the settlement. The Court did not issue a ruling on the motion for final approval at the fairness hearing. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the Court’s October 2004 order certifying a class in six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceeding. Avanex is not one of the test cases and it is unclear what impact this will have on Avanex’s case. The settlement remains subject to a number of conditions, including final approval of the Court. If the settlement does not occur, and litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert management’s attention and resources, which could seriously harm our business, financial condition, results of operations or cash flow in a particular period.

2528 of 4145

New York have been assigned to Judge Shira A. Scheindlin for coordinated pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. On October 9, 2002, the claims against Avanex’s directors and officers were dismissed without prejudice pursuant to a tolling agreement. The issuer defendants filed a coordinated motion to dismiss all common pleading issues, which the Court granted in part and denied in part in an order dated February 19, 2003. The Court’s order did not dismiss the Section 10(b) or Section 11 claims against Avanex.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including Avanex, was submitted to the Court for approval. In August 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. The case involving Avanex is not one of the six test cases. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs filed amended master allegations and amended complaints in the six focus cases. On March 26, 2008, the Court largely denied the defendants’ motion to dismiss the amended complaints. It is uncertain whether there will be any revised or future settlement. If a settlement does not occur, and litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert management’s attention and resources, which could harm our business, financial condition, results of operations or cash flow in a particular period.

Section 16(b) Demand

Merger Purported Class Action Lawsuit

ITEM 1A.

RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, we have identified the following risks and uncertainties that may have a material adverse affect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment. This section should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-Q.

I. ~~Financial~~Risks ~~and~~Relating ~~Revenue Risks~~to the Potential Merger with Bookham, Inc.

WeFailure ~~have~~to acomplete, ~~history~~or ofdelays ~~negative~~in ~~cash~~completing, ~~flow~~the ~~and~~merger ~~losses~~with Bookham, ~~which~~Inc. isannounced ~~likely~~on toJanuary 27, ~~continue~~2009 ifcould wematerially ~~are~~and ~~unable~~adversely toaffect ~~increase~~ our ~~revenues~~results ~~and~~of ~~further~~operations ~~reduce~~ and our ~~costs~~stock price.

WeOn ~~have~~January 27, ~~never been profitable. We have experienced operating losses in each quarterly and annual period since our inception in 1997~~2009, ~~and~~ we ~~may~~ ~~continue~~entered tointo ~~incur~~a ~~operating~~merger ~~losses~~agreement ~~for~~with ~~the~~Bookham, ~~foreseeable future~~Inc. AsConsummation of ~~December 31,~~the ~~2006,~~merger weis ~~had~~subject anto ~~accumulated~~customary ~~deficit~~closing ~~of $692~~conditions.8 ~~million. Also, for the fiscal year ended June 30, 2006 and each of our prior fiscal years, we had negative~~We ~~operating~~cannot ~~cash~~assure ~~flow,~~you ~~and~~that we ~~may~~will ~~incur~~be ~~negative~~successfully ~~operating~~able ~~cash~~to ~~flow~~consummate inthe ~~future~~merger ~~periods.~~as ~~There~~currently ~~can~~contemplated beunder nothe ~~assurance~~merger ~~that~~agreement ~~our~~or ~~business~~at ~~will~~all. ~~become~~Risks ~~profitable~~related into the ~~future~~proposed ormerger ~~that~~include, ~~additional~~but ~~losses~~are ~~and negative cash flows from operations will~~ not ~~be incurred~~limited to, ~~which~~the ~~could~~following: ~~have a material adverse affect on our financial condition.~~

~~Due~~• toWe ~~insufficient~~may ~~cash~~not ~~generated~~realize ~~from~~any ~~operations,~~or weall ~~have~~of ~~funded~~the ~~our operations~~potential ~~primarily~~benefits ~~through~~of the ~~sale of equity securities~~merger, ~~debt~~including ~~securities,~~any ~~bank~~synergies ~~borrowings,~~that ~~equipment~~could ~~lease~~result ~~financings,~~from ~~acquisitions~~combining ~~and other strategic transactions. Although we implemented cost reduction programs during~~ the ~~past~~financial ~~several years, we continue to have significant fixed expenses,~~ and weproprietary ~~expect~~resources toof ~~continue~~Avanex ~~to incur considerable manufacturing, sales~~ and ~~marketing~~Bookham, ~~product development and administrative expenses~~Inc. ~~If we fail to generate higher revenues and increase our gross margins while containing our costs and operating expenses, our financial position will be harmed significantly.~~ ;

If• weWe dowill ~~not~~remain ~~reduce~~liable ~~costs~~for ~~and~~significant ~~improve our~~transaction ~~gross~~costs, ~~margins~~including legal, ~~our~~accounting, financial ~~condition~~advisory and ~~results~~other ofcosts ~~operations~~relating ~~will~~to bethe ~~adversely impacted.~~ merger;

~~Our~~• ~~ability~~Under tosome ~~achieve~~circumstances, ~~profitability~~we ~~depends~~may onhave ~~our ability~~ to ~~control~~pay ~~costs~~a ~~and~~termination ~~expenses~~fee ~~in relation~~ to ~~sales and to increase our gross margin. During the three months and six months ended December 31~~Bookham, ~~2006, our gross margin percentage was positive 19% and 15%, respectively~~Inc. ~~During~~in the ~~fiscal years~~amount ~~ended~~of ~~June 30, 2006, 2005 and 2004, our gross margin percentage was positive 5%, negative 3% and negative 25%, respectively~~$1.64 ~~Despite our continued efforts to improve our gross margins, there can be no assurance that our gross margins will not decrease in the future.~~ million;

We29 ~~are working to minimize fixed costs through the extensive use~~ of ~~contract~~45 manufacturing and the relocation of most of our manufacturing operations into a central facility in Bangkok, Thailand. While this is an accepted model of manufacturing in many electronic industries, the use of this model is relatively untested within the optical industry. As such, we may face execution issues working with our contract manufacturers, including difficulties managing our supply chain and deliveries to our customers. From a financial viewpoint, should these difficulties occur, we could see negative impacts to revenue, gross margin and inventory levels.

In addition, over our limited operating history, the average selling prices of our existing products have decreased and this trend may continue. However, our overall product mix has shifted toward products with higher levels of integration, which we typically sell at higher unit prices. Future price decreases may be due to a number of factors, including competitive pricing pressures, rapid technological change and sales discounts. Therefore, to improve our gross margin, we must develop and introduce new products and product enhancements on a timely basis and reduce our costs of production. Moreover, as our average selling prices decline, we must increase our unit sales volume, or introduce new products, to maintain or increase our revenues. If our average selling prices decline more rapidly than our costs of production, our gross margin will decline, which would adversely impact our business, financial condition and results of operations. If we are unable to continue to generate positive gross margins our cash flows from operations would be negatively impacted, and we would be unable to achieve profitability.

We may not realize the anticipated benefits from our restructuring efforts.

As part of our cost reduction efforts, over the past several years we have implemented various restructuring programs to realign our resources in response to the changes in the industry and customer demand. These efforts have included

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~~transferring~~• ~~most~~The attention of our ~~manufacturing~~management ~~operations~~and ~~to lower-cost contract manufacturers. Our past restructuring programs may have a material effect on~~ our ~~financial~~ ~~position in the future as we pay severance to~~ employees ~~and rent for excess facilities. We~~ may ~~initiate future restructuring actions, which are likely to result in additional expenses that could affect our results of operations or financial position. There can~~ be nodiverted ~~assurance that we will realize the benefits we anticipate~~ from ~~our~~day-to-day ~~current or future restructuring programs or that such programs will reduce our operating expenses and improve our cost structure.~~ operations;

We• The customer sales process (including design wins) may ~~have~~be ~~difficulty~~disrupted ~~obtaining~~by ~~additional~~customer ~~capital.~~and salesperson uncertainty over when or if the merger will be consummated;

• Our ~~balance~~customers ~~of cash, cash equivalents~~ and ~~unrestricted~~suppliers ~~short-term~~may ~~investments~~seek ~~decreased from $67.7 million at June 30, 2006~~ to ~~$52.0~~modify ~~million~~or atterminate ~~December 31,~~existing ~~2006. There can be no assurance that our business will be profitable in the future. If these trends continue in the future~~agreements, itor ~~could~~prospective ~~have~~customers ~~an adverse affect on our financial condition. It~~ may bedelay ~~difficult~~entering ~~for~~into usnew toagreements ~~raise~~or ~~additional~~purchasing ~~capital.~~our Inproducts ~~addition,~~as ~~the~~a ~~holders~~result of the ~~notes~~announcement ~~issued~~of in the May 2005 private placement have imposed certain restrictive covenants, including limits on our future indebtedness and limits on our ability to incur future liens and to make certain restricted payments. If adequate capital is not available to us as required, or is not available on favorable terms, our business and financial condition would be adversely affected. merger;

•

Our ability to retain our existing employees may be harmed by uncertainties associated with the merger; and

•

Our ability to attract new employees may be harmed by uncertainties associated with the merger.

•

The new members of the board of directors and management team of the combined entity, which have had limited exposure to each other, may not be able to work together effectively.

The occurrence of any of these events individually or in combination could materially and adversely affect our results of operations and our stock price.

Since the merger agreement contemplates a fixed exchange ratio, changes in the market price of Bookham, Inc. common stock could adversely affect the value of Bookham, Inc. common stock to be received by our stockholders in the merger.

Under the merger agreement, each outstanding share of our common stock will be converted into the right to receive 5.426 shares of Bookham, Inc. common stock. Because the merger agreement contemplates a fixed exchange ratio, changes in the stock price of Bookham, Inc. common stock in the period leading up to the time the merger is consummated could adversely affect the value of our common stock or the value of the Bookham, Inc. common stock to be received by our stockholders upon consummation of the merger.

A purported class action lawsuit has been filed against Avanex and its directors challenging the merger, and an unfavorable judgment or ruling in this lawsuit could prevent or delay the consummation of the merger, result in substantial costs or both.

Avanex has obligations under certain circumstances to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and Avanex’s bylaws and certificate of incorporation. Such obligations may apply to the lawsuit. Avanex’s management believes that the allegations are without merit and intends to vigorously contest the action. However, there can be no assurance that the defendants will be successful in their defense. An unfavorable outcome in this lawsuit could prevent or delay the consummation of the merger, result in substantial costs to Avanex or both.

II. Financial and Revenue Risks.

We have had a history of negative cash flows and losses, which could continue if we do not to increase our revenue and/or further reduce our costs.

Prior to fiscal 2008, we experienced operating losses in each quarterly and annual period since our inception in 1997. As of December 31, 2008, we had an accumulated deficit of $726.8 million. For the six months ended December 31, 2008 and for each of our prior fiscal years except for fiscal 2008, we had negative operating cash flow, and we expect to incur negative operating cash flow in future periods. For the six months ended December 31, 2008, our net loss was $26.5 million which included an impairment charge of $9.6 million for goodwill and intangible assets. There can be no assurance that our business will be profitable in the future or that additional losses and negative cash flows from operations will not be incurred, which could have a material adverse affect on our financial condition. These factors may impair our ability to continue as a going concern.

Due to insufficient cash generated from operations in the past, we funded our operations primarily through the sale of equity securities, debt securities, bank borrowings, equipment lease financings, acquisitions and other capital raising transactions. Although we implemented cost reduction programs during the past several years, we continue to have significant fixed expenses, and we expect to continue to incur considerable manufacturing, sales and marketing, product development and administrative expenses. If we fail to generate higher revenues and increase our gross margins while containing our costs and operating expenses, our financial position will be harmed significantly. Our revenues may not grow in the future, and we may never generate sufficient revenues to achieve profitability again. This may impair our ability to continue as a going concern.

Our future profitability depends on our ability to maintain or improve gross margin and control operating expenses. If we do not maintain or improve gross margin and control operating expenses, our financial condition and results of operations will be adversely impacted.

During the six months ended December 31, 2008, our gross margin percentage was 16%. During the fiscal years ended June 30, 2008 and 2007, our gross margin percentage was 31% and 18%, respectively. Despite our continued efforts to improve our gross margin, there can be no assurance that our gross margin will improve or be maintained in the future.

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We wrote off excess and obsolete inventory of $3.9 million during the six months ended December 31, 2008 due to lower demand for certain products and lower expected usage of previously purchased inventory. During the fiscal years ended June 30, 2008 and 2007, we wrote off $4.7 million and $12.9 million. Despite our continued efforts to manage our inventory, there can be no assurance that the write-offs of excess and obsolete inventory will decline in the future.

We have reduced fixed costs through the extensive reliance on third party contract manufacturing and the relocation of most of our manufacturing operations into a central facility in Bangkok, Thailand. We may further reduce fixed costs by relocating certain transactional activities to lower cost regions. We have faced and may face execution issues working with our contract manufacturers, including difficulties managing our supply chain and deliveries to our customers. From a financial viewpoint, should these difficulties occur, we could see negative impacts to revenue, gross margin and inventory levels.

In addition, over our limited operating history, the average selling prices of our existing products have decreased and this trend may continue. However, our overall product mix has shifted toward products with higher levels of integration, typically selling at higher unit prices. Future price decreases may be due to a number of factors, including competitive pricing pressures, rapid technological change and sales discounts. Therefore, to maintain or improve our gross margin, we must develop and introduce new products and product enhancements on a timely basis and reduce our costs of production. Moreover, as our average selling prices decline, we must increase our unit sales volume, or introduce new products, to maintain or increase our total revenues. If our average selling prices decline more rapidly than our costs of production, our gross margin will decline. This would adversely impact our business, financial condition and results of operations. If we are unable to continue to generate positive gross margin, our cash flows from operations would be negatively impacted, and we would be unable to maintain profitability.

Our future revenues and operating results are inherently unpredictable, and as a result, we may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline.

Our revenues and operating results have fluctuated significantly from quarter-to-quarter in the past, and may continue to fluctuate significantly in the future. Factors that are likely to cause these fluctuations, some of which are outside of our control, include, without limitation, the factors described elsewhere in this Item 1A and the following:

• the current recessionary macro economic environment, as well as the current economic environment and other developments in the telecommunications industry, including ~~the~~ severe business setbacks, such as bankruptcy, of customers or potential customers ~~and the current perceived oversupply of communications bandwidth~~;

• the ~~mix~~average margin of ~~our~~the mix of products ~~sold~~we sell;

• fluctuations in demand for and sales of our ~~ability~~products, which will depend upon factors such as the speed and magnitude of the transition to ~~control~~an ~~expenses~~all-optical network, the acceptance of our products in the marketplace, and the general level of spending on infrastructure projects in the telecommunications industry;

• fluctuations in demand for and sales of our products, which will depend upon the speed and magnitude of the transition to an all-optical network, the acceptance of our products in the marketplace, and the general level of spending on infrastructure projects in the telecommunications industry;

•

cancellations of orders and shipment rescheduling;

•

changes in product specifications required by customers for existing and future products;

•

satisfaction of contractual customer acceptance criteria and related revenue recognition issues;

• our ability to maintain appropriate manufacturing capacity through our contract manufacturers and materials suppliers, from whom we have no long-term commitments;

• our ability to successfully complete a transition to an outsourced manufacturing model;

•

the ability of our outsourced manufacturers to timely produce and deliver subcomponents, and possibly complete products in the quantity and of the quality we require;

• the current practice of ~~companies~~our customers in the telecommunications industry of sporadically placing large orders with short lead times;

• our ability to comply with new rules and regulations;

•31 ~~competitive factors, including the introduction~~ of ~~new~~45 products and product enhancements by competitors and potential competitors, pricing pressures, and the competitive environment in the markets into which we sell our photonic processing solutions and products, including competitors with substantially greater resources than we have;

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•

competitive factors, including the introduction of new products and product enhancements by competitors and potential competitors, pricing pressures, and the competitive environment in the markets into which we sell our photonic processing solutions and products, including competitors with substantially greater resources than we have;

•

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

•

the availability and cost of components for our products;

•

new product introductions that may result in increased research and development expenses and sales and marketing expenses that are incurred in one quarter, with revenues, if any, that are not recognized until a subsequent quarter;

•

the loss of, or significant reduction in, purchases by our customers, including as a result of industry consolidation, mergers or divestitures involving our customers;

•

the unpredictability of customer demand and difficulties in meeting such demand;

•

revisions to our estimated reserves and allowances, as well as other accounting provisions or charges;

•

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

•

customer perception of our financial condition and resulting effects on our orders and revenue.

A high percentage of our expenses, including those related to manufacturing, engineering, sales and marketing, research and development, and general and ~~administrative~~ administrative functions, are fixed in the short term. As a result, if we experience delays in generating and recognizing revenue, our quarterly operating results are likely to be ~~seriously~~ harmed.

Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. Our results for one quarter should not be relied upon as any indication of our future performance. It is possible that in future quarters our operating results may be below the expectations of public market analysts or investors. If this occurs, the price of our common stock would likely decrease.

AWe ~~lack~~may ofnot ~~effective~~continue ~~internal control over financial reporting could result in an inability~~ to ~~accurately~~realize ~~report~~the ~~our~~anticipated ~~financial~~benefits ~~results,~~from ~~which could lead to a loss of investor confidence in~~ our ~~financial~~restructuring ~~reports and have an adverse effect on our stock price~~efforts.

~~Effective~~As ~~internal~~part ~~controls~~of ~~are~~our ~~necessary~~cost ~~for~~reduction usefforts, over the past several years we have implemented various restructuring programs to realign our resources in ~~provide~~response ~~reliable~~to ~~financial~~changes ~~reports~~in the industry and customer demand. IfThese weefforts ~~cannot~~have ~~provide~~included ~~reliable~~transferring ~~financial~~most ~~reports~~of orour ~~prevent~~manufacturing ~~fraud,~~operations to lower-cost contract manufacturers and selling our ~~business~~semiconductor fabs and ~~operating~~related ~~results~~product ~~could~~lines bein ~~harmed~~France. WeIn September ~~have~~2008, inwe implemented a workforce reduction of 47 employees and announced the ~~past~~closure ~~discovered~~of our Melbourne, Florida facility and the transfer of the respective product lines, inventory, and fixed assets to other offices. Our past restructuring programs may have a material effect on our financial position in the future ~~discover,~~as ~~deficiencies~~we inpay ~~our~~rent ~~internal controls~~for excess facilities. ~~For~~We ~~example~~may initiate future restructuring actions, aswhich ~~more~~are ~~fully~~likely ~~described~~to result in ~~Item 9A~~additional ~~“Controls~~expenses ~~and~~that ~~Procedures,”~~could inaffect our ~~Form~~results ~~10-K~~of operations asor ~~filed~~financial ~~with~~position. There can be no assurance that we will realize the ~~SEC~~benefits onwe ~~September 28,~~anticipate ~~2006,~~from our ~~management~~current ~~concluded~~or ~~that~~future asrestructuring ofprograms ~~June 30,~~or ~~2006~~that wesuch ~~did~~programs ~~not~~will ~~maintain effective~~reduce ~~internal~~our ~~controls~~operating ~~over~~expenses ~~the~~and ~~following:~~improve our cost structure.

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

•Effective ~~Preparation~~internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and ~~review~~operating ~~procedures~~results ~~over~~could ~~account~~be ~~reconciliations~~harmed. We have in the past discovered, and ~~related~~may ~~journal~~in ~~entries;~~the future discover, deficiencies, including those considered to be material weaknesses, in our internal controls. For example, as more fully described in Item 9A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 5, 2008, our management concluded that as of June 30, 2008, we did not maintain effective internal controls over the following:

• Controls over ~~accounts~~the ~~receivable~~review of journal entries for inventory and ~~warranty~~taxes ~~reserves;~~related to certain foreign subsidiaries were inadequately designed to prevent or detect a material misstatement of the consolidated financial statements.

•32 ~~Controls~~of ~~over~~45 ~~inventory;~~

• Controls over pension accounting; and

• Controls over stock-based compensation.

Our management determined that these control deficiencies were considered material weaknesses that could result in a material misstatement to annual or interim financial statements that would not be prevented or detected. As a result, our management concluded that our internal control over financial reporting was not effective as of June 30, 2006 using the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In addition, as described in Part 1, Item 4 above, during the three months ended December 31, 2006, management concluded that there was a material weakness related to revenue recognition from drop shipments to international customers, which could also result in a material misstatement to annual or interim financial statements that would not be prevented or detected.

A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to address the control deficiencies identified above, 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 and operating results and our stock price, and we could be subject to stockholder litigation.

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Our management determined that these control deficiencies were considered a material weakness that could result in a material misstatement to annual or interim financial statements that would not be prevented or detected. As a result, our management concluded that our internal control over financial reporting was not effective as of June 30, 2008 using the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). We expect the remediation of this material weakness to occur during fiscal 2009.

A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to address the control deficiencies identified above, 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 stockholder litigation.

We incur increased costs as a result of being a public company.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as future accounting rules and regulations subsequently implemented by the Securities and Exchange Commission and Nasdaq, ~~has~~have required changes in corporate governance practices of public companies. These rules and regulations have increased our legal and financial compliance costs and have made some activities more time consuming and costly. In addition, we incur additional costs associated with our public company reporting requirements. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board or as an executive.

Our stock price is highly volatile.

The trading price of our common stock has fluctuated significantly since our initial public offering in February 2000, and is likely to remain volatile in the future. For example, since the beginning of fiscal ~~2006~~2007 through January 30, 2009, our common stock has closed as low as $0.6275 and as high as $334.2920 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:

•

quarterly variations in our operating results;

•

significant developments in the businesses of telecommunications companies;

•

changes in financial estimates by securities analysts;

•

changes in market valuations or financial results of telecommunications-related companies;

•

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

•

any deviation from projected growth rates in revenues;

•

any loss of a major customer or a major customer order;

• the ability to meet our debt obligations;

•

additions or departures of key management or engineering personnel;

•

any deviations in our net revenue or in losses from levels expected by securities analysts;

•

activities of short sellers and risk arbitrageurs;

•

future sales of our common stock or the availability of additional financing;

•

volume fluctuations, which are particularly common among highly volatile securities of telecommunications-related companies; and

•

material weaknesses in internal controls.

In33 ~~addition, the stock market has experienced volatility that has particularly affected the market prices~~ of ~~equity~~45 securities of many high technology companies, which often has been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. As long as we continue to depend on a limited customer base and a limited number of products, there is substantial risk that our quarterly results will fluctuate.

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In ~~July 2003~~addition, wethe ~~issued an aggregate of 56,844,376 shares of our common~~ stock tomarket ~~Alcatel~~has ~~Lucent~~experienced ~~and~~volatility ~~Corning~~that ~~Incorporated in~~has ~~connection~~particularly ~~with~~affected ~~our~~the ~~acquisitions~~market prices of ~~the~~equity ~~optical~~securities ~~components businesses~~ of ~~Alcatel~~many ~~Lucent~~high ~~and~~technology ~~Corning. In connection with these acquisitions~~companies, wewhich ~~entered~~often ~~into~~has abeen ~~stockholders’~~unrelated ~~agreement~~or ~~with~~disproportionate ~~Alcatel Lucent and Corning. Pursuant~~ to the ~~stockholders’~~ ~~agreement,~~operating weperformance ~~registered 56,844,376 shares~~ of ~~common~~these ~~stock~~companies. onMarket ~~behalf~~volatility ofhas ~~Alcatel~~been ~~Lucent~~particularly ~~and~~acute ~~Corning~~ in ~~July~~fiscal ~~2004.~~2008 ~~As of January 31, 2007, Alcatel Lucent owned shares of Avanex common stock representing 14% of the outstanding shares of Avanex common stock,~~ and ~~as of that date, Corning no longer held shares of Avanex common stock~~2009. ~~Previously,~~These ~~certain~~broad ~~restrictions on transfer applied to Alcatel Lucent making it more difficult for it to sell its shares of Avanex common~~market ~~stock.~~fluctuations ~~After~~have ~~January 1,~~in ~~2007,~~the ~~however,~~past ~~Alcatel~~and ~~Lucent~~may ~~was no longer subject to such selling restrictions. If Alcatel Lucent or our other stockholders, including our convertible note holders, sell substantial amounts of our common stock~~ in the ~~public~~ ~~market,~~future itadversely ~~could~~affect ~~cause~~ the market price of our common stock. toThere ~~fall,~~is ~~and~~substantial ~~could~~risk ~~make~~that itour ~~more~~quarterly ~~difficult~~results ~~for~~will ~~us to raise capital through public offerings or other sales of our capital stock~~fluctuate.

IfSales ~~the~~of ~~investors~~securities inby our ~~May~~stockholders ~~2005~~or ~~financing~~warrantholders ~~(certain~~could ~~terms~~affect ofthe ~~which~~market ~~were~~price ~~amended~~of inour ~~November~~common ~~2005)~~stock ~~continue to convert their notes~~ or ~~exercise their warrants, it will continue to~~ have a dilutive effect upon our stockholders.

InOn ~~May 2005 we issued notes and warrants to certain institutional investors~~October 29, ~~and in November 2005 certain terms of such convertible note financing were amended. Pursuant to the terms of the amended and restated notes~~2007, the ~~holders~~Pirelli ofGroup ~~such~~acquired ~~notes~~all ~~may convert~~ the ~~notes into~~ shares of our common stock atpreviously ~~any~~held ~~time~~by ~~prior to their maturity at a conversion price of $0.90 per share, subject to broad~~Alcatel-~~based anti-dilution provisions~~Lucent. ~~The~~As ~~anti-dilution~~of ~~provisions also provide for an adjustment for stock splits and certain other situations specified in the notes. Subject to certain conditions, at any time after May~~January 1930, ~~2007~~2009, ~~we can automatically convert all of~~ the ~~outstanding~~Pirelli ~~notes~~Group ~~into~~owned ~~common~~shares ~~stock if the weighted average price~~ of ~~the~~our common stock ofrepresenting ~~Avanex~~approximately ~~equals or exceeds 175~~12% of the ~~conversion~~outstanding ~~price~~shares ~~for a specified period. The warrants are exercisable for a term~~ of 3our ~~years~~common ~~at an exercise price of $1~~stock.13 ~~per share, subject to broad-based anti-dilution provisions similar to the provisions set forth in the notes.~~ If the ~~institutional~~Pirelli ~~investors~~Group ~~convert the notes~~ or ~~exercise the warrants, we will issue shares of~~ our ~~common~~other ~~stock~~large ~~and such issuances will be dilutive to our~~ stockholders. ~~For~~sell ~~example,~~substantial ~~since~~amounts ~~January 2006, we have issued approximately 33.3 million shares~~ of our common stock upon conversion of $30.0 million principal amount of notes and approximately 1.2 million shares upon exercise of warrants. If the institutional investors were to convert the remaining unconverted notes in ~~full at~~ the ~~current~~public ~~conversion price we would be obligated to issue an~~market, ~~additional~~it ~~5.6 million~~could ~~shares~~cause ~~of common stock, and if such investors were to exercise~~ the ~~warrants~~market ~~in full at the current exercise~~ price ~~we would be obligated to issue 8.3 million shares~~ of ~~common~~our ~~stock, for an aggregate of 13.9 million shares of Avanex~~ common stock. ~~These~~to ~~13.9 million shares represent approximately 6% of the outstanding shares of common stock (assuming such conversion and exercise) as of January 31~~fall, ~~2007. Because the conversion price of the notes~~ and ~~the exercise~~could ~~price~~make ofit ~~the~~more ~~warrants~~difficult ~~may~~for beus ~~adjusted from time~~ to ~~time~~raise incapital ~~accordance~~through ~~with~~public ~~the~~offerings ~~provisions of the notes and the warrants, the number of shares that could actually be issued may be greater than the amount described above. In addition, if such institutional investors~~ or ~~our~~ other ~~stockholders~~sales ~~sell substantial amounts~~ of our ~~common~~capital stock ~~in the public market during a short period of time, our stock price may decline significantly~~.

In addition, ~~in March 2006~~ we have issued warrants to purchase initially up to an aggregate of ~~7.2~~665,417 ~~million~~ shares of common stock to certain institutional investors ~~that~~ that are exercisable ~~for~~through a2011 ~~term~~at ofexercise 4prices ~~years~~ranging atfrom an$32.18 ~~exercise~~to ~~price of~~ $2110.7385 per share, subject to broad-based anti-dilution provisions, including weighted-average price-based anti-dilution provisions. If ~~the~~these institutional investors exercise the warrants, we will issue shares of our common stock and such issuances ~~will~~may be dilutive to our stockholders. Because the exercise price of the warrants may be adjusted from time to time in accordance with the provisions of the warrants, the number of shares that could actually be issued may be greater than the amount described above. For example, in connection with our March 1, 2007 financing, the holders of the warrants we issued on March 9, 2006 received an antidilution adjustment pursuant to the terms of such warrants resulting in up to 7,815 additional shares being issued upon the exercise of such warrants and the reduction of the exercise price of the warrants from $40.95 per share to $40.30 per share.

~~II.~~We ~~Market~~may ~~and~~have ~~Competitive~~difficulty ~~Risks~~obtaining additional capital.

Our balance of unrestricted cash, cash equivalents, and short-term investments decreased from $55.4 million at June 30, 2008 to $33.4 million at December 31, 2008. We expect that these balances will decline further in future quarters. Except for fiscal 2008, we have not been profitable, and there can be no assurance that our business will be profitable in the future. A failure to be profitable would have an adverse affect on our financial condition. If we do not consummate the proposed merger with Bookham, Inc. announced on January 27, 2009 or a transaction with another third party, we will need to secure additional funding, and it may be difficult for us to raise additional capital. If adequate capital is not available to us as required, or is not available on favorable terms, our business, operating results and financial condition would be adversely affected.

III. Market and Competitive Risks.

Market conditions in the telecommunications industry may significantly harm our financial position.

InWorldwide ~~the~~economic ~~past~~conditions ~~several~~generally, ~~years~~and market conditions in the telecommunications industry specifically, ~~there~~may ~~has~~significantly ~~been~~harm our financial position. We sell our products primarily to a ~~significant reduction~~few inlarge ~~spending~~customers in the telecommunications industry. ~~Certain~~Two ~~large~~customers ~~telecommunications~~accounted ~~companies~~for ~~who~~an ~~were~~aggregate ~~customers~~of or33% ~~potential~~and ~~customers~~12% of ~~ours~~our ~~have~~net ~~suffered~~revenue, ~~severe~~respectively, ~~business~~for the ~~setbacks~~three months ended December 31, 2008. Two customers accounted for an aggregate of 25% and ~~face~~21% ~~uncertain~~of ~~futures~~our net revenue, respectively, for the fiscal year ended June 30, 2008. ~~There~~We isexpect ~~currently~~that athe ~~perception~~majority of our revenues will continue to ~~that~~depend anon ~~oversupply~~sales of ~~communications~~our ~~bandwidth~~products ~~exists~~to a small number of customers. ~~This~~If ~~perceived~~current ~~oversupply~~customers do not continue to place significant orders, ~~coupled~~or ~~with~~if ~~the~~they ~~current~~cancel ~~economic~~or ~~environment~~delay current orders, we may ~~lead~~not be able to replace those orders. In addition, industry consolidation, mergers or divestitures involving our existing customers, bankruptcies involving existing customers, as well as any negative developments in the ~~continuation~~business of ~~lower~~existing ~~telecommunications~~customers ~~spending~~could result in significantly decreased sales to these customers, ~~and~~which could seriously harm our ~~customers~~business, operating results and financial condition. We have experienced, and in the future we may ~~continue~~experience, losses as a result of the inability to ~~cancel~~collect accounts receivable, ~~defer~~as orwell as the loss of ~~significantly~~ongoing ~~reduce~~business ~~their~~from ~~orders~~customers experiencing financial difficulties. For example, one of our customers, Nortel, filed for bankruptcy protection on January 14, 2009. If our ~~products~~customers fail to meet their payment obligations, we could experience reduced cash flows and losses in excess of amounts reserved. Because of our reliance on a limited number of customers, any decrease in revenues from, or loss of, one or more of these customers without a corresponding increase in revenues from other customers would harm our business, operating results and financial condition.

We34 ~~sell our products primarily to a few large customers in the telecommunications industry. Four customers (including sales to their contract manufacturers) accounted for an aggregate~~ of ~~27%,~~45 ~~21%, 10% and 10% of our net revenue, respectively, for the three months ended December 31, 2006. We expect that the majority of our revenues will continue to depend on~~

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~~sales~~Our ~~of our products to a small number of~~ customers. Ifmay ~~current customers do not continue to place significant orders, or if they~~ cancel or delay ~~current orders,~~purchases wewith ~~may~~little ~~not~~or beno ~~able~~advance tonotice ~~replace those orders. In addition, any negative developments in the business of existing customers could result in significantly decreased sales~~ to ~~these customers, which could seriously harm our revenues and results of operations~~us. We have experienced, and in the future we may experience, losses as a result of the inability to collect accounts receivable, as well as the loss of ongoing business from customers experiencing financial difficulties. If our customers fail to meet their payment obligations, we could experience reduced cash flows and losses in excess of amounts reserved. Because of our reliance on a limited number of customers, any decrease in revenues from, or loss of, one or more of these customers without a corresponding increase in revenues from other customers would harm our operating results.

~~Except~~Our ~~for~~customers ~~Alcatel~~typically ~~Lucent,~~purchase our ~~customers are~~products ~~under~~pursuant noto ~~obligation~~individual topurchase ~~buy~~orders, ~~significant~~and ~~quantities~~only a small portion of our ~~products~~orders is non-cancelable. Accordingly, ~~and~~our customers may cancel, defer or ~~delay~~decrease purchases without significant consequence to them and with ~~minimal~~little or no advance notice. Further, certain of our customers have a tendency to purchase our products near the end of a fiscal quarter. Cancellation or delays of such orders may cause us to fail to achieve that quarter’s financial and operating goals. Decreases in purchases, cancellations of purchase orders, or deferrals of purchases may significantly harm our business, operating results and financial condition, particularly if we are not able to anticipate these events.

Our customers typically purchase our products pursuant to individual purchase orders. While we have executed long-term contracts with some of our customers, and may enter into additional long-term contracts with other customers in the future, these contracts do not obligate our customers to buy significant quantities of our products, except for our supply agreement and frame purchase agreement with Alcatel Lucent, which will expire in October 2007. Our customers may cancel, defer or decrease purchases without significant penalty and with little or no advance notice. Further, certain of our customers have a tendency to purchase our products near the end of a fiscal quarter. Cancellation or delays of such orders may cause us to fail to achieve that quarter’s financial and operating goals. Decreases in purchases, cancellations of purchase orders, or deferrals of purchases may significantly harm our business, particularly if they are not anticipated.

We experience intense competition with respect to our products.

We believe that our principal competitors in the optical systems and components industry include Bookham ~~Technology~~, ~~CyOptics~~ Inc., ~~DiCon~~EMCORE ~~Fiberoptics~~Corporation, ~~Eudyna,~~ Finisar, ~~Fujitsu~~Corporation, ~~Furukawa, Hitachi Cable,~~ JDS Uniphase, ~~NEC~~Corporation, Oplink Communications, ~~Opnext~~Inc., ~~Optium,~~ ~~Intel,~~ and ~~Sumitomo~~Opnext Inc. We may also face competition from companies that expand into our industry in the future.

~~Some~~A few of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. As a result, some of these competitors are able to devote greater resources to the development, promotion, sale, and support of their products. In addition, our competitors that have larger market capitalization or cash reserves are better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Consolidation in the optical systems and components industry could intensify the competitive pressures that we face because these consolidated competitors may have longer operating histories and significantly greater financial, technical, marketing and other resources than we have.

Some existing customers and potential customers, as well as, suppliers and potential suppliers, are also our competitors. These customers and suppliers may develop or acquire additional competitive products or technologies in the future, which may cause them to reduce or cease their purchases from us or their supply to us, as the case may be. Further, these customers may reduce or discontinue purchasing our products if they perceive us as a serious competitive threat with regard to sales of products to their customers. Additionally, suppliers may reduce or discontinue selling materials to us if they perceive us as a serious competitive threat with regard to sales of products to their customers. As a result of these factors, we expect that competitive pressures will intensify and may result in price reductions, reduced margins, and loss of market share.

Competition in the optical systems and components industry has contributed to substantial price-driven competition. As a result, sales prices for ~~specific~~ specific products have decreased over time at varying rates, in some instances significantly. ~~Price~~Pricing pressure is exacerbated by the rapid emergence of new technologies and the evolution of technical standards, which can greatly diminish the value of products relying on older technologies and standards. In addition, the current economic and industry environment in the telecommunications sector has resulted in pressure to reduce prices for our products, and we expect pricing pressure to continue for the foreseeable future, which may ~~continue to~~ adversely affect our operating results. Reduced spending by our customers has caused and may continue to cause increased price competition, resulting in a decline in the prices we charge for our products. If our customers and potential customers continue to constrain their spending, or if the prices we charge continue to decline, our revenues and margins may be adversely affected.

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We will lose market share and may not be successful if our customers do not qualify our products to be designed into their products and systems or if our customers significantly delay purchasing our products.

In the telecommunications industry, service providers and optical systems manufacturers often undertake extensive qualification processes prior to placing orders for large quantities of products such as ours, because these products must function as part of a larger system or network. Once they decide to use a particular supplier’s product or component, these potential customers design the product into their system, which is known as a “design-in” win. Suppliers whose products or components are not designed in are unlikely to make sales to that company until the adoption of a future redesigned system at the earliest, which could occur several years after the last design-in win. If we fail to achieve design-in wins in potential customers’ qualification processes, we may lose the opportunity for significant sales to such customers for a ~~lengthy~~significant period of time.

~~The~~35 ~~long sales cycles for sales~~ of ~~our~~45 ~~products to customers may cause operating results to vary from quarter to quarter, which could continue to cause volatility in our stock price, and may prevent us from achieving profitability.~~

TheTable period of time between our initial contact with certain of our customers and the receipt of an actual purchase order from such customers often spans a time period of six to nine months, and sometimes longer. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products and our manufacturing processes before purchasing our products. While our customers are evaluating our products before they place an order with us, we may incur substantial sales and marketing and research and development expenses, expend significant management efforts, increase manufacturing capacity and order long-lead-time supplies. For example, one of our largest customers required us to perform extensive and lengthy evaluation and testing of a proposed product. After such extensive work, we failed to be designed-in for that product. If we increase capacity and order supplies in anticipation of an order that does not materialize, our gross margins will decline and we will have to carry and write off excess inventory. Even if we receive an order, if we are required to add additional manufacturing capacity in order to service the customer’s requirements, such manufacturing capacity may be underutilized in a subsequent quarter, especially if an order is delayed or cancelled. Either situation could cause our results of operations to be below the expectations of investors or public market analysts, which could, in turn, cause the price of our common stock to decline. Contents

The long sales cycles for sales of our products to customers may cause operating results to vary from quarter to quarter, which could continue to cause volatility in our stock price, and may prevent us from being profitable.

The period of time between our initial contact with certain of our customers and the receipt of an actual purchase order from such customers often spans a time period of six to nine months, or longer. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products and our manufacturing processes before purchasing our products. While our customers are evaluating our products before they place an order with us, we may incur substantial sales and marketing and research and development expenses, expend significant management efforts, increase manufacturing capacity and order long-lead-time supplies. If we increase capacity and order supplies in anticipation of an order that does not materialize, our gross margin will decline, and we will have to carry and write off excess inventory. Even if we receive an order, if we are required to add additional internal manufacturing capacity in order to service the customer’s requirements, such manufacturing capacity may be underutilized in subsequent periods, especially if orders are delayed or cancelled. Either situation could cause our business, results of operations, and financial condition to be below the expectations of public market analysts or investors, which could, in turn, cause the price of our common stock to decline.

If the communications industry does not continue to evolve and grow steadily, our business may not succeed.

Future demand for our products is uncertain and unpredictable, and will depend to a great degree on the speed of the widespread adoption of optical networks. If the transition occurs too slowly or ceases altogether, the market for our products and the growth of our business will be significantly limited.

Our future success depends on the continued growth and success of the telecommunications industry, including the continued growth of the Internet as a widely used medium for commerce and communication and the continuing demand for increased bandwidth over communications networks. If the Internet does not continue to expand as a widespread communication medium and commercial marketplace, the need for significantly increased bandwidth across networks and the market for optical transmission products may not develop. As a result, it would be unlikely that our products would achieve commercial success.

The rate at which telecommunications service providers and other optical network users have built new optical networks or installed new systems in their existing optical networks has fluctuated in the past, and these fluctuations may continue in the future. Sales of our components depend on sales of fiber optic telecommunications systems by our systems-level customers, which are shipped in quantity when telecommunications service providers add capacity. Systems manufacturers compete for sales in each capacity deployment. If systems manufacturers that use our products in their systems do not win a contract, their demand for our products will decline, reducing our future revenues. Similarly, a telecommunications service provider’s delay in selecting systems manufacturers for a deployment could delay our shipments and revenues.

~~III~~IV. Acquisition and Divestiture Risks.

Acquisitions, divestitures and ~~investments~~other significant transactions may adversely affect our business.

We regularly review acquisition, divestiture and ~~investment~~other strategic ~~prospects~~opportunities that would further our business objectives, complement our existing product offerings, augment our market coverage, secure supplies of critical materials or enhance our technological capabilities. ~~Acquisitions~~The anticipated benefits of our acquisitions, divestitures and other strategic transactions may not be realized or ~~investments~~may be realized more slowly than we expected. Acquisitions, divestitures and other strategic opportunities have resulted in, and in the future could result in, a number of financial consequences, including without limitation:

•

potentially dilutive issuances of equity securities;

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•

reduced cash balances and related interest income;

• higher fixed expenses, which require a higher level of revenues to maintain gross ~~margins~~margin;

• the incurrence of debt and contingent liabilities, including indemnification obligations;

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•

restructuring actions, which could result in charges that have a material effect on our results of operations and our financial position;

•

loss of customers, suppliers, distributors, licensors or employees of the acquired company;

•

legal, accounting and advisory fees;

•

amortization expenses related to intangible assets; and

•

one-time write-offs of large amounts.

~~Acquisitions may~~For ~~involve~~example, ~~numerous~~in ~~other~~connection ~~risks~~with our acquisition of the optical components businesses of Alcatel and Corning, we ~~such~~issued asshares ~~integration~~of our common stock to Alcatel and ~~operational~~to ~~risks.~~Corning Inrepresenting ~~addition~~28% and 17%, torespectively, of the ~~extent~~outstanding shares ~~that~~of ~~any~~our ~~potential~~common ~~acquisitions~~stock ~~are~~on ~~not~~a ~~completed~~post-transaction basis. In connection with such acquisitions, we ~~are~~recorded ~~required~~restructuring toliabilities ~~expense~~at ~~the~~July 31, ~~frequently~~2003 ~~significant~~with ~~legal,~~a ~~accounting~~fair value of $64.1 million relating to workforce reductions, ~~consulting~~which ~~and~~were ~~other~~included ~~costs~~in the purchase price of such ~~pursuing~~acquisitions. Following these ~~transactions~~acquisitions, inwe ~~the~~recorded ~~period~~additional insignificant ~~which~~restructuring liabilities that involved the ~~activity~~acquired ~~ceases~~businesses and resulted in, ~~which~~among ~~could~~other ~~adversely~~things, ~~affect~~a significant reduction in the size of our ~~operating~~workforce, ~~results~~consolidation of our facilities and ~~may~~increased ~~not~~reliance beon ~~anticipated~~outsourced, third-party manufacturing.

IVIn fiscal 2007, we sold ninety percent (90%) of the shares of Avanex France, the operator of our semiconductor fabs and associated product lines located in Nozay, France. ~~Operations~~We agreed to indemnify the buyers of Avanex France generally for a period of up to two years in an amount generally not exceeding €5 million for breaches of certain representations, warranties and ~~Research~~covenants relating to the condition of the business prior to and ~~Development~~at ~~Risks~~the time of sale. Should any such liabilities or expenses be of a material amount, our finances could be materially and adversely affected. We may experience a shortfall in revenue, lose existing or potential customers or otherwise experience material adverse effects upon our business, results of operation and financial condition.

WeAdditionally, ~~have~~if aany ~~limited~~potential ~~operating~~acquisitions ~~history~~are not completed, we are required to expense the frequently significant legal, accounting, consulting and other costs of pursuing these transactions in the period in which ~~makes~~the itactivity ~~difficult~~ceases, towhich ~~evaluate~~could adversely affect our operating results and may not be anticipated. For example, in fiscal 2007, we expensed ~~prospects~~approximately $2.1 million in diligence and ~~our~~professional ~~operations~~fees related to a potential acquisition that we decided not to pursue.

~~We are in the optical systems and components industry. We were first incorporated in October 1997. Because of our limited operating history~~Furthermore, ~~we have limited insight into trends that may emerge in~~ our ~~industry~~past ~~and~~acquisition ~~affect our business. The revenue~~ and disposition activity ~~income~~has ~~potential of the optical systems and components industry~~involved, and our ~~business~~future ~~in particular~~acquisition, ~~are~~disposition ~~unproven.~~and ~~As a~~other ~~result~~significant oftransactions may ~~our limited operating history~~involve, wenumerous ~~have~~operational ~~limited financial data that can be used to evaluate our business. Our prospects must be considered in light of the~~ risks, ~~expenses~~including: ~~and challenges we might encounter because we are in a new and rapidly evolving industry.~~

•

difficulties integrating or divesting operations, personnel, technologies, products and the information systems of the acquired or divested companies;

•

diversion of management’s attention from other business concerns;

•

diversion of resources from our existing businesses, products or technologies;

•

risks of entering geographic and business markets in which we have no or limited prior experience; and

•

potential loss of key employees of acquired organizations.

V. Operations and Research and Development Risks.

We face various risks related to our manufacturing operations that may adversely affect our business.

We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our third party manufacturers, and, as a result, product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our business~~. Furthermore~~, ~~even~~results ~~if we are able to timely deliver products to our customers~~of operations, ~~we may~~and befinancial ~~unable to recognize revenue because of our revenue recognition policies~~condition. In the past, we have experienced disruptions in the manufacture of some of our products due to changes in our manufacturing processes, which resulted in reduced manufacturing yields, delays in the shipment of our products and deferral of revenue recognition. Any disruptions in the future could adversely affect our revenues, gross ~~margins~~margin, and results of operations. Changes in our manufacturing processes or those of our third party manufacturers, or the inadvertent use of defective materials by our third party manufacturers or us, could significantly reduce our manufacturing yields and product reliability. Lower than expected manufacturing yields could delay product shipments and further impair our gross margins. These operational issues included capacity constraints at our contract manufacturers, raw materials shortages, logistics issues and manufacturing yield issues for some of our new ~~products.~~

We37 ~~may need to develop new manufacturing processes and techniques that will involve higher levels~~ of ~~automation~~45 to improve our gross margins and achieve the targeted cost levels of our customers. If we fail to effectively manage this process or if we experience delays, disruptions or quality control problems in our manufacturing operations, our shipments of products to our customers could be delayed.

We face risks related to our concentration of research and development efforts on a limited number of key industry standards and technologies, and our future success depends on our ability to develop and successfully introduce new and enhanced products that meet the needs of our customers in a timely manner.

In the past, we have concentrated our research and development efforts on a limited number of technologies that we believed had the best growth prospects. If we are unable to develop commercially viable products using these technologies, or these technologies do not become generally accepted, our business will likely suffer.

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inadvertent use of defective materials by our third party manufacturers or us, could significantly reduce our manufacturing yields and product reliability. Lower than expected manufacturing yields could delay product shipments and further impair our gross margin. These operational issues have included capacity constraints at our contract manufacturers, raw materials shortages, logistics issues, and manufacturing yield issues for some of our new products.

We may need to develop new manufacturing processes and techniques that will involve higher levels of automation, or may need to further relocate certain manufacturing operations to lower cost regions to improve our gross margin and achieve the targeted cost levels of our customers. If we fail to manage this process effectively, or if we experience delays, disruptions or quality control problems in our manufacturing operations, our shipments of products to our customers could be delayed.

We face risks related to our concentration of research and development efforts on a limited number of key industry standards and technologies, and our future success depends on our ability to develop and introduce new and enhanced products successfully that meet the needs of our customers in a timely manner.

The markets for our products are characterized by rapid technological change, frequent new product introduction, changes in customer requirements, and evolving industry standards. Our future performance will depend upon the successful development, introduction and market acceptance of new and enhanced products that address these changes. We may not be able to develop the underlying core technologies necessary to create new or enhanced products, or to license or otherwise acquire these technologies from third parties. Product development delays may result from numerous factors, including:

•

changing product specifications and customer requirements;

•

difficulties in hiring and retaining necessary technical personnel;

•

difficulties in reallocating engineering resources and overcoming resource limitations;

•

changing market or competitive product requirements;

•

unanticipated engineering complexities, and

•

failure to compete with new product releases by our competitors.

Our industry has increased its focus on products that transmit voice, video and data traffic over shorter distances and that are offered at lower cost than the products that we offer to our telecommunications customers for transmission of information over longer distances. If we are unable to develop products that meet the requirements of potential customers of these products, our business, ~~will~~results of operations, and financial condition could suffer.

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 assure that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, or on a timely basis. In addition, the introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. To the extent customers defer or cancel orders for existing products due to the expectation of a new product release, or if there is any delay in the development or introduction of our new products or the enhancements of our products, our ~~operating~~business, results of operations, and financial condition would suffer. Further, we cannot assure that our new products will gain market acceptance or that we will be able to respond effectively to competitive products, technological changes or emerging industry standards. Any failure to respond effectively to competitive products, technological change or emerging industry standards would significantly harm our business, results of operations and financial condition.

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If we are unable to forecast component and material requirements accurately or if we are unable to commit to deliver sufficient quantities of our products to satisfy customers’ needs, our results of operations will be adversely affected.

Our customers typically require us to commit to delivering certain quantities of our products to them (in guaranteed safety stock, guaranteed capacity or otherwise) without committing themselves to purchase such products, or any quantity of such products. Therefore, wide variations between estimates of our customers’ needs and their actual purchases may result in:

•

a surplus and potential obsolescence of inventory, materials and capacity, if estimates of our customers’ requirements are greater than our customers’ actual need; or

•

a lack of sufficient products to satisfy our customers’ needs, if estimates of our customers’ requirements are less than our customers’ actual needs.

We use a rolling ~~three-month to~~ twelve-month demand forecast based on anticipated and historical product orders to determine our ~~component~~ component and material requirements. ~~In addition, due to increased outsourcing, our procurement lead times have lengthened, which can result in higher inventory levels and greater risk of excess and obsolete inventory.~~ It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. It is very difficult to develop accurate forecasts of product demand, especially given the current uncertain conditions in the telecommunications industry. Order cancellations and lower order volumes by our customers have in the past created excess inventories. For example, ~~the~~ inventory write-offs ~~taken in the years ended, June 30, 2006, June 30, 2005, and~~are ~~June 30, 2004, were~~ primarily the result of our inability to anticipate decreases in demand for certain of our products and variations in product mix ordered by our customers. For the three months ended December 31, 2008 and ~~six~~2007, ~~months~~the combined cost of write-offs was $2.3 million and $1.8 million, respectively, for excess and obsolete inventory and losses from purchases commitments. For the fiscal years ended ~~December~~June 3130, ~~2006~~2008 and June 30, 2007, we recorded write-~~downs~~offs of $3.4.7 million and $612.9 million, respectively, for excess and obsolete inventory. If we fail to accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials in the future, we could incur additional excess and obsolete inventory write-downs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively affect our business, results of operations, and financial condition.

34Network carriers and telecommunication system integrators historically have required that suppliers commit to provide specified quantities of 41products over a given period of time. If we are unable to commit to deliver sufficient quantities of our products to satisfy a customer’s anticipated needs, we may lose the opportunity to make significant sales to that customer over a lengthy period of time. In addition, we may be unable to pursue large orders if we do not have sufficient manufacturing capacity to enable us to provide customers with specified quantities of products. We rely heavily upon the capacity and willingness of third party contract manufacturers and materials suppliers to enable us to fulfill our commitments to our customers, but we generally do not have the benefit of long term or other supply or services contracts with our third party contract manufacturers and materials suppliers, who are generally not obligated to adhere to our production schedule. If we cannot deliver sufficient quantities of our products, we may lose business, which could adversely impact our business, results of operations and financial condition.

If our customers do not qualify our manufacturing processes, they may not purchase our products and our operating results could suffer.

Certain of our customers will not purchase our products prior to qualification of our manufacturing processes and approval of our quality assurance system. The qualification process determines whether the manufacturing line meets the quality, performance, and reliability standards of our customers. These customers may also require that we, and any manufacturer that we may use, be registered under international quality standards, such as ISO 9001. Our United States, Europe and Asia sites are currently TL-9000 certified. Delays in obtaining customer qualification of our manufacturing processes or approval of our quality assurance system may cause a product to be removed from a long-term supply program and result in significant lost revenue opportunity over the term of that program.

We depend upon a limited number of contract manufacturers and materials suppliers to manufacture and provide a majority of our products, and our dependence on these manufacturers and suppliers may result in product delivery delays, may harm our operations or have an adverse effect upon our business.

We rely on a limited number of outsourced manufacturers and suppliers to manufacture and provide a substantial majority of our components, subassemblies, and finished products. In particular, one contract manufacturer, Fabrinet, currently manufactures products for sale, which constitutes a significant majority of our net revenue. We intend to develop further our relationships with Fabrinet and with other manufacturers so that they will eventually manufacture many of our high volume key components and subassemblies in the future. The qualification of these independent manufacturers and materials suppliers under quality assurance standards is an expensive and time-consuming process. Our independent

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~~inventory.~~manufacturers Ifhave wea ~~fail~~limited tohistory ~~accurately~~of ~~predict~~manufacturing ~~both~~optical ~~the~~subcomponents. ~~demand~~Any ~~for~~interruption ~~our~~in ~~products~~the ~~and~~operations ~~the~~of ~~lead~~these ~~times~~manufacturers, ~~required~~or toany ~~obtain~~deficiency in the ~~necessary~~quality ~~components~~or ~~and~~quantity ~~materials~~of in the ~~future,~~subcomponents weor products built for us by these manufacturers, could ~~incur~~impede ~~additional~~our ~~excess~~ability ~~and~~to ~~obsolete~~meet ~~inventory~~our ~~write-offs.~~scheduled Ifproduct wedeliveries ~~underestimate~~to our ~~component~~customers. ~~and~~Operational ~~material~~issues ~~requirements~~could result, wesuch ~~may~~as ~~have~~capacity ~~inadequate~~constraints ~~inventory~~at our contract manufacturers, ~~which~~raw ~~could~~materials ~~interrupt~~shortages, ~~our~~logistics ~~manufacturing~~issues, and ~~delay~~manufacturing ~~delivery~~yield ofissues ~~our~~for ~~products to~~some of our ~~customers~~new products. ~~Any~~As ofa ~~these~~result, ~~occurrences~~we ~~would~~may ~~negatively~~lose ~~affect~~existing ~~our~~or ~~results~~potential ~~of operations~~customers.

~~Network~~We ~~carriers~~have ~~and~~limited ~~telecommunication~~experience ~~system~~in ~~integrators historically~~working ~~have~~with ~~required~~outsourced ~~that~~manufacturers and suppliers. ~~commit~~As toa ~~provide~~result, ~~specified~~we ~~quantities~~may ofnot ~~products~~be ~~over~~able ato ~~given~~manage ~~period~~our ofrelationships ~~time~~with them effectively. If we ~~are~~cannot ~~unable~~manage ~~to commit to deliver sufficient quantities of~~ our ~~products~~manufacturing toand ~~satisfy~~supplier arelationships ~~customer’s~~effectively, ~~anticipated~~or ~~needs,~~if ~~we may~~these ~~lose~~manufacturers ~~the~~and ~~opportunity~~suppliers fail to ~~make~~deliver ~~significant~~components ~~sales~~in toa ~~that~~timely ~~customer~~manner, ~~over~~we acould ~~lengthy~~experience ~~period~~significant ofdelays ~~time.~~in Inproduct ~~addition~~deliveries, wewhich may have bean ~~unable~~adverse toeffect ~~pursue~~on ~~large~~our ~~orders~~business ifand weresults doof ~~not~~operations. ~~have~~Increased ~~sufficient~~reliance on outsourced manufacturing ~~capacity~~and tosuppliers, ~~enable~~and usthe toultimate ~~provide~~disposition ~~customers~~of ~~with specified~~our ~~quantities~~manufacturing ofcapacity ~~products.~~in Ifthe wefuture, ~~cannot~~may ~~deliver~~result ~~sufficient~~in ~~quantities~~impairment ofexpense relating to our ~~products,~~long-lived weassets ~~may~~in ~~lose~~future ~~business~~periods, which ~~could~~would ~~adversely~~have an adverse impact on our business, financial condition, and results of operations.

IfOur products ~~our~~may ~~customers~~have dodefects ~~not~~that ~~qualify~~might ~~our~~not ~~manufacturing~~be ~~processes~~detected ~~they~~until ~~may~~full ~~not~~deployment ~~purchase~~of ~~our~~a ~~products~~customer’s network, which could result in a loss of customers and ~~our~~revenue ~~operating~~and ~~results~~in ~~could~~damage ~~suffer~~to our reputation.

Certain of our customers will not purchase our products prior to qualification of our manufacturing processes and approval of our quality assurance system. The qualification process determines whether the manufacturing line meets the quality, performance and reliability standards of our customers. These customers may also require that we, and any manufacturer that we may use, be registered under international quality standards, such as ISO 9001. In August 2000, we successfully passed the ISO 9001 registration audit and received formal registration of our quality assurance system at our Fremont California facility, and we have passed subsequent reviews as well. In addition, in fiscal year 2006 our Bangkok, Shanghai, Nozay, San Donato and New York sites obtained TL-9000 certification. Delays in obtaining customer qualification of our manufacturing processes or approval of our quality assurance system may cause a product to be removed from a long-term supply program and result in significant lost revenue opportunity over the term of that program.

We depend upon a limited number of contract manufacturers to manufacture a majority of our products, and our dependence on these manufacturers may result in product delivery delays, may harm our operations or have an adverse effect upon our business.

We rely on a limited number of outsourced manufacturers to manufacture a substantial majority of our components, subassemblies and finished products. In particular, one contract manufacturer, Fabrinet, currently manufactures products the sale of which constitutes a significant majority of our net revenue. We intend to develop further our relationships with these manufacturers so that they will eventually manufacture many of our high volume key components and subassemblies, and possibly a substantial portion of our finished products, in the future. The qualification of these independent manufacturers under quality assurance standards is an expensive and time-consuming process. Our independent manufacturers have a limited history of manufacturing optical subcomponents, and have no history of manufacturing our products on a turnkey basis. Any interruption in the operations of these manufacturers, or any deficiency in the quality or quantity of the subcomponents or products built for us by these manufacturers, could impede our ability to meet our scheduled product deliveries to our customers. Operational issues could result such as capacity constraints at our contract manufacturers, raw materials shortages, logistics issues and manufacturing yield issues for some of our new products. As a result, we may lose existing or potential customers.

We have limited experience in working with outsourced manufacturers, and do not have contracts in place with many of these manufacturers. As a result, we may not be able to effectively manage our relationships with these manufacturers. If we cannot effectively manage our manufacturing relationships, or if these manufacturers fail to deliver components in a timely manner, we could experience significant delays in product deliveries, which may have an adverse effect on our business and results of operations. Increased reliance on outsourced manufacturing, and the ultimate disposition of our manufacturing capacity in the future, may result in impairment expense relating to our long-lived assets in future periods, which would have an adverse impact on our business, financial condition and results of operations. In addition, for a period of time as we transfer production of certain products to these third party manufacturers and as our customers qualify such third party manufacturers, we incur fixed and variable costs at both locations.

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Our products may have defects that are not detected until full deployment of a customer’s network, which could result in a loss of customers and revenue and damage to our reputation.

Our products are designed to be deployed in large and complex optical networks and must be compatible with existing and future components of such networks. Our products can only be fully tested for reliability when deployed in networks for long periods of time. Our products may not operate as expected, and our customers may discover errors, defects, or incompatibilities in our products only after they have been fully deployed and are operating under peak stress conditions. If we are unable to fix errors or other problems, we could experience:

•

loss of customers or customer orders;

•

loss of or delay in revenues;

•

loss of market share;

•

loss or damage to our brand and reputation;

•

inability to attract new customers or achieve market acceptance;

•

diversion of development resources;

•

increased service and warranty costs;

•

legal actions by our customers; and

•

increased insurance costs.

We may be required to indemnify our customers against certain liabilities arising from defects in our products, which liabilities may also include the following costs and expenses:

• costs and expenses incurred by our customers or their customers to fix the problems; orand

•

costs and expenses incurred by our customers or their customers to replace our products, or their products which incorporate our products, with other product solutions.

While we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted. To date, product defects have not had a material negative effect on our business, ~~financial condition or~~ results of operations, or financial condition; however, we cannot beassure ~~certain~~ that they will not have a material negative effect on us in the future.

We depend on key personnel to manage our business effectively, and if we are unable to hire, retain, or motivate qualified personnel, our ability to sell our products could be harmed.

Our future success depends, in part, on certain key employees and on our ability to attract and retain highly skilled personnel. ~~We recently hired a new Senior Vice President and Chief Financial Officer and a new Senior Vice President of Manufacturing and Operations.~~ In addition, wethere ~~recently~~have ~~made~~been ~~other significant~~ changes in our executive management ~~teams~~team, and there can be no assurance that these changes will be successful. The loss of the services of any of our key personnel, the inability to attract or retain ~~qualified personnel, or delays in hiring required personnel, particularly engineering,~~ sales or marketing personnel, may seriously harm our business, financial condition and results of operations. None of our officers or key employees has an employment agreement for a specific term, and these employees may terminate their employment at any time. For example, several of our executive officers left Avanex since the beginning of fiscal 2005, including three chief financial officers, our vice president of sales and our chief operating officer. We do not have key person life insurance policies covering any of our employees. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs.

In40 ~~addition, we implemented restructuring programs designed to attempt to improve our financial performance. Among other things, we moved substantially all~~ of ~~our manufacturing~~45 operations to lower cost locations. As a result, our headcount in the United States and Europe has been substantially reduced and may be reduced further in the future. To date, such actions have not resulted in substantial work stoppages. Decreases in labor productivity, however, whether formalized by a work stoppage, or strike, or decreased productivity due to morale issues could have an adverse effect on our business and operating results.

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qualified personnel, or delays in hiring required personnel, particularly engineering, sales or marketing personnel, may seriously harm our business, results of operations, and financial condition. For example, Dr. Jo Major, our former President and Chief Executive Officer, Marla Sanchez, our former Chief Financial Officer, and Pat Edsell, our former General Manager, recently left the Company. None of our officers or key employees has an employment agreement for a specific term, and these employees may terminate their employment at any time. We do not have key person life insurance policies covering any of our employees. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay area. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs.

In addition, we have implemented restructuring programs designed to attempt to improve our financial performance. Among other things, we have moved substantially all of our manufacturing operations to lower cost locations. As a result, our headcount in North America and Europe has been substantially reduced and may be reduced further in the future. To date, such actions have not resulted in substantial work stoppages. Decreases in labor productivity, however, whether formalized by a work stoppage or a strike, or by decreased productivity due to morale issues could have an adverse effect on our business and operating results.

We face various risks that could prevent us from successfully manufacturing, marketing and distributing our products internationally.

AsWe ahave ~~result~~expanded ~~of the opening of~~ our international operations ~~center~~ in Thailand and ~~our research and development office in Shanghai~~China, ~~we expanded our international operations,~~ including the expansion of overseas product manufacturing, and we may continue to expand internationally in the future. Further, we have increased international sales and intend to further increase our international sales and the number of our international customers. We have also initiated significant restructuring programs overseas, and may initiate additional restructuring programs overseas in the future. Our international operations have required and will continue to require significant management attention and financial resources. For instance, we have incurred, and may continue to incur, startup costs to open our operations center in Thailand and our research and development office in Shanghai, and may incur costs in transferring operations to Thailand. We ~~may not be able to maintain international demand for our products. We~~ currently have limited experience in manufacturing, marketing and distributing our products internationally, particularly from our new operations center in Thailand. In addition, international operations are subject to inherent risks, including, without limitation, the following:

•

greater difficulty in accounts receivable collection and longer collection periods;

•

difficulties inherent in managing operations and employees in remote foreign operations;

• difficulties and costs of staffing and managing foreign operations with personnel who have expertise in optics;

•

import or export licensing and product certification requirements;

•

tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries;

•

potential adverse tax consequences;

•

seasonal reductions in business activity in some parts of the world;

•

burdens of complying with a wide variety of foreign laws and regulations, particularly with respect to taxes, intellectual property, license requirements, employment matters and environmental requirements;

•

the impact of recessions in economies outside of the United States;

•

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

•

political and economic instability, terrorism and war.

~~Historically~~Some of our ~~international~~ ~~revenues~~suppliers and ~~expenses~~contract ~~have~~manufacturers, ~~been~~including ~~denominated~~Fabrinet, ~~predominantly~~also inhave ~~U.S.~~international ~~dollars;~~operations ~~however,~~and asare asubject ~~result~~to of the ~~acquisitions~~risks ofdescribed ~~the~~above. ~~optical~~Even ~~components~~if ~~businesses~~we ofare ~~Alcatel~~able ~~Lucent~~to ~~and~~manage ~~Corning,~~the arisks ~~portion~~ of ~~our~~ international ~~revenues and~~ ~~expenses~~operations ~~are now denominated in foreign currencies. Therefore~~successfully, ~~fluctuations~~our inbusiness ~~the~~may ~~value~~be ofmaterially ~~foreign~~adversely ~~currencies~~affected ~~could~~if ~~have a negative impact on the profitability of~~ our ~~global~~suppliers ~~operations,~~or ~~which~~contract ~~would~~manufacturers ~~seriously~~are ~~harm~~not ~~our~~able ~~business,~~to ~~financial~~manage ~~condition and~~these ~~results~~risks ~~of operations~~successfully.

V.41 ~~Intellectual~~of ~~Property~~45 ~~and Litigation Risks.~~

Current and future litigation against us could be costly and time consuming to defend.

We are regularly subject to legal proceedings and claims that arise in the ordinary course of business. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, financial condition, results of operations and cash flows.

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A portion of our international revenues and expenses are now denominated in foreign currencies. It has not been our recent practice to engage in the hedging of foreign currency transactions to mitigate foreign currency risk. Therefore, fluctuations in the value of foreign currencies could have a negative impact on the profitability of our global operations, which would seriously harm our business, results of operations, and financial condition.

VI. Intellectual Property and Litigation Risks.

Current and future litigation against us could be costly and time consuming to defend.

We are subject to legal proceedings and claims that arise in the ordinary course of business. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.

We may be unable to protect our proprietary technology, which could significantly impair our ability to compete.

We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality agreements and other contractual restrictions on disclosure to protect our intellectual property rights. We also rely on confidentiality agreements with our employees, consultants and corporate partners, and controlled access to and distribution of our technology, documentation and other confidential information. We have numerous patents issued or applied for in the United States and abroad, of which some may be jointly filed or owned with other parties. Further, we license certain intellectual property from third parties, including ~~Alcatel~~ Alcatel-Lucent and Corning, that is critical to our business, and we also license intellectual property to other parties. We cannot assure ~~you~~ that any patent applications or issued patents will protect our proprietary technology effectively, or that any patent applications or patents issued will not be challenged by third parties. Further, we cannot assure ~~you~~ that parties from whom we license intellectual property will not violate their agreements with us; that they will not license their intellectual property to third parties; that their patent applications, patents and other intellectual property will protect our technology, products and business; or that their patent applications, patents, and other intellectual property will not be challenged by third parties. For example, Alcatel-Lucent has cross licenses with various third parties, which, when combined with their own intellectual property, may permit these third parties to compete with us. Our intellectual property also consists of trade secrets, requiring more monitoring and control mechanisms to protect. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we take will prevent misappropriation or unauthorized use of our technology. Further, other parties may independently develop similar or competing technology or design around any patents that may be issued or licensed to us.

We use various methods to attempt to protect our intellectual property rights. However, we cannot be certain that ~~the~~these ~~steps~~methods ~~we have taken~~ will prevent the misappropriation of our intellectual property. In particular, the laws in foreign countries may not protect our proprietary rights as fully as the laws in the United States.

We face risks with regard to ~~our~~ third-party intellectual property licenses.

From time to time we may be required to license technology or intellectual property from third parties for our product offerings or to develop new products or product enhancements. We cannot assure ~~you~~ that third-party licenses will be available to us on commercially reasonable terms, if at all. The inability to obtain a necessary third-party license required for our product offerings or to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards, or of greater cost, either of which could prevent us from operating our business. ~~For~~If ~~example, Alcatel Lucent currently holds patent cross licenses with various third parties that may be necessary for us to operate our business. We cannot guarantee that~~ we ~~will~~are beunable ~~able~~ to obtain ~~these patent~~ licenses from ~~these~~ third parties, orif ~~that~~and weas ~~will be able to obtain these licenses on favorable terms. If we are not able to obtain licenses from these third parties~~necessary, then we may also be subject to litigation to defend against infringement claims from these third parties. ~~Further, Alcatel Lucent has cross licenses with various third parties, which when combined with their own intellectual property, may permit these thirds parties to compete with us.~~

We may become subject to litigation or claims from or against third parties regarding intellectual property rights, which could divert resources, cause us to incur significant costs, and restrict our ability to utilize certain technology.

We may become a party to litigation in the future to protect our intellectual property or we may be subject to litigation to defend against infringement claims of others. These claims and any resulting ~~lawsuit~~lawsuits, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:

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

•42 ~~obtain from the owner~~ of ~~the~~45 ~~infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;~~

• redesign the products that use the technology; or

• indemnify certain customers against intellectual property claims asserted against them.

If we are forced to take any of these actions, our business may be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel.

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

•

redesign the products that use the technology; or

•

indemnify certain customers and others against intellectual property claims asserted against them.

If we are forced to take any of these actions, our business may be seriously harmed.

We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of competitors, or we may be required to grant certain third parties permission to enforce our intellectual property on our behalf. These claims could result in us being joined as a party to a lawsuit, counterclaims against us or our customers, invalidation or narrow interpretations of our proprietary rights, costly litigation, and the diversion of our technical and management personnel’s time and attention. Although we carry general liability insurance, our insurance may not cover potential claims of the above types or may not be adequate to indemnify us for all liability that may be imposed.

VII. Other Risks.

Our business and future operating results may be adversely affected by events that are outside of our control.

Our business and operating results are vulnerable to interruption by events outside of our control, such as earthquakes, fire, power loss, telecommunications failures and uncertainties arising out of terrorist attacks throughout the world, including the continuation or potential worsening of the current global economic environment, the economic consequences of ~~additional~~ military action and the associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce. We cannot beassure ~~certain~~ that the insurance we maintain against fires, floods and general business interruptions will be adequate to cover our losses for such events in any particular case.

In addition, we handle hazardous materials as part of our manufacturing activities and are subject to a variety of governmental laws and regulations related to the use, storage, recycling, labeling, reporting, treatment, transportation, handling, discharge and disposal of such hazardous materials. Although we believe that our operations conform to presently applicable environmental laws and regulations, we may incur costs in order to comply with current or future environmental laws and regulations, including costs associated with permitting, investigation and remediation of hazardous materials, and installation of capital equipment relating to pollution abatement, production modification and/or hazardous materials management. In addition, we currently sell products that incorporate firmware and electronic components. The additional level of complexity created by combining firmware and electronic components with our optical components requires that we comply with additional regulations, both domestically and abroad, related to power consumption, electrical emissions and homologation. Any failure to ~~successfully~~ obtain the necessary permits or comply with the necessary laws and regulations successfully could have a material adverse effect on our operations.

Certain provisions of our certificate of incorporation and bylaws and Delaware law, ~~as well as our 8% senior secured convertible notes,~~ could delay or prevent a change of control of us.

Certain provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions allow us to issue preferred stock with rights senior to those of our common stock and impose various procedural and other requirements that could make it more difficult for our stockholders to effect certain corporate actions.

In addition, Alcatel Lucent owned shares of Avanex common stock representing 14% of the outstanding shares of Avanex common stock as of January 31, 2007. Pursuant to the stockholders’ agreement entered into by Avanex and Alcatel Lucent, Alcatel Lucent is generally required to vote on all matters as recommended by the board of directors of Avanex, except for proposals relating to certain acquisition transactions between Avanex and certain competitors of Alcatel Lucent. The concentration of ownership of our shares of common stock, combined with the voting requirements contained in the stockholders’ agreement, could have the effect of delaying or preventing a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, unless the transaction is approved by our board of directors.

Finally, certain provisions of our 8% senior secured convertible notes may discourage, delay or prevent a merger or acquisition because, upon a change of control (as defined in the notes), the holders of the notes will have certain redemption rights.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

3943 of 4145

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The ~~annual~~Annual ~~meeting~~Meeting of ~~stockholders~~our Stockholders was held on November 3 13, ~~2006~~2008. All matters voted on were approved. The results are as follows:

PROPOSAL I

The following individuals were elected to the Board of Directors to serve a three-year term as Class I III directors:

	For	~~Authority Withheld~~AuthorityWithheld
Greg Dougherty	174,831,847	6,312,411
Joel A. Smith	10,868,291	2,594,582
Jo S. Major, Jr.	177,584,232	3,560,026
Susan Wang	11,497,115	1,965,758

In addition, the terms of office of the following directors continued after the meeting: Vinton Cerf, ~~Joel~~Greg ~~A. Smith III~~Dougherty, Paul Smith and ~~Susan~~Dennis ~~Wang~~Wolf.

PROPOSAL II

The proposal to ~~approve~~ratify the ~~elimination~~appointment of ~~the~~Deloitte & ~~floor~~Touche ~~price~~LLP ~~limitations~~as ~~from~~Avanex’s ~~the~~independent ~~anti-dilution~~registered ~~provisions~~public ofaccounting ~~certain~~firm ~~warrants~~for tothe ~~purchase~~fiscal ~~common~~year ~~stock~~ending June 30, 2009:

For	Against	Abstained	Non Votes
64,128,910	11,992,716	499,158	104,523,474
13,175,279	244,150	43,444	0

PROPOSAL III

The proposal to amend the Certificate of Incorporation to increase the number of authorized shares of common stock from 300 million to 450 million:

For		Against		Abstained		Non Votes
165,058,414		15,655,138		430,706		0

PROPOSAL IV

The proposal to approve an amendment to Avanex’s 1999 Director Option Plan to increase the number of shares of common stock underlying the initial option grant for new non-employee directors from 40,000 to 80,000 and to provide for an automatic annual grant of 10,000 restricted stock units to non-employee directors:

For		Against		Abstained		Non Votes
62,422,372		13,822,541		375,871		104,523,474

PROPOSAL V

The proposal to ratify the appointment of Deloitte & Touche LLP as Avanex’s independent registered public accounting firm for the fiscal year ending June 30, 2007:

For		Against		Abstained		Non Votes
179,058,082		1,414,747		671,429		0

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ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

10.1		Offer of Employment between Marla Sanchez and the Registrant, effective October 27, 2006.
Exhibit No.		Description
10.2		1999 Director Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 9, 2006).
2.1		Agreement and Plan of Merger and Reorganization, dated January 27, 2009, by and among Bookham, Inc., Ultraviolet Acquisition Sub, Inc. and Avanex Corporation (which is incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on January 28, 2009).
10.3		Form of Restricted Stock Unit Agreement Under 1999 Director Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 15, 2006).
4.1		Fifth Amendment to the Preferred Stock Rights Agreement, dated as of January 27, 2009 between Avanex Corporation and Computershare Trust Company, N.A., formerly known as EquiServe Trust Company, N.A. (which is incorporated herein by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on January 28, 2009).
10.4		Amendment of Warrants (incorporated by reference to Item 1.01 to the Registrant’s Current Report on Form 8-K filed November 9, 2006).
10.1		Form of Change in Control Agreement (which is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on November 25, 2008).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4144 of 4145

SIGNATURES

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

AVANEX CORPORATION (Registrant)
AVANEX CORPORATION(Registrant)
By:		/s/ ~~MARLA~~MARK ~~SANCHEZ~~WEINSWIG
		Marla Sanchez Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
		Mark Weinswig
Date:		February 6, 2007
		Vice President, Finance and Treasurer and Interim Chief Financial Officer
By:		/s/ A.A. RILEY
		(Duly Authorized Officer and Principal Financial Officer)
		A.A. Riley Vice President Finance (Principal Accounting Officer)
Date:		February 6, 2009
Date:		February 6, 2007

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Filing Compare · AVANEX CORP