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Reasons for the Increase in Authorized Shares

The Bookham board of directors has unanimously approved a proposal to amend its restated certificate of incorporation to increase the authorized shares of common stock of Bookham to 450,000,000 shares, subject to stockholder approval. Bookham’s board has declared this amendment to be advisable and recommended that this proposal be presented to Bookham stockholders for approval. The text of the form of proposed amendment to Bookham’s restated certificate of incorporation to increase the authorized shares of common stock of Bookham to 450,000,000 shares, is attached to this joint proxy statement/prospectus as Annex F.

If the Bookham stockholders approve this Proposal No. 2 and the Bookham Proposal No. 1 to approve the issuance of Bookham common stock in the merger, Bookham expects to file a certificate of amendment to the Bookham restated certificate of incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of common stock immediately prior to the proposed merger. Upon filing the certificate of amendment to Bookham’s restated certificate of incorporation to increase the number of authorized shares of common stock from 175,000,000 to 450,000,000, the first sentence of Article FOURTH of Bookham’s restated certificate of incorporation will be as follows (on a pre-reverse stock split basis):

“FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 455,000,000, consisting of (i) 450,000,000 shares of Common Stock, $0.01 par value per share (“Common Stock”), and (ii) 5,000,000 shares of Preferred Stock, $0.01 par value per share (“Preferred Stock”).”

On March 18, 2009, the record date for the Bookham special meeting, Bookham had an aggregate of 100,959,545 shares outstanding, approximately 19,355,179 shares of Bookham common stock were issuable pursuant to outstanding warrants, stock options and restricted stock units and 7,303,957 shares of Bookham common stock were reserved for future issuance pursuant to Bookham’s equity incentive plans.

The primary reason for this increase in the authorized shares is to effect the merger with Avanex. If Bookham’s stockholders do not approve Bookham Proposal No. 1 to approve the issuance of shares of Bookham common stock in the merger, then the Bookham board of directors will, notwithstanding stockholder approval of this proposed amendment, abandon this proposed amendment.

The primary reason for the increase in authorized shares is to effect the merger. At present, Bookham does not have sufficient authorized shares of its common stock in order to effect the merger and to issue the Bookham common stock in the merger pursuant to the merger agreement. Additionally, approval of an increase in authorized shares of Bookham common stock is a closing condition to the obligations of the parties to consummate the merger pursuant to the merger agreement. If Bookham Proposal No. 2 is not approved by the Bookham stockholders, and the closing condition to the merger agreement is not waived, Bookham will be unable to complete the merger.

Although at present, apart from the shares to be issued pursuant to the merger and pursuant to its equity incentive plans and outstanding warrants, Bookham has no commitments or agreements to issue additional shares of common stock, it desires to have additional shares available to provide additional flexibility to use its capital stock for business and financial purposes in the future. In this regard, in connection with Bookham’s evaluation of its strategic and financing alternatives, Bookham may determine to issue additional shares of its common stock at any time following the completion of the merger. In addition, the additional shares may be used for various purposes without further stockholder approval, except as may be required by applicable law, regulations promulgated by government agencies, the rules of the NASDAQ Global Market or other market or exchange on which Bookham common stock is then listed. These purposes may include, among others:


	•	raising capital;

	•	providing equity incentives to employees, officers or directors;

	•	establishing strategic relationships with other companies; and

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	•	expanding the business or product lines of the combined company through the acquisition of other businesses or products.

The terms of additional shares of common stock will be identical to those of the currently outstanding shares of Bookham common stock. However, because holders of Bookham common stock have no preemptive rights to purchase or subscribe for any unissued stock of Bookham, the issuance of any additional shares of common stock authorized as a result of the increase in the number of authorized shares of common stock will substantially reduce the current stockholders’ percentage of ownership interest in the total outstanding shares of common stock.

Effects of the Increase in Authorized Shares

The proposed increase in the authorized number of shares of common stock could have a number of effects on the stockholders of Bookham depending upon the exact nature and circumstances of any actual issuances of authorized but unissued shares. The increase could have an anti-takeover effect, in that additional shares could be issued (within the limits imposed by applicable law) in one or more transactions that could make a change in control or takeover of Bookham difficult. For example, additional shares could be issued by Bookham so as to dilute the stock ownership or voting rights of persons seeking to obtain control of Bookham. Similarly, the issuance of additional shares to certain persons allied with Bookham’s management could have the effect of making it more difficult to remove Bookham’s management by diluting the stock ownership or voting rights of persons seeking to cause such removal.

The proposed amendment to Bookham’s restated certificate of incorporation to increase the number of authorized shares of common stock from 175,000,000 shares to 450,000,000 shares will be effective upon the filing of the certificate of amendment with the Secretary of State of the State of Delaware. Notwithstanding stockholder approval of this proposed amendment, Bookham’s board of directors may abandon the proposed amendment without any further action by Bookham stockholders at any time prior to its effectiveness, and will abandon the proposed amendment if Bookham’s stockholders do not approve Proposal No. 1 to approve the issuance of shares pursuant to the merger. Bookham expects to file such proposed amendment immediately prior to the proposed merger if Bookham’s stockholders approve Bookham Proposal No. 1 and this Proposal No. 2. As previously noted, the proposed amendment to Bookham’s restated certificate of incorporation to increase the number of authorized shares of common stock is a condition to the consummation of the merger.

The share amounts referenced in this Bookham Proposal No. 2, including the proposed increase to 450,000,000 authorized shares, does not give effect to the proposed reverse stock split discussed in the section entitled “Bookham Proposal No. 3 — Amendments to Bookham’s Restated Certificate of Incorporation to Effect a Reverse Stock Split and to Reduce the Number of Authorized Shares of Bookham Common Stock and Preferred Stock.” For more information on the effect of the proposed reverse stock split on Bookham’s authorized shares, please see “Bookham Proposal No. 3 — Amendments to Bookham’s Restated Certificate of Incorporation to Effect a Reverse Stock Split and to Reduce the Number of Authorized Shares of Bookham Common Stock and Preferred Stock — Effects of the Reverse Stock Split.”

Vote Required; Recommendation of Bookham Board of Directors

The affirmative vote of the holders of a majority of the voting power of Bookham common stock outstanding on the record date for the Bookham special meeting is required to approve the proposal to amend Bookham’s restated certificate of incorporation to increase the authorized shares of common stock of Bookham to 450,000,000 shares.

A failure to submit a proxy card or vote at the special meeting, or an abstention, vote withheld or “broker non-vote” will have the same effect as a vote against Bookham Proposal No. 2.

BOOKHAM’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT BOOKHAM STOCKHOLDERS VOTE “FOR” BOOKHAM PROPOSAL NO. 2 TO APPROVE AN AMENDMENT TO BOOKHAM’S RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF BOOKHAM COMMON STOCK TO 450,000,000 SHARES.

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BOOKHAM PROPOSAL NO. 3 — AMENDMENTS TO BOOKHAM’S RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLIT AND TO REDUCE THE NUMBER OF
AUTHORIZED SHARES OF BOOKHAM COMMON STOCK AND PREFERRED STOCK

Reasons for the Reverse Stock Split

The Bookham board of directors has unanimously approved a series of amendments to its restated certificate of incorporation to effect a reverse stock split of all issued and outstanding shares of its common stock at a reverse stock split ratio ranging from one-for-five to one-for-thirty and to effect a corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock in connection with the reverse stock split. The Bookham board of directors has declared such proposed amendments to be advisable and has recommended that these proposed amendments be presented to Bookham stockholders for approval.

The proposed amendments to Bookham’s restated certificate of incorporation would effect a reverse stock split whereby a whole number of outstanding shares of Bookham common stock between and including five and thirty would be combined and reclassified into one share of Bookham common stock, and pursuant to which the total number of authorized shares of Bookham common stock and preferred stock would be proportionately reduced. The actions taken in connection with the reverse stock split would reduce the number of outstanding shares of Bookham common stock and the total number of authorized shares of Bookham common stock and preferred stock.

Upon receiving stockholder approval, the Bookham board of directors will have the sole discretion, but not the obligation, at any time within one year of the date of the Bookham special meeting (and regardless of whether the proposed merger is consummated) and pursuant to Section 242(c) of the Delaware General Corporation Law to elect, as it determines to be in the best interests of Bookham and its stockholders, whether to effect a reverse stock split, and if so, the whole number of shares of Bookham common stock between and including five and thirty that will be combined and reclassified into one share of Bookham common stock with the resulting corresponding proportionate reduction of the total number of authorized shares of Bookham common stock and preferred stock. The Bookham board of directors believes that these amendments granting the Bookham board of directors the discretion to select a specific reverse stock split ratio among those approved by the Bookham stockholders provides the Bookham board of directors with maximum flexibility to react to then-current market conditions and, therefore, is in the best interests of Bookham and its stockholders.

By approving these amendments, Bookham’s stockholders: (a) approve a series of amendments to Bookham’s restated certificate of incorporation pursuant to which any whole number of outstanding shares between and including five and thirty would be combined and reclassified into one share of Bookham common stock and pursuant to which the total number of authorized shares of Bookham common stock and preferred stock would be proportionately reduced; and (b) authorize the Bookham board of directors to file only one such amendment, as determined by the Bookham board of directors in its sole discretion, and to abandon each amendment not selected by the Bookham board of directors. The Bookham board of directors may also elect not to undertake any reverse stock split and therefore abandon all amendments. The text of the proposed form of certificate of amendment to the restated certificate of incorporation is attached hereto as Annex G.

If approved by Bookham’s stockholders, and following such stockholder approval, the Bookham board of directors determines that effecting a reverse stock split is in the best interests of Bookham and its stockholders, the reverse stock split and the corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock will become effective upon the filing of one such amendment with the Secretary of State of the State of Delaware. The amendment filed thereby will contain the number of shares selected by the Bookham board of directors within the limits set forth in this proposal to be combined and reclassified into one share of Bookham common stock, and the resulting corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock. The decision by the Bookham board of directors to effect the reverse stock split, and if implemented the reverse stock split ratio, will be based on a number of factors, including market conditions, existing and expected

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trading prices for Bookham common stock and the applicable listing requirements of the NASDAQ Global Market.

If, following stockholder approval, the Bookham board of directors elects to effect a reverse stock split, the number of issued and outstanding shares of Bookham common stock would be reduced in accordance with a reverse stock split ratio determined by the Bookham board of directors within the limits set forth in this proposal and the total number of shares of Bookham common stock and preferred stock that Bookham is authorized to issue would be proportionately reduced.

Except for adjustments that may result from the treatment of fractional shares as described below, each Bookham stockholder will hold the same percentage of the outstanding Bookham common stock immediately following the reverse stock split as such Bookham stockholder held immediately prior to the reverse stock split. The par value of the common stock would remain unchanged at $0.01 per share.

If this Bookham Proposal No. 3 is approved by the Bookham stockholders, the Bookham board of directors may elect to effect a reverse stock split whether or not any of the other Bookham Proposals are approved, including the approval of the issuance of Bookham common stock in the proposed merger, or whether or not the proposed merger is consummated.

The Bookham board of directors believes that a reverse stock split may be desirable for a number of reasons. First, the Bookham board of directors believes that a reverse stock split may allow Bookham to meet the listing requirements of, and thus remain listed on, the NASDAQ Global Market. Second, the Bookham board of directors believes that a reverse stock split could improve the marketability and liquidity of Bookham common stock.

Bookham’s common stock is currently, and will be following the completion of the merger, listed on the NASDAQ Global Market. According to applicable NASDAQ rules, in order for Bookham common stock to continue to be listed on the NASDAQ Global Market, Bookham must satisfy certain listing maintenance standards established by the NASDAQ Global Market. Among other things, if the closing bid price of Bookham common stock is under $1.00 per share for 30 consecutive trading days and does not thereafter reach $1.00 per share or higher for a minimum of ten consecutive trading days during the 180 calendar days following notification by NASDAQ, NASDAQ may take action to delist Bookham’s common stock from trading on the NASDAQ Global Market. On October 16, 2008, NASDAQ announced that it had suspended the enforcement of its rules requiring a minimum bid price of $1.00 per share through January 16, 2009, which was subsequently extended by NASDAQ on December 18, 2008 and March 18, 2009, such that companies will not be cited for any new concerns related to minimum bid price or market value of publicly held shares deficiencies. According to NASDAQ, the bid price and market value of publicly held shares requirements will be reinstated on July 20, 2009. As a result of this suspension, Bookham does not expect to receive a staff determination letter with respect to the delisting of Bookham common stock resulting from a failure to meet the minimum bid requirement unless it has failed to demonstrate compliance with the minimum bid requirement on or after July 20, 2009. As of March 24, 2009, the closing bid price of Bookham common stock was $0.31, lower than the minimum bid requirement. Therefore, a reverse stock split is intended to allow Bookham to comply with NASDAQ’s minimum bid requirement and thereby permit Bookham common stock to continue to be listed on the NASDAQ Global Market following the reinstatement of the minimum bid requirement.

The Bookham board of directors expects that a reverse stock split of its common stock will increase the market price of its common stock so that Bookham is able to maintain compliance with the NASDAQ minimum bid requirement for the foreseeable future.

The Bookham board of directors also believes that the increased market price of Bookham common stock expected as a result of implementing a reverse stock split will improve the marketability and liquidity of Bookham common stock and will encourage interest and trading in Bookham common stock. Because of the trading volatility often associated with low-priced stocks, many brokerage houses and institutional investors

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have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Some of those policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current average price per share of Bookham common stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were substantially higher. It should be noted that the liquidity of Bookham common stock may be harmed by the proposed reverse stock split given the reduced number of shares that would be outstanding after the reverse stock split. The Bookham board of directors is hopeful, however, that the anticipated higher market price will reduce, to some extent, the negative effects of the policies and practices of institutional investors and brokerage houses described above on the liquidity and marketability of the common stock.

Notwithstanding the foregoing, there can be no assurance that: (a) the market price per share following the reverse stock split would rise in proportion to the reduction in the number of pre-split shares of Bookham common stock outstanding before the reverse stock split; (b) the market price per share following the reverse stock split would remain in excess of the $1.00 minimum bid price for a sustained period of time; (c) the Bookham common stock will not be delisted from NASDAQ due to a failure to meet other continued listing requirements even if the market price per post-reverse split share of Bookham common stock remains in excess of the $1.00 minimum bid requirement; and (d) the reverse stock split would result in a per share price that would attract brokers and investors who do not trade in lower priced stock. The market price of Bookham common stock will also be based on Bookham’s performance and other factors, some of which are unrelated to the number of shares outstanding. If the reverse stock split is effected and the market price of Bookham common stock declines, the percentage decline as an absolute number and as a percentage of Bookham’s overall market capitalization may be greater than would occur in the absence of a reverse stock split.

Bookham Board of Director’s Discretion to Effect the Reverse Stock Split

If the amendments to Bookham’s restated certificate of incorporation to effect a reverse stock split and a corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock are approved by the Bookham stockholders, any one such amendment will be effected, if at all, only upon a determination by the Bookham board of directors that a reverse stock split (with a reverse stock split ratio determined by the Bookham board of directors as described above) and a proportionate corresponding reduction in the total number of authorized shares of Bookham common stock and preferred stock are in the best interests of Bookham and its stockholders. Such determination shall be based upon certain factors, including existing and expected marketability and liquidity of the Bookham common stock, meeting the listing requirements for the NASDAQ Global Market, prevailing market conditions and the likely effect on the market price of the Bookham common stock. Notwithstanding approval by the stockholders of the amendments to Bookham’s restated certificate of incorporation to effect a reverse stock split and a corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock, the Bookham board of directors may, in its sole discretion, abandon all of the proposed amendments and determine prior to the effectiveness of any filing with the Secretary of State of the State of Delaware not to effect the reverse stock split and corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock, as permitted under Section 242(c) of the Delaware General Corporation Law. If the Bookham board of directors fails to effect the reverse stock split and the corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock within one year of the date of the Bookham special meeting, stockholder approval again would be required prior to implementing any reverse stock split. If approved by the Bookham stockholders, the Bookham board of directors may determine to effect the reverse stock split and the corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock even if the merger that is the subject of Bookham Proposal No. 1 is not consummated.

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Effects of the Reverse Stock Split

After the effective date of the proposed reverse stock split and the corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock, each Bookham stockholder will own a reduced number of shares of Bookham common stock. However, any reverse stock split and corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock will affect all Bookham stockholders uniformly and will not affect any stockholder’s percentage ownership interests in Bookham, except to the extent that the reverse stock split results in any of Bookham stockholders owning a fractional share as described below. Voting rights and other rights and preferences of the holders of Bookham common stock will not be affected by the proposed reverse stock split (other than as a result of the payment of cash in lieu of fractional shares). For example, a holder of 2% of the voting power of the outstanding shares of Bookham common stock immediately prior to the reverse stock split would continue to hold 2% of the voting power of the outstanding shares of Bookham common stock immediately after the reverse stock split. The number of stockholders of record will not be affected by the proposed reverse stock split (except to the extent that any stockholder holds only a fractional share interest and receives cash for such interest after the proposed reverse stock split).

The principal effects of the reverse stock split will be that:


	•	depending on the reverse stock split ratio selected by the Bookham board of directors, each five or thirty shares of Bookham common stock owned by a stockholder, or any whole number of shares of Bookham common stock between five and thirty as determined by the Bookham board of directors, will be combined and reclassified into one new share of Bookham common stock;

	•	if Bookham Proposal No. 2 is approved and the certificate of amendment to Bookham’s restated certificate of incorporation to increase the authorized shares of Bookham common stock is filed with the Secretary of State of the State of Delaware as described in Bookham Proposal No. 2, then, dependent on the reverse stock split ratio selected by the Bookham board of directors:


	•	the total number of authorized shares of Bookham common stock will be reduced from 450,000,000 to a range of 90,000,000 to 15,000,000,

	•	the total number of authorized shares of Bookham preferred stock will be reduced from a range of 1,000,000 to 166,667, and

	•	the total number of authorized shares of Bookham capital stock will be reduced from a range of 91,000,000 to 15,166,667;


	•	if Bookham Proposal No. 2 is not approved, then, dependent on the reverse stock split ratio selected by the Bookham board of directors:


	•	the total number of authorized shares of Bookham common stock will be reduced from 175,000,000 to a range of 35,000,000 to 5,833,333,

	•	the total number of authorized shares of Bookham preferred stock will be reduced from a range of 1,000,000 to 166,667, and

	•	the total number of authorized shares of Bookham capital stock will be reduced from a range of 36,000,000 to 6,000,000;


	•	based upon the reverse stock split ratio selected by the Bookham board of directors, proportionate adjustments will be made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all then outstanding Bookham stock options, restricted stock awards, restricted stock units or warrants (including any such securities that may be assumed in the merger), which will result in, with respect to stock options and warrants, a proportional decrease in the number of shares of Bookham common stock reserved for issuance upon exercise of, and a proportional increase in the exercise price of, all such stock options and warrants; and

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	•	the number of shares then reserved for issuance under Bookham’s equity incentive plans (including any such plans assumed in the merger) will be reduced proportionately based upon the reverse stock split ratio selected by the Bookham board of directors.

The following table illustrates the effect of the reverse stock split ratio selected by the Bookham board of directors on the proportionate reduction of the authorized shares of Bookham common stock and preferred stock assuming that Bookham Proposal No. 2 is approved and the certificate of amendment to Bookham’s restated certificate of incorporation to increase the authorized shares of Bookham common stock is filed with the Secretary of State of the State of Delaware as described in Bookham Proposal No. 2, and the reverse stock split is effected after the filing of such certificate of amendment:


	Total Authorized		Total Authorized		Total Authorized
	Shares of Bookham		Shares of Bookham		Shares of Bookham
	Common Stock		Preferred Stock		Capital Stock

Pre-Split		450,000,000		5,000,000		455,000,000
1-for-5		90,000,000		1,000,000		91,000,000
1-for-6		75,000,000		833,333		75,833,333
1-for-7		64,285,714		714,286		65,000,000
1-for-8		56,250,000		625,000		56,875,000
1-for-9		50,000,000		555,556		50,555,556
1-for-10		45,000,000		500,000		45,500,000
1-for-11		40,909,091		454,545		41,363,636
1-for-12		37,500,000		416,667		37,916,667
1-for-13		34,615,385		384,615		35,000,000
1-for-14		32,142,857		357,143		32,500,000
1-for-15		30,000,000		333,333		30,333,333
1-for-16		28,125,000		312,500		28,437,500
1-for-17		26,470,588		294,118		26,764,706
1-for-18		25,000,000		277,778		25,277,778
1-for-19		23,684,211		263,158		23,947,368
1-for-20		22,500,000		250,000		22,750,000
1-for-21		21,428,571		238,095		21,666,667
1-for-22		20,454,545		227,273		20,681,818
1-for-23		19,565,217		217,391		19,782,609
1-for-24		18,750,000		208,333		18,958,333
1-for-25		18,000,000		200,000		18,200,000
1-for-26		17,307,692		192,308		17,500,000
1-for-27		16,666,667		185,185		16,851,852
1-for-28		16,071,429		178,571		16,250,000
1-for-29		15,517,241		172,414		15,689,655
1-for-30		15,000,000		166,667		15,166,667

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	Total Authorized		Total Authorized		Total Authorized
	Shares of Bookham		Shares of Bookham		Shares of Bookham
	Common Stock		Preferred Stock		Capital Stock

Pre-Split		175,000,000		5,000,000		180,000,000
1-for-5		35,000,000		1,000,000		36,000,000
1-for-6		29,166,667		833,333		30,000,000
1-for-7		25,000,000		714,286		25,714,286
1-for-8		21,875,000		625,000		22,500,000
1-for-9		19,444,444		555,556		20,000,000
1-for-10		17,500,000		500,000		18,000,000
1-for-11		15,909,091		454,545		16,363,636
1-for-12		14,583,333		416,667		15,000,000
1-for-13		13,461,538		384,615		13,846,154
1-for-14		12,500,000		357,143		12,857,143
1-for-15		11,666,667		333,333		12,000,000
1-for-16		10,937,500		312,500		11,250,000
1-for-17		10,294,118		294,118		10,588,235
1-for-18		9,722,222		277,778		10,000,000
1-for-19		9,210,526		263,158		9,473,684
1-for-20		8,750,000		250,000		9,000,000
1-for-21		8,333,333		238,095		8,571,429
1-for-22		7,954,545		227,273		8,181,818
1-for-23		7,608,696		217,391		7,826,087
1-for-24		7,291,667		208,333		7,500,000
1-for-25		7,000,000		200,000		7,200,000
1-for-26		6,730,769		192,308		6,923,077
1-for-27		6,481,481		185,185		6,666,667
1-for-28		6,250,000		178,571		6,428,571
1-for-29		6,034,483		172,414		6,206,897
1-for-30		5,833,333		166,667		6,000,000

In addition to the above effects, if a reverse stock split is implemented, it will increase the number of stockholders of Bookham who own “odd lots” of less than 100 shares of Bookham common stock. Brokerage commission and other costs of transactions in odd lots are generally higher than the costs of transactions of more than 100 shares of common stock. Accordingly, a reverse stock split may not achieve the desired results of increasing marketability and liquidity of Bookham common stock that have been outlined above.

Bookham common stock is currently registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Bookham is subject to the periodic reporting and other requirements of the Exchange Act. The proposed reverse stock split will not affect the registration of the common stock under the Exchange Act. Bookham common stock will continue to be reported on the NASDAQ Global Market under the symbol “BKHM” (although, if the proposed reverse stock split is implemented, NASDAQ would likely add the letter “D” to the end of the trading symbol for a period of 20 trading days to indicate that the reverse stock split has occurred). Pursuant to the merger agreement, Bookham and Avanex will take all actions necessary to ensure that the name of the combined company following the merger will be the name mutually agreed to by Bookham and Avanex. The name change has not yet been

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determined between the parties; however, when (and if) a name change is effected, a change in Bookham’s trading symbol may be effected as well.

Effective Date

The proposed reverse stock split would become effective at 5:00 p.m., Eastern time, on the date of filing of a certificate of amendment to Bookham’s restated certificate of incorporation with the office of the Secretary of State of the State of Delaware. Bookham currently expects that, if this Bookham Proposal No. 3 is approved, the reverse stock split will become effective following the consummation of the merger (assuming the merger is consummated). However, this Bookham Proposal No. 3 is not conditioned upon the approval of any of the other Bookham Proposals and the Bookham board of directors may elect to effect a reverse stock split whether or not the merger is approved and consummated and such reverse stock split may be made effective at any time prior to one year after the date of the Bookham special meeting. Except as explained below with respect to fractional shares, on the effective date of the reverse stock split, shares of Bookham common stock issued and outstanding immediately prior to the effective date of the reverse stock split will be combined and reclassified, automatically and without any action on the part of the stockholders, into a lesser number of new shares of Bookham common stock in accordance with the reverse stock split ratio determined by the Bookham board of directors within the limits set forth in this proposal.

Payment for Fractional Shares

No fractional shares of Bookham common stock will be issued as a result of the proposed reverse stock split. Instead, a Bookham stockholder who would otherwise be entitled to receive fractional shares (after taking into account all fractional shares of Bookham common stock otherwise issuable to such holder), upon receipt by the exchange agent selected by Bookham of a properly completed and executed letter of transmittal, and where shares are held in certificated form, surrender to the exchange agent of the stockholder’s certificate(s) formerly representing pre-reverse stock split shares of Bookham common stock, will be entitled to receive a cash payment (without interest) equal to the fractional share of Bookham common stock to which such stockholder would otherwise be entitled multiplied by the closing sales price of a share of Bookham common stock on the date the amendment effecting the reverse stock split is filed with the Secretary of State of the State of Delaware (with such average closing sales price being adjusted to give effect to the reverse stock split).

After the reverse stock split, a stockholder will have no further interest in Bookham with respect to their cashed-out fractional shares. A stockholder otherwise entitled to a fractional interest will not have any voting, dividend or other rights except to receive payment as described above.

Exchange of Stock Certificates

As soon as practicable after the effective date of the reverse stock split, holders of Bookham common stock immediately prior to the effective date of reverse stock split will be notified that the reverse stock split has been effected. Bookham will also select an exchange agent for purposes of implementing the exchange of stock certificates. Holders of pre-reverse stock split shares of Bookham common stock will be asked to surrender to the exchange agent certificates representing pre-reverse stock split shares in exchange for certificates representing post-reverse stock split shares and payment in lieu of fractional shares (if any) in accordance with the procedures to be set forth in a letter of transmittal to be sent by Bookham or its exchange agent. No new certificates will be issued to a Bookham stockholder until such Bookham stockholder has surrendered such stockholder’s outstanding certificate(s) together with the properly completed and executed letter of transmittal to the exchange agent. Bookham stockholders should not destroy any stock certificate and should not submit any certificates until requested to do so.

Accounting Consequences

The par value per share of Bookham common stock would remain unchanged at $0.01 per share after the reverse stock split. As a result, on the effective date of the reverse stock split, the stated capital on Bookham

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balance sheet attributable to the Bookham common stock will be reduced proportionally, based on the reverse stock split ratio, from its present amount, and the additional paid-in capital account shall be credited (or increased) with the amount by which the stated capital is reduced. The per share common stock net income or loss and net book value will be increased because there will be fewer shares of Bookham common stock outstanding. Such reverse stock split will be reflected retroactively in Bookham’s financial statements. Bookham does not anticipate that any other accounting consequences would arise as a result of the reverse stock split.

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split

The following discussion summarizes the material U.S. federal income tax considerations of the proposed reverse stock split that are expected to apply generally to U.S. Holders (as defined below) of Bookham common stock. This summary is based upon current provisions of the Internal Revenue Code of 1986, as amended, or the Code, existing Treasury Regulations under the Code and current administrative rulings and court decisions, all of which are subject to change or different interpretation. Any change, which may or may not be retroactive, could alter the tax consequences to Bookham or the Bookham stockholders as described in this summary. No ruling from the IRS has been or will be requested in connection with the reverse stock split. No attempt has been made to comment on all U.S. federal income tax consequences of the reverse stock split that may be relevant to particular U.S. Holders, including holders:


	•	who are subject to special tax rules such as dealers, brokers and traders in securities, foreign persons, mutual funds, regulated investment companies, real estate investment trusts, insurance companies, banks or other financial institutions or tax-exempt entities;

	•	who are subject to the alternative minimum tax provisions of the Code;

	•	who acquired their shares of Bookham common stock in connection with stock options, warrants, restricted stock units or stock purchase plans or in other compensatory transactions;

	•	who hold their shares of Bookham common stock as a hedge or as part of a hedging, straddle or other risk reduction strategy;

	•	who are partnerships or other pass-through entities or investors in such pass-through entities;

	•	who do not hold their shares of Bookham common stock as capital assets;

	•	whose shares of Bookham common stock constitute qualified small business stock with the meaning of Section 1202 of the Code;

	•	who have a functional currency other than the U.S. dollar; or

	•	holders who will receive shares of Bookham common stock in exchange for Avanex capital stock in the merger.

In addition, the following discussion does not address the tax consequences of the reverse stock split under state, local and foreign tax laws. Furthermore, the following discussion does not address any of the following:


	•	the tax consequences of transactions effectuated before, after or at the same time as the reverse stock split, whether or not they are in connection with the reverse stock split; or

	•	the tax consequences of the receipt of Bookham common stock other than in exchange for Bookham common stock in the reverse stock split, and in particular the acquisition of Bookham common stock in exchange for capital stock of Avanex in the merger.

For purposes of this discussion, a U.S. Holder means a beneficial owner of Bookham common stock who is:


	•	an individual who is a citizen or resident of the United States;

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	•	a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any subdivision thereof;

	•	an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or

	•	a trust (other than a grantor trust) if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (B) it has a valid election in place to be treated as a U.S. person.

HOLDERS OF BOOKHAM COMMON STOCK ARE ADVISED AND EXPECTED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES AND THE CONSEQUENCES OF THE REVERSE STOCK SPLIT UNDER STATE, LOCAL AND FOREIGN TAX LAWS.

The reverse stock split is expected to qualify for one or more non-recognition provisions of the Code. Assuming the reverse stock split so qualifies, the following consequences will result:


	•	no gain or loss will be recognized by Bookham as a result of the reverse stock split;

	•	a Bookham stockholder who receives only Bookham common stock in the reverse stock split generally will not recognize any gain or loss on the reverse stock split, and the aggregate tax basis of the post-reverse split shares received will be equal to the aggregate tax basis of the pre-reverse split shares exchanged therefor;

	•	a Bookham stockholder who receives both Bookham common stock and cash in lieu of fractional shares of Bookham common stock in the reverse stock split generally will recognize any gain inherent in the Bookham common stock surrendered up to the amount of cash received, but will not recognize any loss;

	•	the aggregate tax basis of the post-reverse split shares received, including any fractional share not actually received, will be equal to the aggregate tax basis of the pre-reverse split shares exchanged therefor, increased by the amount of any gain recognized as a result of the reverse stock split;

	•	the holding period of Bookham common stock received in the reverse stock split will include the holding period of the pre-reverse stock split shares exchanged;

	•	a Bookham stockholder who receives only cash in exchange for Bookham common stock in the reverse stock split generally will recognize gain or loss equal to the difference between such stockholder’s tax basis in the shares of Bookham common stock exchanged and the amount of cash received in exchange for those shares; and

	•	any gain or loss recognized by a Bookham stockholder as a result of the reverse stock split will be a capital gain or loss and will be long term capital gain or loss if the stockholder’s holding period for the shares of Bookham common stock exchanged is more than one year.

Certain Bookham stockholders may be required to attach a statement to their tax returns for the year in which the reverse stock split is consummated that contains the information listed in Treasury Regulation Section 1.368-3(b), if applicable. Bookham stockholders are urged to consult their own tax advisors with respect to the applicable reporting requirements.

For purposes of the above discussion of the bases and holding periods for shares of Bookham common stock, and except as provided therein, stockholders who acquired different blocks of Bookham common stock at different times for different prices must calculate their basis, gains and losses, and holding periods separately for each identifiable block of such stock exchanged, reclassified, canceled or received in the reverse stock split.

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Any cash payments for fractional shares made to Bookham stockholders in connection with the reverse stock split may be subject to backup withholding on a holder’s receipt of cash, unless such holder furnishes a correct taxpayer identification number and certifies that he or she is not subject to backup withholding or such stockholder is otherwise exempt from backup withholding. Any amount withheld under the backup withholding rules will generally be allowed as a refund or credit against the holder’s U.S. federal income tax liability, provided the required information is furnished to the IRS.

No Appraisal Rights

Under Delaware law, Bookham stockholders are not entitled to dissenter’s appraisal rights with respect to the proposed amendments to the Bookham restated certificate of incorporation to effect the reverse stock split and to reduce the number of authorized shares of Bookham common stock and preferred stock, and Bookham will not independently provide Bookham stockholders with any such right.

Vote Required; Recommendation of Bookham Board of Directors

The affirmative vote of the holders of a majority of the voting power of Bookham common stock outstanding on the record date for the Bookham special meeting is required to approve the amendments to Bookham’s restated certificate of incorporation to effect a reverse stock split and a corresponding proportionate reduction in the total number of authorized shares of Bookham common stock and preferred stock.

A failure to submit a proxy card or vote at the special meeting, or an abstention, vote withheld or “broker non-vote” will have the same effect as a vote against Bookham Proposal No. 3.

BOOKHAM’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT BOOKHAM STOCKHOLDERS VOTE “FOR” BOOKHAM PROPOSAL NO. 3 TO APPROVE AMENDMENTS TO BOOKHAM’S RESTATED CERTIFICATE OF INCORPORATION THAT WOULD EFFECT A REVERSE STOCK SPLIT, PURSUANT TO WHICH ANY WHOLE NUMBER OF ISSUED AND OUTSTANDING SHARES OF BOOKHAM COMMON STOCK BETWEEN AND INCLUDING FIVE AND THIRTY WOULD BE COMBINED AND RECLASSIFIED INTO ONE SHARE OF BOOKHAM COMMON STOCK, AND PURSUANT TO WHICH THE TOTAL NUMBER OF AUTHORIZED SHARES OF BOOKHAM COMMON STOCK AND PREFERRED STOCK WOULD BE PROPORTIONATELY REDUCED, AND TO AUTHORIZE THE BOOKHAM BOARD OF DIRECTORS TO SELECT AND FILE ONE SUCH AMENDMENT THAT WOULD EFFECT THE REVERSE STOCK SPLIT WITHIN SUCH RANGE AND THAT WOULD PROPORTIONATELY REDUCE THE TOTAL NUMBER OF AUTHORIZED SHARES OF BOOKHAM COMMON STOCK AND PREFERRED STOCK.

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BOOKHAM PROPOSAL NO. 4 — POSSIBLE ADJOURNMENT OF THE
BOOKHAM SPECIAL MEETING

If Bookham fails to receive a sufficient number of votes to approve any of Bookham Proposal Nos. 1, 2 or 3, Bookham may propose to adjourn the special meeting, if a quorum is present, for a period of not more than 30 days for the purpose of soliciting additional proxies to approve any of Bookham Proposal Nos. 1, 2 or 3. Bookham currently does not intend to propose adjournment at the Bookham special meeting if there are sufficient votes to approve each of Bookham Proposal Nos. 1, 2 and 3.

Vote Required; Recommendation of Bookham Board of Directors

The affirmative vote of the holders of a majority of the voting power of the shares of Bookham common stock voting in person or by proxy at the Bookham special meeting is required for approval of Bookham Proposal No. 4.

The failure to submit a proxy card or vote at the special meeting, or an abstention, vote withheld or “broker non-votes” will be counted towards a quorum but will have no effect on the outcome of Bookham Proposal No. 4.

BOOKHAM’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL BOOKHAM STOCKHOLDERS VOTE “FOR” BOOKHAM PROPOSAL NO. 4 TO ADJOURN THE BOOKHAM SPECIAL MEETING, IF NECESSARY, IF A QUORUM IS PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF ANY OF BOOKHAM PROPOSAL NOS. 1, 2 OR 3.

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AVANEX PROPOSAL NO. 2 — POSSIBLE ADJOURNMENT OF THE

AVANEX SPECIAL MEETING

If Avanex fails to receive a sufficient number of votes to approve Avanex Proposal No. 1, Avanex may propose to adjourn the special meeting, if a quorum is present, for a period of not more than 30 days for the purpose of soliciting additional proxies to approve Avanex Proposal No. 1. Avanex currently does not intend to propose adjournment at the Avanex special meeting if there are sufficient votes to approve Avanex Proposal No. 1.

Vote Required; Recommendation of Avanex Board of Directors

The affirmative vote of the holders of a majority of the voting power of the shares of Avanex common stock voting in person or by proxy at the Avanex special meeting is required for approval of Avanex Proposal No. 2.

The failure to submit a proxy card or vote at the special meeting, or an abstention, vote withheld or “broker non-votes” will be counted towards a quorum, but will have no effect on the outcome of Avanex Proposal No. 2.

THE AVANEX BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT AVANEX’S STOCKHOLDERS VOTE “FOR” AVANEX PROPOSAL NO. 2 TO ADJOURN THE AVANEX SPECIAL MEETING, IF NECESSARY, IF A QUORUM IS PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF AVANEX PROPOSAL NO. 1.

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Introduction

The following unaudited pro forma condensed combined financial statements give effect to the proposed merger of merger sub, a wholly-owned subsidiary of Bookham with Avanex. The merger is anticipated to be completed before June 27, 2009, and accordingly is expected to be accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations. Under the purchase method of accounting, the total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the assets acquired and liabilities assumed of Avanex, based on their fair values as of the completion of the merger. Management’s estimates of the fair values are reflected in these unaudited pro forma condensed combined financial statements. A final determination of these fair values, which cannot be made prior to the completion of the merger, will be based on the actual net assets of Avanex that exist as of the closing of the merger.

The unaudited pro forma condensed combined balance sheet as of December 27, 2008 gives effect to the proposed merger as if it occurred on December 27, 2008 and, due to the different fiscal period ends, combines the historical balance sheet of Bookham at December 27, 2008 and the historical balance sheet of Avanex at December 31, 2008. The Bookham consolidated balance sheet information was derived from its unaudited December 27, 2008 condensed consolidated balance sheet included elsewhere in this joint proxy statement/prospectus and the Avanex consolidated balance sheet information was derived from its unaudited December 31, 2008 condensed consolidated balance sheet included elsewhere in this joint proxy statement/prospectus.

The unaudited pro forma condensed combined statement of operations for the six months ended December 27, 2008 is presented as if the transaction had been consummated on June 29, 2008 and, due to the different fiscal period ends, combines the historical results of Bookham for the six months ended December 27, 2008 and the historical results of Avanex for the six months ended December 31, 2008, which results were derived from Bookham’s and Avanex’s unaudited condensed consolidated statements of operations included elsewhere in this joint proxy statement/prospectus. The unaudited pro forma condensed combined statement of operations for the fiscal year ended June 28, 2008 is presented as if the transaction had been consummated on July 1, 2007 and, due to the different fiscal period ends, combines the historical results of Bookham for the fiscal year ended June 28, 2008 and the historical results of Avanex for the fiscal year ended June 30, 2008, which results were derived from Bookham’s and Avanex’s audited consolidated statements of operations included elsewhere in this joint proxy statement/prospectus.

The unaudited pro forma condensed combined financial statements have been prepared by Bookham management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had Bookham and Avanex been a combined company during the specified periods. The pro forma adjustments are based on the information available at the time of the preparation of this joint proxy statement/prospectus. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical consolidated financial statements of Bookham and Avanex included in this joint proxy statement/prospectus.

The unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates of fair values of assets acquired and liabilities assumed of Avanex. Intercompany transactions and balances between Bookham and Avanex, which comprise the sale of certain products and the payment of technology royalties by Bookham to Avanex, have been eliminated in the unaudited pro forma

149

condensed combined financial statements. Further, the unaudited pro forma condensed combined financial statements do not include any adjustments for the anticipated benefits from cost savings or synergies of Bookham and Avanex operating as a combined company or for liabilities resulting from integration planning, as managements of Bookham and Avanex are in the process of making these assessments and estimates of these costs are not currently known. However, liabilities ultimately may be recorded for severance, relocation or retention costs in subsequent quarters related to employees of both companies, the costs of vacating certain leased facilities of either company or other costs associated with exiting or transferring activities between companies that would affect amounts in the unaudited pro forma condensed combined financial statements. A substantial portion of these expenditures is expected to be related to restructuring at closing and therefore will be recorded as assumed liabilities from Avanex and will decrease negative goodwill. Certain reclassifications have been made so that historical amounts included in Avanex’s financial statements conform to Bookham’s presentation.

The actual amounts recorded as of the completion of the merger may differ materially from the information presented in these unaudited pro forma condensed combined financial statements. Changes in Bookham’s stock price, the impact of ongoing integration activities, and other changes in the net tangible assets of Avanex that occur prior to completion of the merger could cause material differences in the information presented.

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BOOKHAM, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF DECEMBER 27, 2008


	Historical							Pro Forma
	Bookham		Avanex					Combined
	December 27,		December 31,		Pro Forma			December 27,
	2008		2008		Adjustments			2008
	(In thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	35,296	$	13,897	$	(6,410	)(1)	$	42,783
Short-term investments		8,894		19,550		—			28,444
Restricted cash		513		3,803		—			4,316
Accounts receivable, net		33,119		30,197		(217	)(2)		63,099
Inventories		58,448		19,528		—			77,976
Prepaid expenses and other current assets		4,842		7,144		(90	)(3)		11,896

Total current assets		141,112		94,119		(6,717	)		228,514

Other intangible assets, net		6,191		—		—			6,191
Property and equipment, net		32,509		8,906		(8,906	)(4)		32,509
Other non-current assets		274		3,094		(1,873	)(4)		1,495

Total assets	$	180,086	$	106,119	$	(17,496	)	$	268,709


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,402	$	24,371	$	(217	)(2)	$	39,556
Accrued expenses and other liabilities		21,245		14,126		—			35,371

Total current liabilities		36,647		38,497		(217	)		74,927

Other long-term liabilities		1,821		4,977		—			6,798
Deferred gain on sale-leaseback		14,019		—		—			14,019

Total liabilities		52,487		43,474		(217	)		95,744

Total stockholders’ equity		127,599		62,645		(62,645	)(5)		172,965
						32,064	(6)
						13,302	(7)

Total liabilities and stockholders’ equity	$	180,086	$	106,119	$	(17,496	)	$	268,709

See accompanying notes to Bookham, Inc. unaudited pro forma condensed combined financial statements.

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BOOKHAM, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED DECEMBER 27, 2008


	Historical						Pro Forma			Pro Forma
	Bookham			Avanex(A)			Adjustments			Combined
	(In thousands, except per share data)

Revenues	$	116,735		$	83,275		$	(1,595	)(8)	$	198,295
							$	(120	)(9)
Cost of revenues		91,401			69,660			(677	)(8)		159,630
								(120	)(9)
								(634	)(10)

Gross margin		25,334			13,615			(284	)		38,665
Operating expenses:
Research and development		14,832			12,722			(417	)(10)		27,137
Selling, general and administrative		19,966			15,544			(922	)(10)		34,588
Amortization of intangible assets		907			107			(107	)(11)		907
Restructuring and severance charges		1,968			2,476			—			4,444
Certain legal actions, settlements and related costs		(184	)		—			—			(184	)
Impairment of goodwill and intangibles		7,881			9,615			(9,615	)(12)		7,881
Loss on sale of property and equipment		8			—			—			8

Total operating expenses		45,378			40,464			(11,061	)		74,781

Operating loss		(20,044	)		(26,849	)		10,777			(36,116	)
Other income (expense):
Other expense		(695	)		370			—			(325	)
Interest income		457			453			(16	)(13)		894
Interest expense		(324	)		—			—			(324	)
Gain (loss) on foreign exchange		16,362			(1,174	)		—			15,188

Total other income (expense)		15,800			(351	)		(16	)		15,433

Loss before income taxes		(4,244	)		(27,200	)		10,761			(20,683	)
Income tax provision (benefit)		24			(745	)		—			(721	)

Net loss	$	(4,268	)	$	(26,455	)	$	10,761		$	(19,962	)

Net loss per share (basic and diluted)	$	(0.04	)	$	(1.71	)				$	(0.11	)
Shares used in computing net loss per share (basic and diluted)		100,209			15,460						185,828


(A)		As discussed above, the historical results of Avanex are for the six months ended December 31, 2008.

See accompanying notes to Bookham, Inc. unaudited pro forma condensed combined financial statements.

152

BOOKHAM, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JUNE 28, 2008


	Historical						Pro Forma			Pro Forma
	Bookham			Avanex(A)			Adjustments			Combined
	(In thousands, except per share data)

Revenues	$	235,491		$	208,094		$	(2,781	)(8)	$	439,405
							$	(1,399	)(9)
Cost of revenues		182,518			144,509			(1,100	)(8)		323,444
								(1,399	)(9)
								(1,084	)(10)

Gross margin		52,973			63,585			(597	)		115,961
Operating expenses:
Research and development		32,633			28,325			(795	)(10)		60,163
Selling, general and administrative		47,941			34,973			(1,597	)(10)		81,317
Amortization of intangible assets		4,639			771			(771	)(11)		4,639
Restructuring and severance charges		3,471			(164	)		—			3,307
Certain legal actions, settlements and related costs		(2,882	)		—			—			(2,882	)
Gain on sale of property and equipment		(2,562	)		(23	)		—			(2,585	)
Gain on sale of subsidiary		—			(1,996	)		—			(1,996	)

Total operating expenses		83,240			61,886			(3,163	)		141,963

Operating income (loss)		(30,267	)		1,699			2,566			(26,002	)
Other income (expense):
Other expense		—			936			—			936
Interest income		1,465			1,634			(32	)(13)		3,067
Interest expense		(671	)		(152	)		—			(823	)
Gain on foreign exchange		6,038			1,530			—			7,568

Total other income (expense)		6,832			3,948			(32	)		10,748

Income (loss) before income taxes		(23,435	)		5,647			2,534			(15,254	)
Income tax provision		5			927			—			932

Net loss	$	(23,440	)	$	4,720		$	2,534		$	(16,186	)

Net loss per share:
Basic	$	(0.25	)	$	0.31					$	(0.09	)
Diluted	$	(0.25	)	$	0.31					$	(0.09	)
Shares used in computing net loss per share:
Basic		93,099			15,242						178,718
Diluted		93,099			15,370						178,718


(B)		As discussed above, the historical results of Avanex are for the fiscal year ended June 30, 2008.

See accompanying notes to Bookham, Inc. unaudited pro forma condensed combined financial statements.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS


1.	Basis of Presentation

On January 27, 2009, Bookham and Avanex entered into a definitive agreement pursuant to which the two companies will be combined through the merger of a wholly-owned subsidiary of Bookham with and into Avanex. The transaction is expected to close in Bookham’s fiscal quarter ending June 27, 2009, subject to approval by the stockholders of both companies and the satisfaction of other customary conditions.

Preliminary Estimated Purchase Price

The total purchase price is estimated to be $35.4 million and is comprised of (in thousands):


Fair value of Bookham shares to be issued	$	31,945
Fair value of vested Avanex stock awards assumed		115
Fair value of vested Avanex warrants assumed		4
Acquisition-related transaction costs(1)		3,300

Total estimated purchase price	$	35,364


(1)		Includes acquisition-related transaction costs of Bookham determined in accordance with SFAS No. 141. If the merger is completed after June 27, 2009, the merger would be accounted for under SFAS No. 141 (revised 2007), Business Combinations, or SFAS No. 141R. Under SFAS. No. 141R, acquisition-related transaction costs are expensed as incurred and would not be included in determining the purchase price.

Fair Value of Shares to be Issued

Under the terms of the merger agreement, Avanex stockholders will receive 5.426 shares of Bookham common stock for each share of Avanex common stock they own. Avanex options and warrants will represent a corresponding right to acquire a number of shares of Bookham common stock based on the exchange ratio. Based on the number of shares of Avanex common stock outstanding as of January 27, 2009, Bookham expects to issue approximately 84.6 million common shares in the proposed combination. In addition, approximately 193,000 restricted stock units of Avanex contain acceleration provisions, and those units will therefore be accelerated upon the close of the merger and exchanged for approximately 1,049,000 shares of Bookham common stock. For accounting purposes, the total estimated purchase price is based on a per share price of $0.3731, which is the weighted-average of the closing market prices of Bookham’s common stock for a period beginning two days before and ending two days after January 27, 2009.

Fair Value Estimate of Stock Awards Assumed

As of January 27, 2009, Avanex had outstanding stock options for the purchase of approximately 1.0 million shares of Avanex common stock and approximately 298,000 restricted stock units, net of the approximately 193,000 restricted stock units with acceleration provisions. In accordance with the merger agreement, 5.426 stock options and restricted stock units will be issued for each stock option and restricted stock unit assumed. The fair values of stock options assumed were determined using a Black-Scholes valuation model with the following assumptions: weighted-average expected life of 4.5 years; weighted-average risk-free interest rate of 2.3%; expected volatility of 83% and no dividend yield. The fair values of the restricted stock units assumed were determined using their intrinsic value, which is the fair value of the shares to be issued in the merger of $0.3731 per share. The fair values of the Avanex unvested stock options and restricted stock units assumed will be recorded as operating expenses on a straight-line basis over the remaining service periods, while the fair values of the vested stock options are included in the total purchase price.

154

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS — (Continued)

Fair Value Estimate of Warrants Assumed

As of January 27, 2009, Avanex had outstanding warrants for the purchase of 673,232 shares of Avanex common stock. In accordance with the merger agreement, warrants for the purchase of 5.426 shares of Bookham common stock will be issued for each warrant assumed.

The fair values of warrants assumed were determined using a Black-Scholes valuation model with the following assumptions: weighted-average remaining warrant term of 1.1 years; weighted-average risk-free interest rate of 2.3%; expected volatility of 83% and no dividend yield. The fair values of the warrants assumed are included in the total purchase price.

Acquisition Related Transaction Costs

Acquisition related transaction costs include Bookham’s estimated legal, accounting and financial advisory fees and other external costs directly related to the acquisition.

Preliminary Estimated Purchase Price Allocation

Under the purchase method of accounting of SFAS No. 141, the total estimated purchase price shown in the table above is allocated to the assets acquired and liabilities assumed of Avanex based on their estimated fair values as of the date of the completion of the merger, which is expected to occur on or before June 27, 2009. If the merger is completed after June 27, 2009, it would be accounted for under SFAS No. 141R. Under SFAS. No. 141R, there are significant differences as compared to SFAS No. 141 in determining the purchase price of an acquired entity.

The costs of the merger will be allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess of fair value over purchase price being allocated to negative goodwill. Based on information currently available, and subject to potentially material changes after completion of the merger and other factors as described in the introduction to these unaudited pro forma condensed combined financial statements, the preliminary estimated purchase price is allocated as follows (in thousands):


Assets acquired and liabilities assumed:
Cash and short-term investments(1)	$	34,050
Accounts receivable, net		30,197
Inventories		19,528
Prepaid expenses and other current assets		7,144
Other non-current assets		1,221
Accounts payable and accrued liabilities		(38,497	)
Other liabilities		(4,977	)

Net assets acquired		48,666
Negative goodwill		(13,302	)

Total estimated purchase price	$	35,364


(1)		Excludes $3.2 million expected to be paid at close for Avanex’s transaction costs as result of the merger.

Bookham has not identified any pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available which would indicate it is probable that such events have occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS — (Continued)

Assets Acquired and Liabilities Assumed

Of the total estimated purchase price, a preliminary estimate of $48.7 million has been allocated to net assets based on information currently available. Assets and liabilities are being valued at net book value, which are estimated to approximate fair market value.

Negative Goodwill

Of the total estimated purchase price, a preliminary estimate of $13.3 million has been allocated to negative goodwill. Negative goodwill represents the excess of the fair value of the assets acquired and liabilities assumed of an acquired business over the purchase price. In accordance with SFAS No. 141, negative goodwill resulting from a business combination will be recognized as an extraordinary gain in the period in which the business combination is completed.


2.	Pro Forma Adjustments

Pro forma adjustments are necessary to reflect the estimated consideration paid, to adjust amounts related to the net assets of Avanex to a preliminary estimate of their fair values, to eliminate transactions between Bookham and Avanex and to reflect changes in depreciation and amortization expense and impairment charges resulting from the estimated fair value adjustments to assets acquired and liabilities assumed.

The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements:

Footnotes to Unaudited Pro Forma Condensed Combined Balance Sheet as of December 27, 2008

(1) To record cash to be used for Bookham’s and Avanex’s estimated transaction costs as result of the merger, net of $90,000 previously paid and recorded as prepaid expenses.

(2) To eliminate accounts receivable and accounts payable balances related to product sales to Avanex by Bookham.

(3) To eliminate Bookham’s direct acquisition-related transaction costs recorded by Bookham as a prepaid expense.

(4) To allocate the excess of the fair value of the assets acquired and liabilities assumed over the purchase price to non-current non-financial assets.

(5) To reverse Avanex’s historical equity balances.

(6) To record Bookham’s equity consideration for the merger, which amount was determined based on the estimated 85,619,000 shares of common stock to be issued upon the closing of the merger multiplied by the fair value per share of common stock of $0.3731.

(7) To reflect the estimated fair value of negative goodwill. Because this credit is directly attributable to the merger and will not have a continuing impact, it is not reflected in the pro forma condensed combined statement of operations. However, this item will be recognized as an extraordinary gain in the period that the merger with Avanex is completed.

Footnotes to Unaudited Pro Forma Condensed Combined Statement of Operations for the Six Months Ended December 27, 2008 and for the Fiscal Year Ended June 28, 2008

(8) To eliminate revenues and cost of revenues related to product sales by Bookham to Avanex.

(9) To eliminate revenue and expenses for technology royalties payable by Bookham to Avanex.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS — (Continued)

(10) To reverse depreciation of property and equipment by Avanex based on the allocation of excess fair value to acquired property and equipment, net.

(11) To reverse amortization of intangible assets from acquisitions previously consummated by Avanex.

(12) To reverse impairment of goodwill from acquisitions previously consummated by Avanex.

(13) To record the reduction in investment income resulting from the reduced cash balance after payments to effect the merger.


3.	Pro Forma Loss Per Share

The pro forma basic and diluted loss per share amounts presented in Bookham’s unaudited pro forma condensed combined statements of operations are based upon the weighted-average number of shares of Bookham common stock outstanding and are adjusted for the estimated number of shares to be issued to Avanex’s stockholders, based on the number of shares of Avanex common stock outstanding as of January 27, 2009, and for Avanex restricted stock units which are subject to accelerated vesting upon the closing of the merger.


	Six Months
	Ended		Year Ended
	December 27,		June 28,
	2008		2008
	(In thousands)

Weighted-average shares used in computing net loss per share (basic and diluted)		100,209		93,099
Shares estimated to be issued by Bookham		84,570		84,570
Shares estimated to be issued by Bookham upon acceleration of Avanex restricted stock units at close		1,049		1,049

Pro forma weighted-average shares used in computing net loss per share (basic and diluted)		185,828		178,718

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BOOKHAM BUSINESS

Customers, Sales and Marketing

We design, manufacture and market optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals principally for use in high-performance fiber optics communications networks. Due to its advantages of higher capacity and transmission speed, optical transmission has become the predominant technology for large-scale communications networks. Our primary operating segment, which we refer to as our telecom segment, addresses the optical communications market. We are one of the largest vertically-integrated vendors of optical components used for fiber optic telecommunications network applications. Our customers include leading equipment systems vendors, including ADVA AG Optical Networking, Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Huawei Technologies Co., Ltd., Tellabs, Inc., Tyco Electronics, Ltd. and Nortel Networks Corporation, which we refer to as Nortel Networks. Our remaining product lines, which comprise our non-telecom segment, leverage our optical component technologies and expertise in manufacturing optical subsystems to address opportunities in other markets, including industrial, research, semiconductor capital equipment, military and biotechnology.

Innovation at the component level has been a primary enabler of optical networking, facilitating increased transmission capacity, improving signal quality and lowering cost. Optical communications equipment vendors initially developed and manufactured their own optical components. For a variety of industry-related reasons, many of the larger optical equipment vendors have sold, eliminated or outsourced their internal component capabilities and now rely on third-party sources to meet their optical component needs. In the absence of significant internal component technology expertise or manufacturing capability, communications equipment vendors have become more demanding of their component suppliers, including Bookham, seeking companies with broad technology portfolios, component innovation expertise, advanced manufacturing capabilities, the ability to provide more integrated solutions and financial strength.

Although many of our competitors have in recent years outsourced their own manufacturing capabilities, in whole or in part, we have maintained a vertically integrated structure. By leveraging our own in-house research and manufacturing capabilities we are able to support and control all phases of the development and manufacturing process from chip creation to component design and all the way through module and subsystem production. In particular, our wafer fabrication facilities, we believe, position us to introduce product innovations delivering optical network cost and performance advantages to our customers. We also believe that our in-house control of this complete process provides us with the opportunity to respond more quickly to changing customer requirements, allowing our customers to improve the time it takes them to deliver products to market, and that our ability to deliver innovative technologies in a variety of form factors ranging from chip level to module level to subsystem level, allows us to address the needs of a broad base of potential customers regardless of their desired level of product integration or complexity.

We also believe our advanced chip and component design and manufacturing facilities would be very expensive to replicate. On-chip, or monolithic, integration of functionality is more difficult to achieve without control over the production process, and requires advanced process know-how and equipment. Although the market for optical integrated circuits is still in its early stages, it shares many characteristics with the semiconductor market, including the positive relationship between the number of features integrated on a chip, the wafer size and the cost and sophistication of the fabrication equipment. For this reason, we believe our 3-inch wafer indium phosphide, or InP, semiconductor fabrication facility in Caswell, U.K. provides us a competitive advantage by allowing us to increase the complexity of the optical circuits that we design and manufacture, and the integration of photonics components within smaller packages, without the relatively high cost, power and size issues associated with less integrated solutions. We believe that our pump laser gallium arsenide semiconductor fabrication facility in Zurich, Switzerland is one of the few facilities in the world offering the 980 nanometer pump laser diode capability required for most metro and long haul optical amplification solutions. We also believe that our Shenzhen, China assembly and test operation constitutes a leading manufacturing facility which has allowed us to reduce costs, improve processing efficiencies, respond to changes in customer requirements and reduce time to market for ourselves and our customers by reducing design turnaround time. We also believe that leveraging our investment in these advanced telecom facilities to

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manufacture and support products in our non-telecom segment represent a competitive opportunity within certain of the non-telecom markets we serve.

We intend to draw upon our internal development and manufacturing capability to continue to create innovative solutions for our customers. We are currently delivering a range of tunable products that include an InP tunable laser chip, 10 gigabyte per second, or Gb/s, iTLA tunable laser, a 10Gb/s iTTA transmitter module and a 10Gb/s SFF tunable transponder. Tunable products provide customers with the opportunity to reduce their inventory levels and their order lead time, and we believe this is one of the technologies enabling what is becoming known as the agile network. We believe we are gaining share in the 10Gb/s tunable product markets. We are also delivering chips and packages performing at 40Gb/s data rate operations for integration in our customers’ products, and are developing additional products targeted at the 40Gb/s data rate, including products with tunable characteristics. We have recently announced our demonstration of a 40Gb/s tunable transmitter assembly designed to meet price points we believe will enable cost-effective deployment of 40Gb/s transmission in metro networks. We plan to extend our offerings to operations requiring even higher data rates over time. We believe our 10Gb/s indium phosphide mach-zender transmitter, which demonstrates the advantages of our InP photonic integration, is the only transmitter of its kind on the market today, and we are currently the sole-source supplier to a number of customers.

In developing and growing our telecom segment, we acquired and integrated a number of optical components companies and businesses from 2002 through 2004, including those of Nortel Networks, Marconi Optical Components Limited, which we refer to as Marconi, and the assets and liabilities of Cierra Photonics. These acquisitions, in particular the optical components businesses of Nortel Networks and Marconi, significantly increased our telecom product portfolio and manufacturing expertise, and we believe we have since enhanced our existing relationships with leading optical systems vendors. We have completed the integration of these acquired businesses and companies, and in the process have in recent years taken significant steps to rationalize production capacity, adjust headcount and restructure resources to reduce manufacturing and operating overhead expenses.

Since the acquisition of Nortel Networks Optical Components, or NNOC, in 2002, we have diversified our revenue base by increasing our revenues from customers other than Nortel Networks, on both an absolute basis and as a percentage of total revenues. This has been one of our key strategic objectives. For example, in our fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006, our revenues from customers other than Nortel Networks were $200.3 million, $162.9 million and $121.2 million of our total revenues, respectively, which represented increases of 23% in 2008 compared to 2007 and 34% in 2007 compared to 2006. In addition, in the six months ended December 27, 2008 and December 29, 2007, our revenues from customers other than Nortel Networks were $99.2 million and $96.2 million of our total revenues, respectively, which represented an increase of 3% in the 2008 period compared to the 2007 period.

In 2004 we acquired New Focus, Inc., a photonics and microwave company, and in 2006 we acquired Avalon Photonics AG, a VCSEL company, and both are now important components of our non-telecom business segment.

Bookham, Inc., a Delaware corporation, was incorporated on June 29, 2004. On September 10, 2004, pursuant to a scheme of arrangement under the laws of the United Kingdom, Bookham, Inc. became the publicly traded parent company of the Bookham Technology plc group of companies, including Bookham Technology plc, a public limited company incorporated under the laws of England and Wales whose stock was previously traded on the London Stock Exchange and the NASDAQ National Market. Our common stock is traded on the NASDAQ Global Market under the symbol “BKHM.” Pursuant to the merger agreement, Bookham and Avanex will take all actions necessary to ensure that the name of the combined company following the merger will be the name mutually agreed to by Bookham and Avanex. The name change has not yet been determined between the parties; however, when (and if) a name change is effected, a change in Bookham’s trading symbol may be effected as well.

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Industry Background

In the 1990s, telecommunications network vendors and data communications vendors increasingly incorporated optical systems into communications infrastructures, taking advantage of the ability of fiber optic systems to support dramatically greater bandwidths than traditional copper networks. Widespread adoption of fiber optic systems has significantly improved the ability of these networks to transmit and manage the high volume of voice, video and data traffic generated in recent years by the growth of the Internet and other innovative communications technologies. The continuing build-out of fiber optic networks requires optical components that generate, detect, amplify, combine and separate light signals as they are transmitted.

The business climate for telecommunications companies became less favorable in late 2000, as network service providers began to experience significant financial difficulties. Many equipment providers stopped buying components, which severely affected optical component manufacturers, who were left with significant inventories, excess production capacity and cost structures not aligned with industry demand levels. In response to these conditions, optical component suppliers reduced manufacturing and operating cost overheads dramatically in order to sustain their businesses during a period of reduced demand and to achieve cost efficiencies required to meet their customers’ pricing objectives, and certain optical systems vendors divested, or closed, their own optical components businesses. As a result, these optical systems vendors began seeking component suppliers with a depth of technology expertise, a breadth of product portfolio and access to manufacturing capabilities no longer existing within their own organizations. These conditions have all contributed to significant consolidation among optical component suppliers. We played an active role in this industry consolidation, acquiring the optical components businesses of Nortel Networks and Marconi, both in 2002, among others. We believe that the trend toward consolidation will continue, providing companies positioned as consolidators with the opportunity to capture increased market share and to improve profitability through increased capacity utilization and other operating efficiencies.

There are four particular drivers in the optical component market: (i) wireless and wire-line spending by telecommunications networking equipment companies, (ii) the introduction of new, more cost-effective product technologies, such as tunable products, (iii) the expansion of optical networking in the metro space, driven by the build out of broadband access networks such as fiber-to-the-home initiatives and (iv) the growing competition among cable network operators offering voice, video and data services and traditional telephony service providers which results in increased utilization of optical networking technologies, including the long-haul backbone where many of our product offerings are utilized. We believe drivers (i), (iii) and (iv) contribute to the overall demand for broadband capacity and therefore to the demand for the substantial portion of our telecom product offerings, while driver (ii) is of particular relevance to the demand for our tunable telecom products.

In addition, optical technologies originally developed for the communications industry, such as high-power lasers, are also being deployed in a variety of non-telecom applications. We believe that optical component suppliers have the opportunity to leverage their existing research and development expertise into non-telecom markets that are less subject to the cycles of the telecommunications industry.

Our Strategy

Our goal is to maintain and enhance our position as a leading provider of optical component, module and subsystem solutions for telecommunications providers while also broadening our leadership into new markets by:


	•	Leveraging broad product portfolio and technology expertise. We believe that our broad product portfolio positions us to increase our penetration of existing customers and gives us a competitive advantage in winning new customers. In addition, we intend to continue to apply our optical component technologies to opportunities in other, non-telecommunications markets, including material processing, inspection and instrumentation, and research and development, where we believe the use of those technologies is expanding.

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	•	Providing more comprehensive and technologically advanced solutions. We intend to continue to invest in innovative component level technologies that we believe will allow us to be a market leader in terms of quality, price and performance. We also plan to leverage our component level technologies into a series of components, modules and subsystems, enabling us to meet our customers’ growing demand for complete solutions.

	•	Continuing to improve cost structure. We intend to continue to focus on managing our variable costs through yield improvements, labor productivity gains, component substitutions and aggressive supply chain management, including the sourcing of certain internal manufacturing and other operations to our lower cost Shenzhen facility when appropriate.

	•	Selectively pursuing acquisitions. As we have done in the past, we will continue to consider the use of acquisitions as a means to enhance our scale, obtain critical technologies and enter new markets.

Our Product Offerings

We design, manufacture and market optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals with primary application in fiber optic telecommunications networks. We have significant expertise in technology such as III-V optoelectronic semiconductors utilizing InP and gallium arsenide substrates, thin film filters and micro-optic assembly and packaging technology. In addition to these technologies, we also have electronics design, firmware and software capabilities to produce transceivers, transponders, optical amplifiers and other value-added subsystems.

Telecom Products

Our telecom products provide functionality for the various elements within the optical networking system from transmitting to receiving light signals, and include products that generate, detect, amplify, combine and separate light signals. Our product offerings, which are principally aimed at the metro and long-haul telecommunications marketplace, include:


	•	Transmitters. Our transmitter product lines include products with fixed and tunable wavelength designed for both long-haul and metro applications at 2.5 Gb/s and 10 Gb/s. This product line includes lasers that are either directly or externally modulated depending on the application.

	•	Transceivers. Our small form factor pluggable transceiver portfolio includes SFP products operating at 2.5 Gb/s and XFP products operating at 10 Gb/s.

	•	Transponder modules. Our transponder modules provide both transmitter and receiver functions. A transponder includes electrical circuitry to control the laser diode and modulation function of the transmitter as well as the receiver electronics.

	•	Tunable lasers and transmitter modules. Our tunable laser products include discrete lasers and co-packaged laser modulators to optimize performance and reduce the size of the product. Our tunable products include an InP tunable laser chip, a 10Gb/s iTLA tunable laser, a 10Gb/s iTTA transmitter module, and a SFF tunable transponder. We also supply our tunable components into our customers 40Gb/s products, and are developing technology to deliver wide band electronic tunability into our own products at data rates of 40Gb/s and beyond.

	•	Receivers. Our portfolio of discrete receivers for metro and long-haul applications at 2.5 Gb/s and 10 Gb/s includes avalanche photodiode, or APD, preamp receivers, as well as photodiode, or PIN, preamp receivers, and PIN and APD modules and products that feature integrated attenuators.

	•	Amplifiers. Erbium doped fiber amplifiers, or EDFAs, are used to boost the brightness of optical signals and offer compact amplification for ultra long-haul, long-haul and metro networks. We offer a semi-custom product portfolio of multi-wavelength amplifiers from gain blocks to full card level or subsystem solutions designed for use in wide bandwidth wave division multiplexing, or WDM, optical transmission systems. We also offer lower cost narrow band mini-amplifiers.

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	•	Pump laser chips. Our 980 nanometer pump laser diodes are designed for use as high-power, reliable pump sources for EDFAs in terrestrial and undersea, or submarine, applications. Uncooled modules are designed for low-cost, reliable amplification for metro, cross-connect or other single/multi channel amplification applications, and submarine applications.

	•	Thin Film Filters. Our thin film filter, or TFF, products are used for multiplexing and demultiplexing optical signals within dense WDM transmission systems. In addition to this, TFF products are used to attenuate and control light within our amplifier product range.

Non-Telecom Products

The optical technology originally developed for the telecommunications industry is increasingly being deployed in other markets, such as industrial, consumer display and life sciences, in addition to the test and measurement market where it has been deployed for some time. Advancements in laser technology have improved the cost, size and power of devices, making them more suitable for non-telecommunications applications. Our non-telecom product offerings include:


	•	Photonics and Microwave Products. In the area of photonics and microwave solutions, we sell two primary product families to diversified markets such as research institutions and semiconductor capital equipment manufacturers as follows:


	•	Advanced photonic tools principally used for generating, measuring, moving, manipulating, modulating and detecting optical signals.

	•	Tunable lasers for test and measurement applications.


	•	High Powered Laser Products. We currently market our advanced pump laser technology for material processing and printing applications.

	•	Thin Film Filter Products. We deploy our optical TFF technology to markets outside of telecommunications, with applications available in the life sciences, biotechnology and consumer display industries.

	•	VCSEL Products. We sell low power polarized products for mouse and datacom applications.

We operate in two business segments: (i) telecom and (ii) non-telecom. Telecom relates to the design, development, manufacture, marketing and sale of optical component products to telecommunications systems vendors. Non-telecom relates to the design, manufacture, marketing and sale of optics and photonics solutions for certain other markets including material processing, inspection and instrumentation, and research and development.

The following table sets forth our revenues by segment for the periods indicated:


	Six Months Ended				Years Ended
	December 27,		December 29,		June 28,		June 30,		July 1,
	2008		2007		2008		2007		2006
	(In millions)

Revenues:
Telecom	$	89.7	$	85.5	$	176.9	$	153.8	$	195.5
Non-telecom		27.0		27.7		58.6		49.0		36.1

Consolidated revenues	$	116.7	$	113.2	$	235.5	$	202.8	$	231.6

For additional information on the telecom and non-telecom segments, see Note 12 — “Segments of an Enterprise and Related Information” to our consolidated financial statements as of June 28, 2008 and June 30, 2007 and for the fiscal years ended June 28, 2008 and June 30, 2007 and July 1, 2006, and Note 13 — “Segments of an Enterprise and Related Information” to our condensed consolidated financial statements as of

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December 27, 2008 and June 28, 2008 and for the three and six month periods ended December 27, 2008 and December 29, 2007. appearing elsewhere in this joint proxy statement/prospectus.

We believe it is essential to maintain a comprehensive and capable direct sales and marketing organization. As of December 27, 2008, we had an established direct sales and marketing force of 78 people for all of our products sold in the U.K., China, France, Germany, Switzerland, Canada, Italy and the U.S.

In addition to our direct sales and marketing organization, we also sell and market our products through international sales representatives and resellers that extend our commercial reach to smaller geographic locations and customers that are not currently covered by our direct sales and marketing efforts.

Our non-telecom products targeted at research applications are also sold under the New Focus brand name through catalogs and on-line via our website at www.newfocus.com. Neither this website, nor any information that may be accessed through links on such website, are part of this joint proxy statement/prospectus and shall not be deemed to be incorporated by reference herein.

Our telecom products and many of our non-telecom products typically have a long sales cycle. The period of time between our initial contact with a customer to the receipt of an actual purchase order is frequently a year or more. In addition, many customers perform, and require us to perform, extensive process and product evaluation and testing of components before entering into purchase arrangements.

We offer support services in connection with the sale and purchase of certain products, primarily consisting of customer service and technical support. Customer service representatives assist customers with orders, warranty returns and other administrative functions. Technical support engineers provide customers with answers to technical and product-related questions. Technical support engineers also provide application support to customers who have incorporated our products into custom applications.

In 2002, when we acquired the optical components business of Nortel Networks, Nortel Networks entered into a supply agreement with us which specified a minimum amount of products to be purchased from us. This supply agreement was amended three times. Pursuant to the second addendum to our supply agreement, Nortel Networks issued non-cancelable purchase orders, based on revised pricing, totaling approximately $100 million, for certain products to be delivered through March 2006, which included $50 million of products we were discontinuing. Pursuant to the third addendum to the supply agreement, Nortel Networks was obligated to purchase $72 million of our products. These obligations expired in December 2006 and Nortel Networks is no longer subject to any minimum purchase obligations. Our revenues from Nortel Networks were $17.5 million, $35.2 million, $39.9 million and $110.5 million in the six months ended December 27, 2008 and in the fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively. These revenues from Nortel Networks represented 15%, 15%, 20% and 48% of our total revenues in the six months ended December 27, 2008 and in the fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively. On January 14, 2009, Nortel Networks filed for bankruptcy relief and there can be no assurance that Nortel Networks will continue to purchase our products at previously or currently anticipated levels, or at all, while it is in insolvency proceedings for reasons including, but not limited to, Nortel Network’s distractions from its core business execution and the reaction of its own customers.

In the six months ended December 27, 2008, we issued billings of $4.1 million for products that were shipped to Nortel Networks, but for which payment was not received prior to its bankruptcy filing on January 14, 2009, and $1.3 million for products that were shipped to a contract manufacturer for Nortel Networks for which payment may not be received as a result of the Nortel Networks bankruptcy filing. As a result, an aggregate of $5.4 million in revenue was not recognized as revenues or accounts receivable at the time of such billings, and such amounts were therefore deferred as we determined that such amounts were not reasonably assured of collectability in accordance with our revenue recognition policy. The corresponding costs associated with these billings for the six months ended December 27, 2008 were fully included in costs of revenues in the condensed consolidated financial statements for such period, which are included elsewhere in this joint proxy statement/prospectus, as title to the products passed to the customer upon shipment or delivery, depending on the terms of the individual sale. Accordingly, revenue deferrals for the six months ended December 27, 2008 to financially distressed customers reduced revenues and gross margin and increased

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net loss by $5.4 million, and decreased our gross margin rate by approximately 8 percentage points. To the extent that collectability becomes reasonably assured for these deferred billings in future periods, our future results will benefit from the recognition of these amounts.

One of our strategic objectives has been to increase our telecom revenues from customers other than Nortel Networks. Excluding revenues from Nortel Networks, our telecom segment revenues increased to $141.7 million in the fiscal year ended June 28, 2008, from $114.0 million in the fiscal year ended June 30, 2007, and to $114.0 million in the fiscal year ended June 30, 2007 from $85.0 million, in the fiscal year ended July 1, 2006. In addition, excluding revenues from Nortel Networks, our telecom segment revenues increased to $72.1 million in the six months ended December 27, 2008, from $68.5 million in the six months ended December 29, 2007.

Huawei Technologies Co., Ltd. accounted for 14% and 11% of our total revenue in the six months ended December 27, 2008 and the fiscal year ended June 28, 2008, respectively. Cisco Systems, Inc. accounted for 12% of our revenue in the fiscal year ended June 30, 2007.

We principally sell our telecom products to telecommunications systems and components vendors, as well as to customers in data communications, military and aerospace. Customers for our non-telecom products include semiconductor capital equipment manufacturers, life-sciences companies, industrial printing companies, and consumer electronics components companies, as well as academic, military and governmental research institutions that engage in advanced research and development activities.

The following table sets forth our revenues by geographic region for the periods identified, determined based on the country shipped to:


	Six Months Ended				Years Ended
	December 27,		December 29,		June 28,		June 30,		July 1,
	2008		2007		2008		2007		2006
	(In millions)

United States	$	31.0	$	28.3	$	59.5	$	46.0	$	47.8
Canada		7.9		21.4		39.1		56.1		107.4
China		27.4		25.3		59.1		37.7		27.8
Europe		26.9		22.6		47.6		34.4		28.8
Asia other than China		13.3		11.5		22.4		25.2		15.6
Rest of the World		10.2		4.1		7.8		3.4		4.2

Total revenues	$	116.7	$	113.2	$	235.5	$	202.8	$	231.6

We are subject to risks related to operating in foreign countries. These risks include, among others: currency fluctuations; difficulty in accounts receivable collection and longer collection periods; difficulty in enforcing or adequately protecting our intellectual property; foreign taxes; political, legal and economic instability in foreign markets; and foreign regulations. Any of these risks, or any other risks related to our foreign operations, could materially adversely affect our business, financial condition and results of operations and could result in increased operating expenses and reduced revenues.

Intellectual Property

We believe that our proprietary technology provides us with a competitive advantage, and we intend to continue to protect our technology, as appropriate, including design, process and assembly aspects. We believe that our intellectual property portfolio is a strategic asset that we can use to develop our own sophisticated solutions and applications, or in conjunction with the technologies of the companies with whom we collaborate, for use in optical networking and certain other functions. Our intellectual property portfolio includes technology that we obtained from our acquisitions of businesses and companies in addition to our own internally developed technology. Our expertise in applications and process engineering is supplemented by the know-how of personnel who joined us as a result of these acquisitions. We believe that the future

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success of our business will depend on our ability to translate our intellectual property portfolio and the technological expertise and innovation of our personnel into new and enhanced products.

As of December 27, 2008, we held 245 U.S. patents and 74 non-U.S. patents, and we had approximately 141 patent applications pending in various jurisdictions. The patents we currently hold expire at various times between 2009 and 2026. We maintain an active program designed to identify technology appropriate for patent protection. We require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals during their work for us and require that all proprietary information disclosed remain confidential. While such agreements are intended to be binding, we may not be able to enforce these non-disclosure and proprietary rights agreements in all jurisdictions.

Although we continue to take steps to identify and protect our patentable technology and to obtain and protect proprietary rights to our technology, we cannot be certain the steps we have taken will prevent misappropriation of our technology. We may, as appropriate, take legal action to enforce our patents and trademarks and otherwise to protect our intellectual property rights, including our trade secrets, which may not be successful. In the future, situations may arise in which we may decide to grant licenses to third parties to certain of our proprietary technology in which case other parties will be able to exploit our technology in the marketplace.

For example, on March 4, 2008, we filed a declaratory judgment complaint captioned Bookham, Inc. v. JDS Uniphase Corp. and Agility Communications, Inc., Civil Action No. 5:08-CV-01275-RMW, in the United States District Court for the Northern District of California, San Jose Division. Our complaint seeks declaratory judgments that our tunable laser products do not infringe any valid, enforceable claim of U.S. Patent Nos. 6,658,035, 6,654,400, 6,687,278, and that all claims of the aforementioned patents are invalid and unenforceable. Our complaint also contains affirmative claims for relief against JDS Uniphase Corp. and Agility Communications, Inc. for statutory unfair competition, and for intentional interference with economic advantage.

On July 21, 2008, JDS Uniphase Corp. and Agility Communications, Inc. answered our complaint and asserted counterclaims against us for infringement of U.S. Patent Nos. 6,658,035, 6,654,400, 6,687,278, which JDS Uniphase Corp. acquired from Agility Communications, Inc. On October 6, 2008, JDS Uniphase Corp. indicated that its infringement claims are directed at our LamdaFlex^TM TL500 VCJ; TL5000VLJ; TL3000; TL7000; TL8000 and TL9000 products. JDS Uniphase Corp. seeks unspecified compensatory damages, treble damages and attorneys’ fees from us, and an order enjoining us from future infringement of the patents-in-suit This litigation has been stayed due to JDS Uniphase Corp.’s commencement of a U.S. International Trade Commission Investigation, which is described below.

On November 7, 2008, JDS Uniphase Corp. petitioned the U.S. International Trade Commission to commence an investigation into alleged violations by us of Section 337 of the Tariff Act of 1930. On December 8, 2008, the U.S. International Trade Commission commenced investigation No. 337-TA-662 into our alleged importation into the United States, sale for importation, and sale within the United States after importation of tunable laser chips, assemblies, and products containing the same that infringe U.S. Patent Nos. 6,658,035 and 6,687,278. JDS Uniphase Corp. seeks a general exclusion order prohibiting the importation of any Bookham tunable laser chip, assembly, or product containing the same that infringes any claim of the aforementioned patents, as well as an order prohibiting sales after importation into the United States of any allegedly infringing products. The U.S. International Trade Commission has adopted a target completion date of March 19, 2010 for the investigation, and indicated that a final initial determination should be filed by November 19, 2009. Any adverse ruling by the U.S. International Trade Commission, including an exclusion order that could prohibit us from importing into the United States tunable laser chips, assemblies, or products containing the same, or prolonged litigation may have an adverse effect on our business, financial condition and results of operations and any resolution may not be in our favor.

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Research and Development

We believe that continued focus on the development of our technology is critical to our future competitive success. Our goal is to expand and develop our line of telecom products, particularly in the area of wideband tunable products, expand and develop our line of non-telecom products and technologies for use in a variety of different applications, enhance our manufacturing processes to reduce production costs, provide increased device performance and reduce product time to market.

We have significant expertise in optical technologies such as optoelectronic semiconductors utilizing InP and gallium arsenide substrates, thin film filters and micro-optic assembly and packaging technology. In addition to these technologies, we also have electronics design, firmware and software capabilities to produce transceivers, transponders, optical amplifiers and other value-added subsystems. We at times will also consider supplementing our in-house technical capabilities with capabilities acquired by means of strategic alliances or technology development arrangements with third parties when we deem appropriate. We spent $14.8 million, $32.6 million, $43.0 million and $42.6 million on research and development during the six months ended December 27, 2008 and the years ended June 28, 2008, June 30, 2007, and July 1, 2006, respectively. As of December 27, 2008, our research and development organization comprised 148 people.

Our research and development facilities in Paignton and Caswell, U.K., Santa Rosa and San Jose, California, Zurich, Switzerland, Shenzhen, China and Ottawa, Canada include computer-aided design stations, modern laboratories and automated test equipment. Our research and development organization has optical and electronic integration expertise that facilitates meeting customer-specific requirements as they arise.

Manufacturing

Our manufacturing capabilities include fabrication processing operations for InP substrates, gallium arsenide substrates and thin film filters, including clean room facilities for each of these fabrication processes, along with assembly and test capability and reliability/quality testing. We utilize sophisticated semiconductor processing equipment in these operations, such as epitaxy reactors, metal deposition systems, and photolithography, etching, analytical measurement and control equipment. Our assembly and test facilities include specialized automated assembly equipment, temperature and humidity control and reliability and testing facilities.

We lease a facility which houses our advanced 3-inch wafer InP semiconductor fabrication operation, which we believe is one of our key competitive differentiators. This facility is located in Caswell U.K. and is leased pursuant to a 20 year lease, commencing in March 30, 2006, with an option to extend an additional 5 years after the initial 20 year period and for additional 2 year increments indefinitely after the initial 25 year period. We previously owned this facility, but in March 2006 we sold it to a subsidiary of Scarborough Development as a part of a sale-leaseback arrangement. For additional information about the sale-leaseback arrangement of the Caswell facility, (see Note 6 — “Commitments and Contingencies — Caswell Sale-Leaseback” to our consolidated financial statements appearing elsewhere in this joint proxy statement/prospectus). We also have assembly and test facilities in Shenzhen, China and San Jose, California. We have a wafer fabrication facility in Zurich, Switzerland, and a thin film filter manufacturing facility in Santa Rosa, California. In 2004, we implemented a restructuring plan which included the transfer of a majority of our assembly and test operations from Paignton to Shenzhen in order to take advantage of the comparatively low manufacturing costs in China. The transfer of assembly and test operations from our Paignton facility was completed in the quarter ended March 31, 2007. In calendar 2007, we consolidated certain activities within our Caswell, U.K. wafer facility in an effort to rationalize our capacity to match our near term fabrication requirements. In 2008, we transferred substantially all of the manufacturing operations and processes of certain of our non-telecom products from our San Jose, California facility to our Shenzhen facility, in order to take advantage of the comparatively low manufacturing costs in China.

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Long-Lived Tangible Assets

The following table sets forth our long-lived tangible assets by geographic region as of the dates indicated:


	December 27,		June 28,		June 30,
	2008		2008		2007
	(In millions)

China	$	22.8	$	20.5	$	18.5
United Kingdom		3.3		6.3		9.7
Europe other than United Kingdom		4.4		4.1		3.9
United States		1.8		1.8		1.3
Canada		0.2		0.3		0.3

Total long-lived assets	$	32.5	$	33.0	$	33.7

Total Assets

The following table sets forth our total assets by geographic region as of the dates indicated:


	December 27,		June 28,		June 30,
	2008		2008		2007
	(In millions)

United States	$	42.2	$	65.2	$	21.0
United Kingdom		45.7		61.3		58.8
China		65.9		56.3		69.6
Europe other United Kingdom		25.8		28.5		52.7
Canada		0.5		0.8		2.4

Total assets	$	180.1	$	212.1	$	204.5

Competition

The markets for our telecom and non-telecom products are highly competitive. We believe we compete favorably with respect to the following factors:


	•	product quality, performance and price;

	•	on-going product evolution;

	•	manufacturing capabilities; and

	•	customer service and support.

With respect to our telecom products, we also believe we compete favorably on the basis of our historical customer relationships and the breadth of our product lines.

Although we believe that we compete favorably with respect to these factors, there can be no assurance that we will continue to do so. We encounter substantial competition in most of our markets, although no one competitor competes with us across all product lines or markets.

We believe that our principal competitors in telecom are the major suppliers of optical components and modules, including both vendors selling to third parties and components companies owned by large telecommunications equipment manufacturers. Specifically, we believe that our telecom segment competes against two main categories of competitors in the telecom market:


	•	broad-based merchant suppliers of components, principally JDS Uniphase Corporation, Avanex, Opnext, Inc. and Finisar Corporation; and

	•	vertically integrated equipment manufacturers, such as Fujitsu and Sumitomo.

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Our non-telecom segment competes with a number of companies including JDS Uniphase Corporation, Newport, and Thorlabs.

Employees

As of December 27, 2008 we employed 2,324 persons, including 148 in research and development, 1,994 in manufacturing, 78 in sales and marketing, and 104 in finance and administration. None of our employees are subject to collective bargaining agreements. We believe that our relations with our employees are good.

Properties

We lease our corporate headquarters in San Jose, California, which has approximately 52,000 square feet, and includes manufacturing, research and development and office space, under a lease agreement that will expire on March 31, 2011. We lease our wafer fabricating facility in Zurich, Switzerland, which is approximately 124,000 square feet, under a lease that will expire in June 30, 2012. We lease a thin film manufacturing facility in Santa Rosa, California, which has approximately 33,000 square feet, under a lease that expires on December 31, 2011. We lease a 183,000 square foot facility in Caswell, U.K., which includes wafer fabricating, assembly and test capabilities, manufacturing support functions and research and development capabilities and office space, under a lease that expires in March 2026, with options to extend the lease term an additional 5 years immediately after 2026 and for two-year increments indefinitely after 2031. We lease an 18,000 square foot research and development facility in Paignton, U.K. under a lease that expires on December 31, 2017. We own our facility in Shenzhen, China, which is approximately 247,000 square feet comprising manufacturing space, including clean rooms, assembly and test capabilities, packaging, storage, research and development and office space. In addition, we lease approximately 145,000 square feet of facilities in Ventura County California, pursuant to a lease agreement which expires in April 2011, which we currently do not utilize.

Our telecom business segment utilizes the Paignton facility, substantial portions of the Shenzhen and Caswell facilities, and it shares the Santa Rosa and Zurich facilities with our non-telecom business segment. Our non-telecom business segment utilizes the majority of the San Jose facility, shares the Santa Rosa and Zurich facility with our telecom segment, and utilizes a comparatively small portion of our Caswell facility. Our non-telecom business segment recently transferred substantially all of its manufacturing operations from our San Jose facility to our Shenzhen facility.

Legal Proceedings

On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822 was filed against New Focus, Inc., or New Focus, and several of its officers and directors, or the Individual Defendants, in the United States District Court for the Southern District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter Defendants, the underwriters in New Focus’s initial public offering. Three subsequent lawsuits were filed containing substantially similar allegations. These complaints have been consolidated.

On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and others in the United States District Court for the Southern District of New York. On April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described below. The Amended Class Action Complaint names as defendants Bookham Technology plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens, Inc., two of the underwriters of Bookham Technology plc’s initial public offering in April 2000, and Andrew G. Rickman, Stephen J. Cockrell and David Simpson, each of whom was an officer and/or director at the time of Bookham Technology plc’s initial public offering.

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Technology plc, have been coordinated for pretrial purposes and captioned In re Initial Public Offering Securities Litigation, 21 MC 92.

It is uncertain if the litigations will settle. If settlement of the litigations does not occur and litigation against Bookham Technology plc and New Focus continues, we believe that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the Amended Class Action Complaints and

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therefore we believe that such claims will not have a material effect on its financial position, results of operations or cash flows.

On March 4, 2008, we filed a declaratory judgment complaint captioned Bookham, Inc. v. JDS Uniphase Corp. and Agility Communications, Inc., Civil Action No. 5:08-CV-01275-RMW, in the United States District Court for the Northern District of California, San Jose Division. Our complaint seeks declaratory judgments that its tunable laser products do not infringe any valid, enforceable claim of U.S. Patent Nos. 6,658,035, 6,654,400 and 6,687,278, and that all claims of the aforementioned patents are invalid and unenforceable. Our complaint also contains affirmative claims for relief against JDS Uniphase Corp. and Agility Communications, Inc. for statutory unfair competition, and for intentional interference with economic advantage.

On July 21, 2008, JDS Uniphase Corp. and Agility Communications, Inc. answered our complaint and asserted counterclaims against us for infringement of U.S. Patent Nos. 6,658,035, 6,654,400 and 6,687,278, which JDS Uniphase Corp. acquired from Agility Communications Inc. On October 6, 2008, JDS Uniphase Corp. indicated that its infringement claims are directed at our LamdaFlex^TM TL500 VCJ; TL5000VLJ; TL3000; TL7000; TL8000 and TL9000 products. JDS Uniphase Corp. seeks unspecified compensatory damages, treble damages and attorneys’ fees from us, and an order enjoining us from future infringement of the patents-in-suit. This litigation has been stayed due to JDS Uniphase Corp.’s commencement of a U.S. International Trade Commission Investigation, which is described below.

On November 7, 2008, JDS Uniphase Corp. petitioned the U.S. International Trade Commission to commence an investigation into alleged violations by us of Section 337 of the Tariff Act of 1930. On December 8, 2008, the U.S. International Trade Commission commenced investigation No. 337-TA-662 into our alleged importation into the United States, sale for importation, and sale within the United States after importation of tunable laser chips, assemblies, and products containing the same that infringe U.S. Patent Nos. 6,658,035 and 6,687,278. JDS Uniphase Corp. seeks a general exclusion order prohibiting the importation of any Bookham tunable laser chip, assembly, or product containing the same that infringes any claim of the aforementioned patents, as well as an order prohibiting sales after importation into the United States of any allegedly infringing products. The U.S. International Trade Commission has adopted a target completion date of March 19, 2010 for the investigation, and indicated that a final initial determination should be filed by November 19, 2009. Any adverse ruling by the U.S. International Trade Commission, including an exclusion order that could prohibit us from importing into the United States tunable laser chips, assemblies, or products containing the same, or prolonged litigation may have an adverse effect on our business, financial condition and results of operations and any resolution may not be in our favor.

We and merger sub are also named as defendants in the litigation described under “Bookham Proposal No. 1 and Avanex Proposal No. 1 — The Merger — Legal Proceedings Related to the Merger” of this joint proxy statement/prospectus.

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AVANEX BUSINESS

Patents and Intellectual Property

Avanex is a global provider of high-performance, intelligent, photonic products including optical components, modules and subsystems. Avanex’s products enable optical communication networks to regenerate, transmit and manage voice, video and data optical signals efficiently. Telecommunication system integrators and their network carrier customers use Avanex’s products to enhance system performance and increase network speed and capacity. Avanex believes it is one of the largest broad-based suppliers of telecom optical equipment.

In 2003, Avanex acquired all of the outstanding equity of Alcatel Optronics France, a subsidiary of Alcatel, certain assets of the optical components business of Corning Incorporated, and substantially all of the assets of Vitesse’s Optical Components Systems Division. As part of these acquisitions, Alcatel and Corning Incorporated licensed certain intellectual property rights to Avanex. Over the past five years, Avanex has integrated and restructured these assets and have shifted most of its manufacturing operations and portions of its development resources to lower-cost geographic regions. For instance, in March 2005, Avanex announced that it had opened an operations center in Bangkok, Thailand to centralize global manufacturing and operational overhead functions in a lower-cost region. In July 2005, Avanex announced the opening of a development and marketing office in Shanghai, China. In April 2007, Avanex sold ninety percent (90%) of its share capital and voting rights of its wholly-owned subsidiary in France, including Avanex’s Indium Phosphide (InP) and Gallium Arsenide (GaAs) semiconductor fabs, and its laser, terrestrial pump, submarine pump and Fiber Bragg Grating (FBG) product lines, to 3S Photonics.

In order to expand Avanex’s transmission product portfolio, in July 2007, it acquired the assets relating to the MSA 300-pin transponder and XFP transceiver businesses of the Commercial Communication Products Division of Essex Corporation, a subsidiary of Northrop Grumman Space and Mission Systems Corporation.

Avanex has one of the broadest optical product portfolio platforms available, with a scalable and efficient global operating model.

Avanex was incorporated in October 1997 as a California corporation, and in January 2000, it was reincorporated as a Delaware corporation. Avanex’s principal executive office is located at 40919 Encyclopedia Circle, Fremont, California, 94538. Avanex also maintains facilities in Horseheads, New York; Shanghai, China; Villebon Sur Yvette, France; San Donato, Italy; and Bangkok, Thailand. Avanex’s main telephone number is (510) 897-4188, and its web site address is www.avanex.com. Avanex’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through its internet web site, as soon as reasonably practicable, after it electronically files such material with, or furnishes it to the Securities and Exchange Commission (SEC).

Avanex and the Avanex logo are registered trademarks of Avanex Corporation. This joint proxy statement/prospectus also includes other trade names, trademarks and service marks of Avanex’s and of other companies.

Industry

Optical technology transfers information in the form of light signals along optical fibers. The light signals are transmitted through fiber optic cable. Beyond lasers, many other optical components and subsystems are utilized within optical networks to generate, clean, amplify, isolate, route, or otherwise enhance light signals.

Over the last several years, the optical components, modules and subsystems industry has experienced a modest increase in business levels, as compared to previous years, because network carriers and cable companies have been deploying new communication networks or have been upgrading the backbone of existing communication networks. The increasing demand for optical solutions is in response to growing bandwidth demand driven by increased transmission of video, voice and data over optical communication networks, and by a need among network carriers to decrease the total cost of ownership of their networks. Certain large telecommunications network carriers have also disclosed that they plan to deploy, and have begun to deploy, new broadband access networks based on fiber optic technologies. These fiber-to-the-premise

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networks significantly increase the capacity and expand the type of services that can be utilized by residential users.

Products

Avanex’s product portfolio is comprised of the following product families (depicted visually above):

Amplification — Avanex’s Amplification product family includes products that optically amplify transmission signals, including Erbium doped fiber amplifiers.

Wavelength Management — Avanex’s Wavelength Management platform includes Switching and Routing solutions, Multiplexing and Signal Processing solutions and Micro-Optics and Integrated Modules, including products that optically add and drop transmission signals in both fixed and reconfigurable versions, products that optically multiplex or demultiplex signals based on thin film filters, planar and interleaver technologies, and products that optically attenuate signal power across a single or multiple wavelength bands.

Dispersion Compensation Management — Avanex’s Dispersion Compensation product family consists of products that optically compensate for chromatic dispersion and dispersion degradation of transmission signals, including fixed and tunable products based on dispersion compensating fiber and cascaded etalons.

Transmission — Avanex’s Transmission product family includes transceivers and transponders. These products transmit and receive optical signals on optical fibers. Avanex’s Transmission product family also includes Lithium Niobate Modulators, which are optical devices fabricated from Lithium Niobate and other optical devices that manipulate the phase of magnitude of an optical signal. Their primary function is to transfer information on an optical carrier by modulating the light.

Competition

The optical communications markets are rapidly evolving. Avanex expects these markets to continue to be highly competitive because of the available capacity and easily obtained funding. Avanex believes that its principal competitors in the optical subsystems, modules and components industry include Bookham, Inc., EMCORE Corporation, JDS Uniphase Corporation, Oplink Communications, Inc., Opnext, Inc. and Optium Corporation. Avanex believes it differentiates itself from its competitors by offering high levels of customer value through collaborative product design, technology innovation, optical/mechanical performance, intelligent

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features for configuration, control and monitoring, multi-function integration and overall customization. The principal competitive factors upon which Avanex competes include breadth of product line, availability, performance, product reliability, innovation and selling price. Avanex believes that it competes favorably with its competitors with respect to the foregoing factors.

Consolidation in the optical systems and components industry in the past has intensified, and future consolidation could further intensify, the competitive pressures that Avanex faces. For example, Finisar Corporation and Optium Corporation, and Opnext Inc. and StrataLight Communications, Inc. have recently consummated combinations. In addition, Oplink Communications and EMCORE Corporation have expanded their businesses through acquisitions. Significant consolidation has also taken place recently at the carrier level and at Avanex’s customer level. Recent mergers among Avanex’s customers include that of ADVA Optical Networking with Movaz Networks Inc., Alcatel with Lucent Technologies Inc., Ericsson AB with Marconi, and the merger of the optical businesses of Siemens AG and Nokia.

Avanex also faces competition from companies that may expand into its industry and introduce additional competitive products. Existing and potential customers are also Avanex’s potential competitors. These customers may develop or acquire additional competitive products or technologies, which may cause them to reduce or cease their purchases from us. Please see “Risks Relating to Avanex” in this joint proxy statement/prospectus, including in Section II: “Market and Competitive Risks.”

Research and Development

Avanex believes that research and development is critical to its strategic growth objectives. Avanex’s research and development activities are focused on new products that integrate multiple optical functions and that offer intelligent features for configuration, control and monitoring. To accomplish this, Avanex’s research and development team possesses expertise in the areas of optical components, micro-optic and integrated-optic design, as well as in electronics, firmware, and software. Most of Avanex’s efforts are directed toward the development of platforms with new revenue potential, but Avanex does continue to invest in current technological platforms to ensure its continued competitiveness in the future.

Avanex’s research and development expenses totaled $28.3 million for the fiscal year ended June 30, 2008, $25.2 million for the fiscal year ended June 30, 2007, and $23.5 million for the fiscal year ended June 30, 2006. During fiscal 2008, research and development expenditures increased due to higher prototype parts spending and additional staff in the U.S. and China. During fiscal 2007, research and development expenditures increased as Avanex added staff in China and increased patent-related expenses; however, by the end of fiscal 2007, expenses had decreased to comparable levels with the prior year with the sale of Avanex’s subsidiary in France. In addition, Avanex has moved significant engineering resources to its Shanghai location to increase the cost effectiveness of its overall research and development activities and to provide support to its third-party contract manufacturers. As of February 11, 2009, Avanex employed 143 people in its research and development groups in Fremont, California; Horseheads, New York; Villebon Sur Yvette, France; San Donato, Italy; and Shanghai, China.

During fiscal 2006, 2007 and 2008, Avanex saw an increase in the number of customers purchasing integrated subsystem products, as well as an increase in the complexity of such products with existing customers as the demand for more intelligent, efficient and flexible optical fiber networks increases. Avanex continues to invest in such products, as it believes applications for these types of products will become increasingly important in the future. For risks associated with Avanex’s research and development efforts, please see “Risks Relating to Avanex” in this joint proxy statement/prospectus, including in Section IV: “Operations and Research and Development Risks.”

Sales and Marketing

Avanex primarily markets its products to telecommunications system integrators. Avanex’s marketing efforts are centered on the demonstration of, and education about, its products’ performance at trade shows and customer visits. Avanex sells and markets its products through a combination of direct sales, distributors and representatives.

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As of February 11, 2009, Avanex’s direct sales organization consisted of directly employed account managers in the United States, Europe and Asia, supported by application engineers and product line managers. Avanex focuses its direct sales efforts on service providers and telecommunications systems and optical module manufacturers. The direct sales account managers cover the market on an assigned-account, regional basis and work as a team with systems engineers and product line managers. As of February 11, 2009, Avanex’s sales and marketing organization consisted of 51 people. Avanex provides customer service directly to its customers.

In order to further Avanex’s international sales objectives, it has established relationships with distributors and manufacturer’s representatives geographically as needed to support its customers. These distributors and representatives have expertise in distributing complex telecommunications equipment in their markets and provide basic customer service to the end customers they serve.

While Avanex has diversified its customer base, it expects that a substantial proportion of its sales will continue to be concentrated with a limited number of customers. During fiscal 2008, Alcatel-Lucent accounted for 25% of Avanex’s net revenue and Tellabs accounted for 21% of Avanex’s net revenue. During fiscal 2007, Alcatel-Lucent accounted for 29% of Avanex’s net revenue and Tellabs accounted for 17% of Avanex’s net revenue. During fiscal 2006, Alcatel accounted for 27% of Avanex’s net revenue and Nortel accounted for 11% of Avanex’s net revenue.

A summary of certain financial information by geographic location is found in Note 15 in the Notes to Consolidated Financial Statements.

Backlog

Avanex does not believe that backlog as of any particular date is meaningful, as its sales are made primarily pursuant to standard purchase orders for delivery of products. Only a small portion of Avanex’s orders are non-cancelable, and the dollar amount associated with the non-cancelable portion is not significant.

Manufacturing

During fiscal 2007, Avanex completed the transition of most of its manufacturing operations to third party contract manufacturers located in Thailand and China, whose operations are coordinated through Avanex’s Asian Operations Center in Bangkok, Thailand; however, Avanex continues to manufacture Lithium Niobate chips that are used in its products in San Donato, Italy. As of February 11, 2009, Avanex’s manufacturing support organization consisted of 196 people.

Avanex currently purchases several key components used in its products and equipment from single or limited sources of supply, including Bookham Inc., Corning, Eudyna Devices Inc., JDS Uniphase Corporation and Photop, Inc. These key components include lasers, variable optical attenuators, thin film filters, gain flattening filters, and optical fiber. Avanex also purchases turnkey solutions from OEM manufacturers, such as Browave Corporation, Fabrinet, Optiworks, and Photop Inc. For risks associated with Avanex’s manufacturing strategy, please see “Risks Relating to Avanex” in this joint proxy statement/prospectus, including Section IV: “Operations and Research and Development Risks.”

Avanex’s United States, Europe and Asia sites are currently TL-9000 certified. Avanex will continue to refine its quality processes to ensure that it maintains its high standards of product quality and customer satisfaction.

As of February 11, 2009, Avanex held approximately 543 U.S. patents and approximately 313 foreign patents (issued and pending), covering a broad range of photonics and optical communications products and technologies. These technologies are incorporated into Avanex’s products and are covered by patents that expire through November 2028; however, Avanex also has patents that have not been incorporated into its products. In addition, Avanex’s intellectual property includes trade secrets, trademarks, and copyrights. Avanex does not expect to maintain or enhance its market position primarily through the exercise of its intellectual

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property rights because the rapid evolution of technology and the wide distribution of patents in its industry preclude such market positioning through intellectual property. Avanex will pursue opportunities to license its intellectual property if it believes that it can be adequately compensated or if there is the potential for a beneficial cross-license agreement.

Avanex’s engineering teams have significant expertise in photonic, micro-optic and systems-level design and manufacturing. While Avanex relies on patent, copyright, trade secret and trademark law to protect its technology, Avanex also believes that other factors, such as the technological and creative skills of its personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position.

Avanex generally enters into confidentiality or license agreements with Avanex’s employees, consultants and corporate partners, and generally controls access to and distribution of its proprietary information.

In addition, Avanex has been granted licenses to use other intellectual property, including patents of Alcatel, Corning and various other third parties. For risks associated with Avanex’s patents and intellectual property, please see “Risks Relating to Avanex” in this joint proxy statement/prospectus, including Section V: “Intellectual Property and Litigation Risks.”

Employees

As of February 11, 2009, Avanex had 459 employees and consultants comprised of 196 employees in manufacturing support, 143 employees in research and development, 51 employees in sales and marketing, and 69 employees in general and administrative capacities. The work force is located in Canada, China, France, Germany, Italy, Japan, Thailand, the United Kingdom, and the United States.

As of February 11, 2009, some of Avanex’s employees located in Europe were represented by labor organizations.

Avanex considers its relations with its employees to be good. Avanex’s future success depends on its continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Please see “Risks Relating to Avanex” in this joint proxy statement/prospectus, including Section IV: “Operations and Research and Development Risks,” specifically the risk factor entitled “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.”

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Properties

Avanex leases the following properties:


	Square
Location	Feet		Principal Operations	Date Lease Expires

Bangkok, Thailand		15,610	Administrative office	February 28, 2010
Bangkok, Thailand		3,300	Warehouse	May 31, 2009
Horseheads, New York		15,000	Administrative office and Research & Development	January 31, 2010
Fremont, California #1		54,000	Corporate headquarters and partial sublease	October 17, 2009
Fremont, California #2		91,000	Administrative office (subleased)	April 15, 2010
Newark, California #1		48,000	Administrative office (subleased)	November 30, 2010
Newark, California #2		62,000	Administrative office (subleased)	November 30, 2010
Melbourne, Florida		6,000	Administrative office and Research & Development (vacant)	May 15, 2009
Villebon, France		8,830	Administrative office and Research & Development	April 25, 2010
San Donato, Italy		65,700	Manufacturing and Administrative	June 30, 2011
Shanghai, China		12,200	Administrative office and Research & Development	December 31, 2009

Avanex believes that existing facilities are in excess of its needs. Avanex is currently evaluating the most appropriate use of its existing facilities and the possibility of subleasing more of its space to third parties. Avanex currently sublease some of the space at its facilities in Fremont and Newark, California to other companies.

Legal Proceedings

From time to time, Avanex is 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. Avanex does not believe that any of these legal proceedings or claims is likely to have a material adverse effect on its 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 Avanex’s 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

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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. The parties have reached a global settlement of the litigation and have so advised the Court. Under the settlement, which remains subject to Court approval, the insurers would pay the full amount of settlement share allocated to Avanex, and Avanex would bear no financial liability. Avanex, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, would receive complete dismissals from the case. It is uncertain whether the settlement will receive final Court approval. If the settlement does not receive final Court approval, 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

On October 3, 2007, a purported Avanex stockholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against Avanex’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. Avanex is named as a nominal defendant. No recovery is sought from Avanex. On March 12, 2009, the district court entered its order and judgment dismissing with prejudice the claims against the underwriter defendants. An appeal may be filed within 30 days after the judgment was entered.

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 stockholders of Avanex. Plaintiffs purport to bring this action on behalf of all stockholders of Avanex. On March 3, 2009, these individuals filed an amended complaint. The amended complaint alleges that the defendants breached their fiduciary duties by failing to maximize stockholder value in connection with the contemplated merger of Avanex and Bookham, and that the joint proxy statement/prospectus fails to provide stockholders with material information or contains materially misleading information thereby rendering the stockholders unable to cast an informed vote on the proposed merger. 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 Avanex fails to prevail in these legal matters or if these matters are resolved against Avanex, the operating results of a particular reporting period could be materially adversely affected or the merger with Bookham could be halted.

Other Litigation

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MANAGEMENT AND OTHER INFORMATION OF THE COMBINED COMPANY

Executive Officers and Directors of the Combined Company

Resignation of Avanex’s Current Officers and Directors

Pursuant to the merger agreement, it is contemplated that each corporate officer and director of Avanex and any of its subsidiaries will resign at or prior to the effective time of the merger agreement, provided that in the case of each director of Avanex such resignation will be effective 24 hours after the effective time of the merger.

Executive Officers and Directors of Bookham Following the Merger

The Bookham board of directors is currently comprised of eight directors and is divided into three classes, with each class serving a staggered three-year term.

Pursuant to the merger agreement, the Bookham board of directors immediately following the effective time of the merger will be comprised of three members of the Avanex board of directors (currently expected to be Giovanni Barbarossa, Greg Dougherty and Joel Smith) and four members to be designated by Bookham (currently expected to be Alain Couder, Bernard Couillaud, Lori Holland and Edward Collins). The merger agreement provides that the parties will take all actions necessary to ensure that effective immediately following the effective time of the merger agreement, the board of directors of Bookham will consist of the following members in the following director classes, each to hold an office from and after the effective time of the merger until the earliest of appointment of his or her respective successor, resignation or proper removal in accordance with Bookham’s charter documents and applicable legal requirements:


	•	Class I:


	•	Two members to be chosen by Bookham (in its sole discretion), or to the extent any such person determines not to serve (or is unable to serve) as a member of the board, another person designated by Bookham; and

	•	Giovanni Barbarossa, or, to the extent Dr. Barbarossa determines not to serve (or is unable to serve) as a member of the board, another person designated by Avanex.


	•	Class II:


	•	One member to be chosen by Bookham (in its sole discretion), or, to the extent any such person determines not to serve (or is unable to serve) as a member of the board, another person designated by Bookham; and

	•	Greg Dougherty, or, to the extent Mr. Dougherty determines not to serve (or is unable to serve) as a member of the board, another person designated by Avanex.


	•	Class III:


	•	One member to be chosen by Bookham (in its sole discretion), or, to the extent any such person determines not to serve (or is unable to serve) as a member of the board, another person designated by Bookham; and

	•	Joel A. Smith, III, or, to the extent Mr. Smith determines not to serve (or is unable to serve) as a member of the board, another person designated by Avanex.

The merger agreement further provides that Bernard Couillaud (to the extent he becomes a director immediately following the effective time) will serve as the chairman of the board of directors of Bookham immediately following the effective time of the merger.

The following table lists the names and ages as of February 23, 2009, and positions of the individuals who are currently expected to serve as directors of Bookham immediately following the completion of the merger. However, as of the date of this joint proxy statement/prospectus, a final determination as to who will be appointed to the Bookham board of directors has not been made and the requisite corporate action to appoint the persons who will serve as directors of Bookham following the completion of the merger has not

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been effected; accordingly, the persons who will serve as directors Bookham following the completion of the merger may differ from the persons currently expected to serve in such capacity. For example, a person currently expected to serve as a Bookham director immediately following the completion of the merger may determine, prior to the completion of the merger, not to serve in such capacity (or may be unable to so serve), in which case, Bookham or Avanex, as applicable, may designate a substitute person to serve in such capacity.


Name	Age		Position

Alain Couder		62	President, Chief Executive Officer and Director
Bernard Couillaud		65	Chairman of the Board
Giovanni Barbarossa		47	Director
Edward Collins		66	Director
Greg Dougherty		49	Director
Lori Holland		50	Director
Joel A. Smith III		63	Director

Alain Couder, President, Chief Executive Officer and Director. Mr. Couder has served as a director and the President and Chief Executive Officer of Bookham since August 2007. Prior to joining Bookham, Mr. Couder was the President and CEO of Solid Information Technology Inc., a supplier of database solutions, from March 2005 to August 2007. From May 2004 to February 2005, Mr. Couder was a Venture Advisor to Sofinnova Ventures, Inc., a venture capital company. From April 2003 to March 2004, Mr. Couder was the President and CEO of Confluent Software, Inc., a software company. From August 2002 to March 2003, Mr. Couder was President and CEO of IP Dynamics, Inc., a software company. Mr. Couder served as Chief Operating Officer of Agilent Technologies, Inc., a measurement and analysis company, from February 2000 to May 2002. Earlier in his career, Mr. Couder worked for Packard-Bell NEC, Groupe Bull, Hewlett Packard and IBM, each a computer hardware company. Mr. Couder is a director at Sanmina-SCI, an electronic manufacturing services firm, since February 2007. Mr. Couder holds a master’s degree in electrical engineering from the Ecole Superieure d’Electricite in Paris.

Bernard Couillaud, Chairman of the Board. Mr. Couillaud has served as a director of Bookham since May 2008. The majority of Dr. Couillaud’s career was spent with the Santa Clara, California-based laser manufacturer, Coherent, Inc., where he served as President and Chief Executive Officer from July 1996 until 2002. Dr. Couillaud was the Chairman of Coherent’s Board of Directors from October 2002 until his retirement in June 2007. From 2000 to 2005, Dr. Couillaud was the Chairman of the Supervisory Board of Lambda Physik AG, a German public company. Dr. Couillaud was a full Professor at the University of Bordeaux and a CNRS Fellow and he is also a member of the French National Academy of Technology.

Giovanni Barbarossa, Director. Dr. Barbarossa has served as the Chief Executive Officer of Avanex since July 2008 and as the Senior Vice President and Chief Technology Officer of Avanex since May 2002. Dr. Barbarossa led the Active Component Business Unit from August 2004 to June 2005 and served as Vice President of Product Development from May 2001 to August 2004. Prior to being promoted to Vice President of Product Development, Dr. Barbarossa was Director of Research and Development from February 2000 until May 2001. From 1999 to February 2000, Dr. Barbarossa served as Project Manager in the Optical Networking Division of Agilent Technologies. Dr. Barbarossa held various positions, including Team Leader in the Optical Application Specific Integrated Circuits Department and Member of Technical Staff of Bell Laboratories at Lucent Technologies, a developer and manufacturer of communications products, from 1995 through 1999. Dr. Barbarossa received his Ph.D. degree in Electronics Engineering from the University of Glasgow, U.K. and a B.S. degree in Electrical Engineering from the University of Bari, Italy.

Edward Collins, Director. Mr. Collins has served as a director of Bookham since May 2008. From 1995 to present, Mr. Collins has served as the Managing Director and a Partner at ChinaVest Group, a private equity group investing in China. In addition, from 2007 to present, Mr. Collins has served as chairman of California Bank of Commerce and from 1999 to present he has served as chairman of the Taiwan Greater China Fund. From 1988 to 1994, Mr. Collins was a partner at the law firm of McCutchen, Doyle, Brown, & Enersen where he was responsible for the Greater China practice. He has served as counsel to various investment groups, banks, and manufacturing companies in Hong Kong and Taiwan, and has been a member of the State Bars of

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California and Texas. Mr. Collins also serves as non-executive Chairman of Branded Spirits, Ltd., a privately held company.

Greg Dougherty, Director. Mr. Dougherty has served as a director of Avanex since April 2005. Mr. Dougherty is a Senior Advisor and previously served as Chief Executive Officer of Picarro, Inc., a company focused on developing lasers and optical instruments. He has also served as a director of Picarro since October 2002. From February 2001 to September 2002, Mr. Dougherty held a number of positions at JDS Uniphase, an optical technology company, including Chief Operating Officer, Executive President and Chief Operating Officer of the Amplification and Transmission Business Group. Mr. Dougherty held a number of positions at SDL, Inc., an optical technology company, from March 1997 to February 2001, including Chief Operating Officer, Vice President of the Communications Business Unit and Corporate Marketing and Sales, Vice President of Communications and Information Products, Vice President of the Components Group and President of SDL Optics. Prior to joining SDL, from 1989 to 1997, Mr. Dougherty was the Director of Product Management and Marketing at Lucent Technologies Microelectronics in the Optoelectronics Strategic Business Unit. Mr. Dougherty received a B.Sc. degree in optics from Rochester University.

Lori Holland, Director. Ms. Holland has served as a director of Bookham since September 2004. Ms. Holland served as a director of Bookham Technology plc from April 1999 until September 2004. Ms. Holland has served as a consultant to various technology startups since January 2001. From November 1999 until December 2000, Ms. Holland was the Chief Financial Officer of Zaffire, Inc., a telecommunication company in California. Ms. Holland served as a director and audit committee member of Credence Systems Corporation, a test equipment supplier to the semiconductor industry based in Silicon Valley, from September 2004 until August 2008 when Credence merged with LTX Corporation. Ms. Holland currently serves as a director and audit committee member of LTX-Credence Corporation. Ms. Holland received a BS in Economics from California Polytechnic State University.

Joel A. Smith III, Director. Mr. Smith has served as a director of Avanex since December 1999. Mr. Smith was the Dean of the Darla Moore School of Business of the University of South Carolina from October 2000 to December 2007. Previously, Mr. Smith served as the President of Bank of America East, a financial institution, from October 1998 to September 2000. From July 1991 to October 1998, Mr. Smith served as President of Nations Bank Carolinas, a financial institution. Mr. Smith serves on the board of directors of First National Bank of the South. Mr. Smith received a B.A. from the University of the South in Sewanee, Tennessee.

It is currently expected that the executive officers of Bookham following the merger will be substantially similar to the current executive officers of Bookham. In addition, following the effective time of the merger Bookham contemplates that certain employees of Avanex will join Bookham as officers of Bookham and thus may become executive officers of Bookham. In the event that new personnel become executive officers of Bookham, certain persons who currently serve as executive officers of Bookham may no longer serve in such capacity. As of the date of this joint proxy statement/prospectus it is not known which Avanex employees, if any, will become executive officers of Bookham and no determinations by Bookham have been made in this regard. Similarly, it is not known which of Bookham’s current executive officers, if any, will cease to serve in such capacity. Any executive officers of Bookham following the completion of the merger will serve in such capacity at the discretion of the Bookham board of directors. The following table lists the names and ages as of February 23, 2009, and positions of the individuals who are currently serving as executive officers of Bookham.


Name	Age		Current Position with Bookham

Alain Couder		62	President, Chief Executive Officer and Director
Jerry Turin		46	Chief Financial Officer
James Haynes		47	Chief Operating Officer
Adrian Meldrum		38	Executive Vice President, Telecom Division
Kate Rundle		52	Executive Vice President, General Counsel and Corporate Secretary

Jerry Turin, Chief Financial Officer. Mr. Turin has served as the Chief Financial Officer of Bookham since August 1, 2008. From July 2005 to July 2008, Mr. Turin served as Bookham’s Corporate Controller.

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From April 2008 to July 2008, Mr. Turin served as Bookham’s Vice President of Finance. From 1999 to 2002, Mr. Turin served as Controller of Silicon Spice Inc. (which was acquired by Broadcom Corporation in October 2000), a developer of gateway and carrier access chipsets, software and development tools. Mr. Turin received his bachelor’s degree in Business Administration and Commerce from the University of Alberta in Alberta, Canada and is a member of the Canadian Institute of Chartered Accountants and the Institute of Chartered Accountants of Alberta.

James Haynes, Chief Operating Officer. Mr. Haynes has served as the Chief Operating Officer of Bookham since March 2005 and as acting Chief Technology Officer since June 2005. From August 2004 to March 2005, Mr. Haynes was the Officer VP, U.K. Operations, of Bookham Technology plc. From June 2003 to August 2004, Mr. Haynes served as VP Operations and Site Leader, Caswell for Bookham, Inc. From December 2000 to June 2003, Mr. Haynes served as Chief Operating Officer of Agility Communications, Inc., a tunable laser company. From 1998 to December 2000, Mr. Haynes served as Director of Technology of Nortel Networks Corporation. Mr. Haynes received his BSc (Hons) in Materials Science and Technology from Swansea University, United Kingdom.

Adrian Meldrum, Executive Vice President, General Manager of Telecom Division. Mr. Meldrum has served as the Executive Vice President, General Manager of Telecom Division of Bookham since October 2007. He was Vice President, Sales and Marketing from July 2005 to October 2007. From November 2004 to July 2005, Mr. Meldrum served as our Vice President, Communication Sales. Mr. Meldrum previously served as Vice President, Business Development and held various positions in business development and product management roles after joining Bookham in 2001. From 2000 to 2001, Mr. Meldrum served as Product Line Manager for JDS Uniphase Corp., in the United Kingdom and joined JDS Uniphase Corp. through its acquisition of SDL in 2000. Mr. Meldrum holds a BSc in Physics from Manchester Metropolitan University.

Kate Rundle, Executive Vice President, General Counsel and Corporate Secretary. Ms. Rundle has served as the Executive Vice President, General Counsel and Corporate Secretary of Bookham since November 2007. Prior to joining Bookham, from February 2006 to May 2007, Ms. Rundle was Vice President, General Counsel and Corporate Secretary of MIPS, Inc., a publicly-traded semiconductor technology licensing company. Ms. Rundle worked at Sun Microsystems from 1997 to 2006, holding a number of positions including Senior Director responsible for the world wide legal support of the company’s marketing organization. Ms. Rundle completed her BA from the University of California, Berkeley and she received her J.D. from the University of California, Hastings College of the Law.

The executive officers are elected by, and serve at the discretion of, the board of directors. There are no family relationships among any of the currently expected directors and current executive officers of Bookham.

Director Independence

Under applicable NASDAQ rules, a director will only qualify as an “independent director” if the director does not have a relationship with the listed company that would impair his/her independence, and, in the determination of Bookham’s board of directors, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director of Bookham.

Of the eight current members of the Bookham board of directors, seven have been determined to be independent within the meaning of applicable NASDAQ rules. These seven current Bookham directors are Peter Bordui, Bernard Couillaud, Edward Collins, Joseph Cook, Lori Holland, W. Arthur Porter and David Simpson. Alain Couder, a current member of Bookham’s board and Bookham’s President and Chief Executive Officer, is not independent within the meaning of applicable NASDAQ rules. Prior to the appointment of Giovanni Barbarossa, Greg Dougherty and Joel A. Smith, III (or any substitute persons designated by Avanex) to the Bookham board of directors, the Bookham board of directors will determine whether these individuals are independent (as to Bookham) within the meaning of applicable NASDAQ rules, and whether those individuals expected to serve as members of Bookham’s audit committee immediately following the completion of the merger meet the additional independence requirements set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended.

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Board Committees

The board of directors of Bookham following the completion of the merger will have an audit committee, a compensation committee and a nominating and corporate governance committee.

Audit Committee

The responsibilities of the audit committee of the Bookham board following the completion of the merger will include: appointing, approving the compensation of, and evaluating the independence of Bookham’s independent registered public accounting firm, overseeing the work of Bookham’s independent registered public accounting firm, including through the receipt and consideration of certain reports from the firm, reviewing and discussing with management and Bookham’s independent registered public accounting firm Bookham’s annual and quarterly financial statements and related disclosures, monitoring Bookham’s internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics, establishing procedures for the receipt and retention of accounting related complaints and concerns, and meeting independently with Bookham’s independent registered public accounting firm and management.

Immediately following completion of the merger, it is currently expected that Ms. Holland, as the chairperson, and two additional directors to be appointed by the Bookham board (one of which is currently expected to be either Mr. Dougherty or Mr. Smith) will serve on the audit committee. Bookham’s board has previously determined that Ms. Holland, who currently serves on Bookham’s audit committee, is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.

Compensation Committee

The responsibilities of the compensation committee of the Bookham board following the completion of the merger will include: reviewing and approving, or making recommendations to the Bookham board with respect to, the compensation of Bookham’s chief executive officer and other executive officers, making recommendations to the Bookham board with respect to incentive compensation and equity-based plans, and administering Bookham’s incentive compensation and equity-based plans.

Immediately following completion of the merger, it is currently expected that Mr. Dougherty, as the chairperson, and two additional directors to be appointed by the Bookham board will serve on the compensation committee.

Nominating and Corporate Governance Committee

The responsibilities of the nominating and corporate governance committee of the Bookham board following the completion of the merger will include: reviewing with the Bookham board, on an annual basis, the requisite skills and criteria for new Bookham board members and the composition of the Bookham board as a whole, recommending to the Bookham board the persons to be nominated for election as directors and to each of the Bookham board committees, reviewing and making recommendations to the Bookham board with respect to director compensation, developing and recommending to the Bookham board corporate governance guidelines, overseeing the self-evaluation of the Bookham board, and overseeing an annual review by the Bookham board of succession planning.

Immediately following completion of the merger, it is currently expected that Mr. Smith, as the chairperson, and two additional directors to be appointed by the Bookham board will serve on the nominating and corporate governance committee.

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

The following discussion and analysis of Bookham’s financial condition and results of operations should be read in conjunction with “Selected Historical Consolidated Financial Data of Bookham” and Bookham’s consolidated financial statements and condensed consolidated financial statements and the notes related to those financial statements appearing elsewhere in this joint proxy statement/prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Bookham’s actual results may differ materially from those anticipated by the forward-looking statements due to, among other things, Bookham’s critical accounting estimates discussed below and other important factors set forth in this joint proxy statement/prospectus, including the factors described under “Risks Related to the Merger” and “Risks Related to Bookham” in this joint proxy statement/prospectus.

Recent Accounting Pronouncements

We design, manufacture and market optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals principally for use in high-performance fiber optics communications networks. Due to its advantages of higher capacity and transmission speed, optical transmission has become the predominant technology for large-scale communications networks. Our primary operating segment, which we refer to as our telecom segment, addresses the optical communications market. There are four particular drivers which we believe are contributing to growth in this market: (i) wireless and wire-line spending by telecommunications networking equipment companies, (ii) the introduction of new, more cost-effective product technologies, such as tunable products, (iii) the expansion of optical networking in the metro space, driven by the build out of broadband access networks such as fiber-to-the-home initiatives and (iv) the growing competition among cable network operators offering voice, video and data services and traditional telephony service providers which results in increased utilization of optical networking technologies, including the long-haul backbone where many of our product offerings are utilized. We believe drivers (i), (iii) and (iv) contribute to the overall demand for broadband capacity and therefore to the demand for the substantial portion of our telecom product offerings, while driver (ii) is of particular relevance to the demand for our tunable telecom products.

We are one of the largest vertically-integrated vendors of optical components used for fiber optic telecommunications network applications. Our customers include leading equipment systems vendors, including ADVA AG Optical Networking, Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Huawei Technologies Co., Ltd., Tellabs, Inc., Tyco Electronics, Ltd. and Nortel Networks Corporation, which we refer to as Nortel Networks.

Our remaining product lines, which comprise our non-telecom segment, leverage our optical component technologies and expertise in manufacturing optical subsystems to address opportunities in other markets, including industrial, research, semiconductor capital equipment, military and biotechnology.

Our products typically have a long sales cycle. The period of time between our initial contact with a customer and the receipt of a purchase order is frequently a year or more. In addition, many customers perform, and require us to perform, extensive process and product evaluation and testing of components before entering into purchase arrangements.

Since the beginning of 2002, we have acquired a total of eight companies and businesses. In 2002, we acquired the optical components businesses of Nortel Networks and Marconi Optical Components Limited. In 2003, we purchased substantially all of the assets of Cierra Photonics and acquired all of the outstanding capital stock of Ignis Optics, Inc. During 2004, we acquired New Focus, Inc., and Onetta, Inc. In fiscal 2006, we acquired Avalon Photonics AG, or Avalon, and City Leasing (Creekside) Limited, or Creekside.

Prior to 2002, we reduced manufacturing overhead and our operating expenses in response to the initial decline in demand in the optical components industry. Since 2002, we have announced and implemented a series of restructuring plans in connection with the integration of acquisitions, the transfer of certain manufacturing operations to our China facility which is a lower cost manufacturing center, and in an effort to

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streamline and reduce our manufacturing and operating expenses. On January 31, 2007, we adopted our most recent initiative, which was an overhead cost reduction plan that included workforce reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations within our existing U.K. facilities and the transfer of certain research and development activities to our Shenzhen facility. These actions were substantially completed in our quarter ended December 29, 2007. We continue to consider opportunities to reduce our cost base by moving activities to the comparatively lower cost base of our China facility, and we have recently transferred substantially all of the manufacturing operations and processes of certain of our non-telecom products from our San Jose, California facility to our Shenzhen, China facility.

Since the acquisition of Nortel Networks Optical Components, or NNOC, in 2002, we have diversified our revenue base by increasing our revenues from customers other than Nortel Networks, on both an absolute basis and as a percentage of total revenues. This has been one of our key strategic objectives. For example, in our fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006, our revenues from customers other than Nortel Networks were $200.3 million, $162.9 million and $121.2 million of our total revenues, respectively, which represented increases of 23% in fiscal 2008 compared to fiscal 2007 and 34% in fiscal 2007 compared to fiscal 2006. In addition, in the six months ended December 27, 2008 and December 29, 2007, our revenues from customers other than Nortel Networks were $99.2 million and $96.2 million of our total revenues, respectively, which represented an increase of 3% in the 2008 period compared to the 2007 period.

A substantial portion of our revenues are, and historically have been, denominated in U.S. dollars, while a substantial portion of our costs have been incurred in U.K. pounds sterling. Despite our change in domicile from the United Kingdom to the United States in 2004 and the transfer of our assembly and test operations from Paignton, U.K. to Shenzhen, China, a significant portion of our expenses are still denominated in U.K. pounds sterling and substantially all of our revenues are denominated in U.S. dollars. Fluctuations in the exchange rate between these two currencies and, to a lesser extent, other currencies, including the Chinese Yuan and the Swiss Franc, in which we collect revenues or pay expenses, will continue to have a material effect on our operating results.

Because of recent changes in the spending plans of certain telecom customers, leading them to draw down their existing inventories, we anticipate that our revenues in the near term will decline. Further, because of the worldwide financial uncertainty, it is possible that network providers will significantly reduce capital expenditures in the near term and that more of the equipment providers whom we supply will therefore draw down inventories, reduce production levels of existing products and defer introduction of new products. We cannot currently predict the duration or the overall impact of any such reduced demand in our markets over the next several quarters. We intend to respond to these trends through management efforts and actions that include carefully controlling our expenses, focusing on continuing to improve our direct product costs and monitoring our inventory levels and our capital spending. However, we do expect that the anticipated reductions in revenues in our third fiscal quarter, and any further reductions beyond such quarter, will have an impact on our gross margins, income (loss) from operations and net income (loss).

In September 2006, the Financial Accounting Standard Board, or the FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. It also requires expanded information about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS No. 157 became effective for us on June 29, 2008. The adoption of SFAS No. 157 will not have a material impact on our financial position, results of operations or cash flows.

In February 2007, the FASB, issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment to FASB Statement No. 115, or SFAS No. 159. SFAS No. 159 gives companies the option of applying at specified election dates fair value accounting to certain financial instruments and other items that are not currently required to be measured at fair value. If a company chooses

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to record eligible items at fair value, the company must report unrealized gains and losses on those items in earnings at each subsequent reporting date. SFAS No. 159 also prescribes presentation and disclosure requirements for assets and liabilities that are measured at fair value pursuant to this standard and pursuant to the guidance in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 159 became effective for us on June 29, 2008. The adoption of SFAS No. 159 will not have a material impact on our financial position, results of operations or cash flows.

In June 2007, the FASB also ratified Emerging Issues Task Force 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities, or EITF 07-3. EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 will not have a material effect on our financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired in a business combination. This standard also establishes disclosure requirements intended to enable users to evaluate the nature and financial effects of a business combination. SFAS No. 141R is effective for us for acquisitions made after June 27, 2009. We do not anticipate that the adoption of this pronouncement will have a significant impact on our financial statements; however, the implementation of SFAS No. 141R may have a material impact on our accounting for businesses we acquire post-adoption.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51, or SFAS No. 160. SFAS No. 160 changes the accounting and reporting for minority interests, which are to be re-characterized as non-controlling interests and classified as a component of equity on the balance sheet and statement of stockholders’ equity. This consolidation method will significantly change the accounting for transactions with minority interest holders. We are required to adopt SFAS No. 160 at the beginning of the first quarter of fiscal 2010, which begins on June 27, 2009. We are currently evaluating the effect, if any, that the adoption of SFAS No. 160 will have on our financial position, results of operations or cash flows.

In February 2008, the FASB issued FASB Staff Position, or FSP, No. 157-2, Effective Date of FASB Statement No. 157. FSP No. 157-2 delays the effective date of SFAS No. 157, Fair Value Measurements for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2010. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial statements when it is applied to non-financial assets and non-financial liabilities that are not measured at fair value on a recurring basis beginning in the first quarter of fiscal 2010. The major categories of non-financial assets and non-financial liabilities that are measured at fair value, for which we have not yet applied the provisions of SFAS No. 157, are goodwill and intangible assets.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment to FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to us in the third quarter of fiscal 2009. We are currently evaluating the effect, if any, that the adoption of SFAS No. 161 may have on our consolidated results of operations and financial condition.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting principles. FSP

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No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets we acquire after June 27, 2009.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 supersedes the existing hierarchy contained in the U.S. auditing standards. The existing hierarchy was carried over to SFAS No. 162 essentially unchanged. SFAS No. 162 becomes effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to the auditing literature. The new hierarchy is not expected to change our current accounting practice in any area.

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 for financial assets in a market that is not active. FSP No. 157-3 was effective upon issuance. SFAS No. 157 was adopted by us, as it applies to our financial instruments, in the first quarter of fiscal 2009. The impact of our adoption of SFAS No. 157 is discussed in Note 3 to our condensed consolidated financial statements appearing elsewhere in this joint proxy statement/prospectus.

Application of Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements and our condensed consolidated financial statements contained elsewhere in this joint proxy statement/prospectus, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses and other financial information. Actual results may differ significantly from those based on our estimates and judgments or could be materially different if we used different assumptions, estimates or conditions. In addition, our financial condition and results of operations could vary due to a change in the application of a particular accounting standard.

We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where:


	•	the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

	•	the impact of such estimates and assumptions on our financial condition or operating performance is material.

Our significant accounting policies are described in our consolidated financial statements and in our condensed consolidated financial statements included elsewhere in this joint proxy statement/prospectus. Not all of these significant accounting policies, however, require that we make estimates and assumptions that we believe are “critical accounting estimates.” We have discussed our accounting policies with the audit committee of our board of directors, and we believe that the policies described below involve “critical accounting estimates.”

Revenue Recognition and Sales Returns

Revenue represents the amounts, excluding sales taxes, derived from the provision of goods and services to third-party customers during a given period. Our revenue recognition policy follows Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements. Specifically, we recognize product revenue when persuasive evidence of an arrangement exists, the product has been shipped, title has transferred, collectibility is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. For certain sales, we are required to determine, in particular, whether the delivery has occurred, whether items will be returned and whether we will be paid under normal commercial terms. For certain products sold to customers, we specify delivery terms in the agreement under which the sale was made and assess each shipment against those terms, and only recognize revenue when we are certain that the delivery terms have been met. For shipments to new

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customers and evaluation units, including initial shipments of new products, where the customer has the right of return through the end of the evaluation period, we recognize revenue on these shipments at the end of an evaluation period, if not returned, and when collection is reasonably assured. We record a provision for estimated sales returns in the same period as the related revenues are recorded, which is netted against revenue. These estimates for sales returns are based on historical sales returns, other known factors and our return policy. Before accepting a new customer, we review publicly available information and credit rating databases to provide ourselves with reasonable assurance that the new customer will pay all outstanding amounts in accordance with our standard terms. For existing customers, we monitor historic payment patterns to assess whether we can expect payment in accordance with the terms set forth in the agreement under which the sale was made.

We recognize revenues from financially distressed customers when collectibility becomes reasonably assured, assuming all other criteria for revenue recognition have been met. In the three months ended December 27, 2008, we issued billings of (i) $4.1 million for products that were shipped to Nortel Networks, but for which payment was not received prior to its bankruptcy filing on January 14, 2009 and (ii) $1.3 million for products that were shipped to a contract manufacturer to Nortel Networks for which payment may not be received as a result of the Nortel Networks bankruptcy filing. As a result, an aggregate of $5.4 million in revenue was not recognized as revenues or accounts receivable in our condensed consolidated financial statements included elsewhere in this joint proxy statement/prospectus at the time of such billings, and such amounts were therefore deferred as we determined that such amounts were not reasonably assured of collectability in accordance with our revenue recognition policy. The corresponding costs associated with these billings for the second quarter of fiscal 2009 are fully included in costs of revenues in our condensed consolidated financial statements included elsewhere in this joint proxy statement/prospectus, as title to the products passed to the customer upon shipment or delivery, depending on the terms of the individual sale. Accordingly, revenue deferrals for the second quarter of fiscal 2009 to financially distressed customers reduced revenues and gross margin and increased net loss by $5.4 million, and decreased our gross margin rate by approximately eight percentage points. To the extent that collectability becomes reasonably assured for these deferred billings in future periods, our future results will benefit from the recognition of these amounts.

Inventory Valuation

In general, our inventories are valued at the lower of cost to acquire or manufacture our products or market value, less write-offs of inventory we believe could prove to be unsaleable. Manufacturing costs include the cost of the components purchased to produce our products and related labor and overhead. We review our inventory on a quarterly basis to determine if it is saleable. Products may be unsaleable because they are technically obsolete due to substitute products, specification changes or excess inventory relative to customer forecasts. We currently reserve for inventory using methods that take these factors into account. In addition, if we find that the cost of inventory is greater than the current market price, we will write the inventory down to the selling price, less the cost to complete and sell the product.

Accounting for Acquisitions and Goodwill

We have accounted for acquisitions using the purchase accounting method in accordance with SFAS No. 141. Under this method, the total consideration paid, excluding the contingent consideration that has not been earned, is allocated over the fair value of the net assets acquired, including in-process research and development, with any excess allocated to goodwill (defined as the excess of the purchase price over the fair value allocated to the net assets). Our judgments as to fair value of the assets will, therefore, affect the amount of goodwill that we record. These judgments include estimating the useful lives over which periods the fair values will be amortized to expense. For tangible assets acquired in any acquisition, such as plant and equipment, we estimate useful lives by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of acquired intangible assets with definite lives, we consider the industry environment and specific factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include core and current technology, patents, supply agreements, capitalized licenses and customer contracts.

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We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from three to six years and, in the case of one specific customer contract, fifteen years.

Impairment of Goodwill and Other Intangible Assets

We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also review goodwill annually in accordance with SFAS No. 142, Goodwill and Other Intangibles. In addition, we review identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Circumstances which could trigger an impairment test include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes to the business climate or legal factors, current period cash flow or operating losses or a forecast of continuing losses associated with the use of the asset and a current expectation that the asset will more likely than not be sold or disposed of significantly below carrying value before the end of its estimated useful life. The values assigned to goodwill and other intangible assets are based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.

Goodwill is tested for impairment using a two-step process. SFAS No. 142 requires that the first phase of testing goodwill for impairment be based on a reporting unit’s “fair value,” which is generally determined through market prices. In certain cases, due to the absence of market prices for a particular element of our business, and as permitted by SFAS No. 142, we have elected to base our testing on discounted future expected cash flows. Although the discount rates and other input variables may differ, the model we use in this process is the same model we use to evaluate the fair value of acquisition candidates and the fairness of offers to purchase businesses that we are considering for divestiture. The forecasted cash flows we use are derived from the annual long-range planning process that we perform and present to our board of directors. In this process, each business unit is required to develop reasonable sales, earnings and cash flow forecasts for the next three to seven years based on current and forecasted economic conditions. For purposes of testing for impairment, the cash flow forecasts are adjusted as needed to reflect information that becomes available concerning changes in business levels and general economic trends. The discount rates used for determining discounted future cash flows are generally based on our weighted average cost of capital and are then adjusted for “plan risk” (the risk that a business will fail to achieve its forecasted results) and “country risk” (the risk that economic or political instability in the countries in which we operate will cause a reporting unit’s projections to be inaccurate). Finally, a growth factor beyond the three to seven-year period for which cash flows are planned is selected based on expectations of future economic conditions. Virtually all of the assumptions used in our models are susceptible to change due to global and regional economic conditions as well as competitive factors in the industry in which we operate. Unanticipated changes in discount rates from one year to the next can also have a significant effect on the results of the calculations. While we believe the estimates and assumptions we use are reasonable, various economic factors could cause the results of our goodwill testing to vary significantly.

If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill.

During the three month period ended December 27, 2008, we observed indicators of potential impairment of our goodwill, including the impact of the current general economic downturn on our future prospects and the continued decline of our current market capitalization, which caused us to conduct a preliminary interim goodwill impairment analysis. Specifically, indicators emerged within the New Focus reporting unit for SFAS No. 142 purposes, which includes the technology acquired in the March 2004 acquisition of New Focus and is in our non-telecom segment, and one other reporting unit in our non-telecom segment that includes the technology acquired in the March 2006 acquisition of Avalon, which we refer to as the Avalon reporting unit, that led us to conclude that a SFAS No. 142 impairment test was required to be performed during the second quarter for goodwill in these reporting units.

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Our management has determined, in our preliminary first step goodwill impairment analysis, that our goodwill in our New Focus and Avalon reporting units was in fact impaired. In the second step, the measurement of the impairment, we hypothetically apply purchase accounting to these reporting units using the fair values from the first step. Due to the timing and complexity of step two, we have yet to complete this step. However, based upon preliminary calculations, we have recorded a preliminary estimate of $7.9 million for the impairment loss in our statements of operations for the three and six months ended December 27, 2008 as we concluded that the loss was probable and that the amount of loss was reasonably determinable. This is a preliminary estimate only. We are continuing to evaluate the impairment of our goodwill, and the amount of the actual impairment charge may vary from this initial estimate. We expect that we will complete the full evaluation of the impairment analysis during the quarter ending March 28, 2009. The impairment will not result in any current or future cash expenditures.

We also tested the intangible assets of these two reporting units during the second quarter of 2009 in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Based on this testing, we have determined that no impairment charge was necessary. At December 27, 2008, intangible assets subject to the amortization provisions of SFAS No. 142, net of accumulated amortization and impairment charges, were $6.2 million.

Accounting for Share-Based Payments

SFAS No. 123R, Share-Based Payment, or SFAS No. 123R, requires companies to recognize in their statement of operations all share-based payments, including grants of employee stock options and restricted stock, based on their fair values on the grant dates. The application of SFAS No. 123R involves significant amounts of judgment in the determination of inputs into the Black-Scholes-Merton valuation model which we use to determine the fair value of share-based awards. These inputs are based upon highly subjective assumptions as to the volatility of the underlying stock, risk free interest rates and the expected life of the options. Judgment is also required in estimating the number of share-based awards that are expected to be forfeited during any given period. As required under the accounting rules, we review our valuation assumptions at each grant date, and, as a result, our valuation assumptions used to value employee stock-based awards granted in future periods may change. If actual results or future changes in estimates differ significantly from our current estimates, stock-based compensation expense and our consolidated results of operations could be materially impacted. During the six months ended December 27, 2008 and the years ended June 28, 2008 and June 30, 2007, we recognized $2.2 million, $8.8 million and $6.7 million of stock-based compensation expense, respectively. See the notes to our consolidated financial statements and our condensed consolidated financial statement included elsewhere in this joint proxy statement/prospectus for further information.

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Results of Operations

Comparison of the Three and Six Months Ended December 27, 2008 and December 29, 2007

The following table sets forth our condensed consolidated results of operations for the three month periods indicated, along with amounts expressed as a percentage of net revenues, and comparative information regarding the absolute and percentage changes in these amounts:


	Three Months Ended
	December 27,						December 29,									Increase
	2008						2007						Change			(Decrease)
	(Thousands)			%			(Thousands)			%			(Thousands)			%

Revenues	$	50,204			100.0		$	58,956			100.0		$	(8,752	)		(14.8	)
Cost of revenues		41,499			82.7			45,522			77.2			(4,023	)		(8.8	)

Gross margin		8,705			17.3			13,434			22.8			(4,729	)		(35.2	)

Operating expenses:
Research and development		6,897			13.7			8,168			13.9			(1,271	)		(15.6	)
Selling, general and administrative		9,282			18.5			12,162			20.6			(2,880	)		(23.7	)
Amortization of intangible assets		444			0.9			1,353			2.3			(909	)		(67.2	)
Restructuring and severance charges		482			0.9			562			0.9			(80	)		(14.2	)
Legal settlement		—			—			877			1.5			(877	)		(100.0	)
Impairment of goodwill		7,881			15.7			—			—			7,881			n/m (1	)
(Gain) loss on sale of property
and equipment		(8	)		—			(1,481	)		(2.5	)		1,473			(99.5	)

Total operating expenses		24,978			49.7			21,641			36.7			3,337			15.4

Operating loss		(16,273	)		(32.4	)		(8,207	)		(13.9	)		(8,066	)		98.3
Other income (expense):
Other expense		(95	)		(0.2	)		—			—			(95	)		n/m (1	)
Interest income		209			0.4			494			0.8			(285	)		(57.7	)
Interest expense		(132	)		(0.3	)		(253	)		(0.4	)		121			(47.8	)
Gain on foreign exchange		9,866			19.7			2,732			4.6			7,134			261.1

Total other income (expense)		9,848			19.6			2,973			5.0			6,875			231.2

Loss before income taxes		(6,425	)		(12.8	)		(5,234	)		(8.9	)		(1,191	)		22.8
Income tax provision (benefit)		36			0.1			(47	)		(0.1	)		83			n/m (1	)

Net loss	$	(6,461	)		(12.9	)	$	(5,187	)		(8.8	)	$	(1,274	)		24.6


(1)		Not meaningful.

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The following table sets forth our condensed consolidated results of operations for the six month periods indicated, along with amounts expressed as a percentage of net revenues, and comparative information regarding the absolute and percentage changes in these amounts:


	Six Months Ended
	December 27,						December 29,									Increase
	2008						2007						Change			(Decrease)
	(Thousands)			%			(Thousands)			%			(Thousands)			%

Revenues	$	116,735			100.0		$	113,238			100.0		$	3,497			3.1
Cost of revenues		91,401			78.3			87,467			77.2			3,934			4.5

Gross margin		25,334			21.7			25,771			22.8			(437	)		(1.7	)

Operating expenses:
Research and development		14,832			12.7			16,860			14.9			(2,028	)		(12.0	)
Selling, general and administrative		19,966			17.1			23,488			20.7			(3,522	)		(15.0	)
Amortization of intangible assets		907			0.8			3,350			3.0			(2,443	)		(72.9	)
Restructuring and severance charges		1,968			1.7			1,779			1.6			189			10.6
Legal settlement		(184	)		(0.2	)		877			0.8			(1,061	)		n/m (1	)
Impairment of goodwill		7,881			6.8			—			—			7,881			n/m (1	)
(Gain) loss on sale of property
and equipment		8			—			(1,716	)		(1.5	)		1,724			n/m (1	)

Total operating expenses		45,378			38.9			44,638			39.5			740			1.7

Operating loss		(20,044	)		(17.2	)		(18,867	)		(16.7	)		(1,177	)		6.2
Other income (expense):
Other expense		(695	)		(0.6	)		—			—			(695	)		n/m (1	)
Interest income		457			0.4			746			0.7			(289	)		(38.7	)
Interest expense		(324	)		(0.3	)		(387	)		(0.3	)		63			(16.3	)
Gain on foreign exchange		16,362			14.0			2,320			2.0			14,042			605.3

Total other income (expense)		15,800			13.5			2,679			2.4			13,121			489.8

Loss before income taxes		(4,244	)		(3.7	)		(16,188	)		(14.3	)		11,944			(73.8	)
Income tax provision (benefit)		24			—			(47	)		—			71			n/m (1	)

Net loss	$	(4,268	)		(3.7	)	$	(16,141	)		(14.3	)	$	11,873			(73.6	)


(1)		Not meaningful.

Revenues

Revenues for the three months ended December 27, 2008 decreased by $8.8 million, or 14.8 percent, compared to the three months ended December 29, 2007. The decrease was largely due to a decrease in sales from our telecom segment of $7.4 million and a decrease in non-telecom segment sales of $1.4 million.

Our decrease in telecom sales for the three months ended December 27, 2008 was primarily attributable to a decrease in sales to Nortel Networks (including its contract manufacturers) of $3.4 million, due to the deferral of recognition of $5.4 million in billings during the period in accordance with our revenue recognition policy, and decreased sales to other telecom customers of $4.0 million which we believe was due to the uncertainty in the worldwide financial markets and resulting impact on the markets for our products, which was partially offset by increases in sales to Huawei Technologies of $2.3 million and smaller increases in sales from other customers. For the three months ended December 27, 2008, Nortel Networks accounted for $5.4 million, or 11 percent, of our total revenues, and Huawei Technologies accounted for $7.4 million, or 15 percent, of our total revenues. For the three months ended December 29, 2007, Nortel Networks accounted

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for $8.8 million, or 15 percent, of our revenues, and Cisco Systems accounted for $6.6 million, or 11 percent, of our total revenues.

Revenues for the six months ended December 27, 2008 increased by $3.5 million, or 3.1 percent, compared to the six months ended December 29, 2007. The increase was largely due to an increase in sales from our telecom segment of $4.1 million and a decrease in non-telecom segment sales of $0.6 million.

Our increase in telecom sales for the six months ended December 27, 2008 compared to the same period in the prior year was primarily attributable to increases in sales to Huawei Technologies of $7.5 million and Nortel Networks of $0.5 million. For the six months ended December 27, 2008, Nortel Networks accounted for $17.5 million, or 15 percent, of our total revenues, and Huawei Technologies accounted for $16.4 million, or 14 percent, of our total revenues. For the six months ended December 29, 2007, Nortel Networks accounted for $17.1 million, or 15 percent, of our revenues, and Cisco Systems accounted for $12.7 million, or 11 percent, of our total revenues.

As noted previously, we anticipate that our revenues, primarily our telecom revenues, will be negatively affected in our third quarter of fiscal 2009, and that our revenues in the next several quarters may be negatively impacted by the uncertainty in the worldwide financial markets and resulting impact on the markets for our products.

Cost of Revenues

Our cost of revenues consists of the costs associated with manufacturing our products and includes the costs to purchase raw materials and manufacturing-related labor costs and related overhead, including stock-based compensation expense. It also includes costs associated with under-utilized production facilities and resources. Charges for inventory obsolescence, the cost of product returns and warranty costs are also included in cost of revenues. Costs and expenses of the manufacturing resources which relate to the development of new products are included in research and development expense.

Our cost of revenues for the three months ended December 27, 2008 decreased $4.0 million, or 8.8 percent, from the three months ended December 29, 2007. This decrease was primarily due to lower costs associated with lower sales volumes, which was partially offset by $0.4 million in additional manufacturing overhead costs in connection with the transfer of manufacturing operations of our non-telecom segment from our San Jose, California facility to our facility in Shenzhen, China. Cost of revenues for the three months ended December 27, 2008 relative to the three months ended December 29, 2007, were also favorably impacted by a $0.5 million reduction in our U.K. manufacturing costs associated with the weakening of the U.K. pound sterling relative to the U.S. dollar. Cost of revenues for the three months ended December 27, 2008 included $0.3 million of stock-based compensation charges compared to $0.7 million for the three months ended December 29, 2007.

Our cost of revenues for the six months ended December 27, 2008 increased $3.9 million, or 4.5 percent, from the six months ended December 29, 2007. This increase was primarily due to higher costs associated with higher sales volumes and $0.9 million in additional manufacturing overhead costs in connection with the transfer of manufacturing operations of our non-telecom segment from our San Jose, California facility to our facility in Shenzhen, China. Our cost of revenues for the six months ended December 27, 2008 included $0.7 million of stock-based compensation charges compared to $1.3 million for the six months ended December 29, 2007.

The costs associated with the $5.4 million of products shipped to two customers in the second quarter of fiscal 2009, but for which revenue was deferred in accordance with our revenue recognition policy, as described above, are fully included in costs of revenues as title to the products passed to the customer upon shipment or delivery, depending on the terms of the individual sale.

Gross Margin

Gross margin is calculated as revenues less cost of revenues. The gross margin rate is gross margin reflected as a percentage of revenues.

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Our gross margin decreased by $4.7 million, or 35.2 percent, for the three months ended December 27, 2008, compared to the three months ended December 29, 2007. Our gross margin rate decreased to 17.3 percent for the three months ended December 27, 2008, compared to 22.8 percent for the three months ended December 29, 2007. The decreases in gross margin and gross margin rate were primarily associated with (i) decreased sales volumes in both of our operating segments for the three months ended December 27, 2008 as compared to December 29, 2007 due to the fixed nature of certain overheads spread over lower volume, (ii) recognizing the costs associated with the $5.4 million of products shipped to two customers in the second quarter of fiscal 2009, but for which revenue was deferred in accordance with our revenue recognition policy; and (iii) increased expenses for the three months ended December 27, 2008 of $0.4 million of additional manufacturing overhead costs in connection with the transfer of manufacturing operations of our non-telecom segment from our San Jose, California facility to our facility in Shenzhen, China. Gross margin for the three months ended December 27, 2008 relative to the three months ended December 29, 2007, was also favorably impacted by a $0.5 million reduction in our U.K. manufacturing costs associated with the weakening of the U.K. pound sterling relative to the U.S. dollar.

Our gross margin decreased by $0.4 million, or 1.7 percent, for the six months ended December 27, 2008, compared to the six months ended December 29, 2007. Our gross margin rate decreased to 21.7 percent for the six months ended December 27, 2008, compared to 22.8 percent in the six months ended December 29, 2007. The decreases in gross margin and gross margin rate were primarily associated with recognizing the costs associated with the $5.4 million of products shipped to two customers in the second quarter of fiscal 2009, but for which revenue was deferred in accordance with our revenue recognition policy, and increased expenses for the six months ended December 27, 2008 of $0.9 million of additional manufacturing overhead costs in connection with the transfer of manufacturing operations of our non-telecom segment from our San Jose, California facility to our facility in Shenzhen, China.

The decrease in gross margin rate for the three and six months ended December 27, 2008, relative to the same periods of the previous year, included declines of 8.0 percentage points and 3.5 percentage points, respectively, due to recognizing the costs associated with the $5.4 million of products shipped to major customers in the second quarter of fiscal 2009, but for which revenue was deferred in accordance with our revenue recognition policy.

As previously noted, we anticipate our revenues to be lower in our third quarter of fiscal 2009, and accordingly we expect gross margins in the same quarter to be lower due to lower sales volumes associated with that revenue decrease, only partly offset by reductions in our manufacturing overhead expenses implemented in response to the expected revenue decrease.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related costs of employees engaged in research and design activities, including stock-based compensation charges related to those employees, costs of design tools and computer hardware, costs related to prototyping and facilities costs for certain research and development focused sites.

Research and development expenses decreased to $6.9 million for the three months ended December 27, 2008 from $8.2 million for the three months ended December 29, 2007. The decrease was primarily due to decreases in personnel costs of $0.8 million and stock-based compensation of $0.4 million due to reductions in personnel and other miscellaneous decreases in spending of $0.9 million, as a result of our restructurings and cost reduction plans, which were partially offset by increased costs for materials used in research and development of $0.8 million. Approximately $1.0 million of the cost reductions was associated with lower expenses in our U.K. research and development activities as a result of the U.K. pound sterling weakening relative to the U.S. dollar.

Research and development expenses decreased to $14.8 million for the six months ended December 27, 2008 from $16.9 million for the six months ended December 29, 2007. The decrease was primarily due to decreases in personnel costs of $1.5 million and stock-based compensation of $0.6 million due to reductions in personnel and other miscellaneous decreases in spending of $1.3 million, as a result of our restructurings and

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cost reduction plans, which were partially offset by increased costs for materials used in research and development of $1.4 million. Approximately $1.0 million of the cost reductions was associated with lower expenses in our U.K. research and development activities as a result of the U.K. pound sterling weakening relative to the U.S. dollar.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation charges related to employees engaged in sales, general and administrative functions, legal and professional fees, facilities expenses, insurance expenses and certain information technology costs.

Selling, general and administrative expenses decreased to $9.3 million for the three months ended December 27, 2008 from $12.2 million for the three months ended December 29, 2007. The decrease was primarily the result of decreases in personnel costs of $1.4 million and stock-based compensation of $0.8 million as a result of restructuring and cost reduction plans and a reduction of $0.7 million in other miscellaneous expenses. Approximately $0.8 million of the cost reductions was associated with lower expenses in our U.K. selling, general and administrative activities as a result of the U.K. pound sterling weakening relative to the U.S. dollar.

Selling, general and administrative expenses decreased to $20.0 million for the six months ended December 27, 2008 from $23.5 million for the six months ended December 29, 2007. The decrease was primarily the result of decreases in personnel costs of $1.8 million and stock-based compensation of $0.9 million as a result of restructuring and cost reduction plans and a reduction of $0.8 million in other miscellaneous expenses. Approximately $0.9 million of the cost reductions was associated with lower expenses in our U.K. selling, general and administrative activities as a result of the U.K. pound sterling weakening relative to the U.S. dollar.

Amortization of Intangible Assets

In previous years we acquired six optical components companies and businesses and one photonics and microwave company. Our last such acquisition was in March 2006. Each of these business combinations added to the balance of our purchased intangible assets, and the related amortization of these intangible assets was recorded as an expense in each of the three and six month periods ended December 27, 2008 and December 29, 2007. Subsequent to the three months ended December 29, 2007, the purchased intangible assets from certain of these business acquisitions became fully amortized, which reduced our expense for amortization of purchased intangible assets for the three and six months ended December 27, 2008 by $0.9 million and $2.4 million, respectively, as compared to the same three and six month periods in the prior year. We expect the amortization of intangible assets to continue to decrease in the year ending June 27, 2009 as more of the purchased intangible assets associated with these acquisitions become fully amortized during the fiscal year.

Restructuring and Severance Charges

In connection with earlier plans of restructuring, and the assumption of restructuring accruals upon the March 2004 acquisition of New Focus, we continue to make scheduled payments drawing down the related lease cancellations and commitments as well as making termination payments to employees and related costs. For the three months ended December 27, 2008 and December 29, 2007 we accrued $0.5 million and $0.6 million, respectively, in expenses for revised estimates related to these cancellations and commitments and termination payments to employees and related costs. For the six months ended December 27, 2008 and December 29, 2007 we accrued $2.0 million and $1.8 million, respectively, in expenses for the same items.

Impairment of Goodwill

During the three month period ended December 27, 2008, we saw indicators of potential impairment of our goodwill, including the impact of the current general economic downturn on our future prospects and the continued decline of our current market capitalization, which caused us to conduct a preliminary interim goodwill impairment analysis. Our management has determined, in our preliminary first step goodwill

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impairment analysis, that our goodwill in our New Focus and Avalon reporting units was in fact impaired. Based upon preliminary calculations, we have recorded a preliminary estimate of $7.9 million for the impairment loss in our statements of operations for the three and six months ended December 27, 2008 as we concluded that the loss was probable and that the amount of loss was reasonably determinable. This is a preliminary estimate only. We are continuing to evaluate the impairment of our goodwill, and the amount of the actual impairment charge may vary materially from this initial estimate. We expect that we will complete the full evaluation of the impairment analysis during the quarter ending March 28, 2009. The impairment will not result in any current or future cash expenditures.

Other Income (Expense)

The increase in other income (expense) for the three and six months ended December 27, 2008 when compared to the three and six months ended December 29, 2007 was primarily related to an increase of $7.1 million and $14.0 million, respectively, in income related to the re-measurement of short term balances between our international subsidiaries due to the strong appreciation of the dollar during the three and six months ended December 27, 2008 relative to our other local functional currencies during such periods and an expense for the three and six months ended December 27, 2008 of $0.1 million and $0.7 million, respectively, related to the fair value impairment of our short-term investment in a debt security of Lehman Brothers.

Income Tax Benefit

We recognize income taxes under the liability method. Deferred income taxes are recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

We have incurred substantial losses to date and expect to incur additional losses in the future, and accordingly our income tax provision is negligible in each period presented. Based upon the weight of available evidence, which includes our historical operating performance and the recorded cumulative net losses in prior periods, we have provided a full valuation allowance against our net deferred tax assets at December 27, 2008 and June 28, 2008.

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Comparison of the Fiscal Years Ended June 28, 2008, June 30, 2007 and July 1, 2006

The following tables set forth our condensed consolidated results of operations for the fiscal years indicated, along with amounts expressed as a percentage of net revenues, and comparative information regarding the absolute and percentage changes in these amounts:


	Year Ended															Increase
	June 28, 2008						June 30, 2007						Change			(Decrease)
	(Thousands)			%			(Thousands)			%			(Thousands)			%

Revenues	$	235,491			100.0		$	202,814			100.0		$	32,677			16.1
Cost of revenues		182,518			77.5			173,493			85.5			9,025			5.2

Gross margin		52,973			22.5			29,321			14.5			23,652			80.7

Operating expenses:
Research and development		32,633			13.8			43,025			21.2			(10,392	)		(24.2	)
Selling, general and administrative		47,941			20.4			47,820			23.6			121			0.3
Amortization of intangible assets		4,639			2.0			8,884			4.4			(4,245	)		(47.8	)
Restructuring and severance charges		3,471			1.5			10,347			5.1			(6,876	)		(66.5	)
Certain legal actions, settlements and related costs		(2,882	)		(1.2	)		490			0.2			(3,372	)		n/m (1	)
Impairment of other long-lived assets		—			—			1,621			0.8			(1,621	)		(100.0	)
Gain on sale of property and equipment and other long-lived assets		(2,562	)		(1.1	)		(3,009	)		(1.5	)		447			(14.9	)

Total operating expenses		83,240			35.4			109,178			53.8			(25,938	)		(23.8	)

Operating loss		(30,267	)		(12.9	)		(79,857	)		(39.3	)		49,590			(62.1	)
Other income (expense):
Interest income		1,465			0.6			1,239			0.6			226			18.2
Interest expense		(671	)		(0.3	)		(573	)		(0.3	)		(98	)		17.1
Gain (loss) on foreign exchange		6,038			2.6			(2,879	)		(1.4	)		8,917			n/m (1	)

Total other income (expense)		6,832			2.9			(2,213	)		(1.1	)		9,045			n/m (1	)

Loss before income taxes		(23,435	)		(10.0	)		(82,070	)		(40.4	)		58,635			(71.4	)
Income tax provision		5			—			105			0.1			(100	)		(95.2	)

Net loss	$	(23,440	)		(10.0	)	$	(82,175	)		(40.5	)	$	58,735			(71.5	)


(1)		Not meaningful.

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	Year Ended															Increase
	June 30, 2007						July 1, 2006						Change			(Decrease)
	(Thousands)			%			(Thousands)			%			(Thousands)			%

Revenues	$	202,814			100.0		$	231,649			100.0		$	(28,835	)		(12.4	)
Cost of revenues		173,493			85.5			190,085			82.1			(16,592	)		(8.7	)

Gross margin		29,321			14.5			41,564			17.9			(12,243	)		(29.5	)

Operating expenses:
Research and development		43,025			21.2			42,587			18.4			438			1.0
Selling, general and administrative		47,820			23.6			52,167			22.5			(4,347	)		(8.3	)
Amortization of intangible assets		8,884			4.4			10,004			4.3			(1,120	)		(11.2	)
Restructuring and severance charges		10,347			5.1			11,197			4.8			(850	)		(7.6	)
Certain legal actions, settlements and related costs		490			0.2			4,997			2.2			(4,507	)		(90.2	)
Acquired in-process research and development		—			—			118			0.1			(118	)		(100.0	)
Impairment of goodwill and other intangible assets		—			—			760			0.3			(760	)		(100.0	)
Impairment (recovery) of long-lived assets		1,621			0.8			(832	)		(0.4	)		2,453			n/m (1	)
Gain on sale of property and equipment and other long-lived assets		(3,009	)		(1.5	)		(2,070	)		(0.9	)		(939	)		45.4

Total operating expenses		109,178			53.8			118,928			51.3			(9,750	)		(8.2	)

Operating loss		(79,857	)		(39.3	)		(77,364	)		(33.4	)		(2,493	)		3.2
Other income (expense):
Loss on conversion and early extinguishment of debt		—			—			(18,842	)		(8.1	)		18,842			(100.0	)
Other income		—			—			298			0.1			(298	)		(100.0	)
Interest income		1,239			0.6			1,113			0.5			126			11.3
Interest expense		(573	)		(0.3	)		(5,128	)		(2.2	)		4,555			(88.8	)
Gain (loss) on foreign exchange		(2,879	)		(1.4	)		677			0.3			(3,556	)		n/m (1	)

Total other income (expense)		(2,213	)		(1.1	)		(21,882	)		(9.4	)		19,669			(89.9	)

Loss before income taxes		(82,070	)		(40.4	)		(99,246	)		(42.8	)		17,176			(17.3	)
Income tax provision (benefit)		105			0.1			(11,749	)		(5.0	)		11,854			n/m (1	)

Net loss	$	(82,175	)		(40.5	)	$	(87,497	)		(37.8	)	$	5,322			(6.1	)


(1)		Not meaningful.

Revenues

Revenues for the year ended June 28, 2008 increased by $32.7 million, or 16%, compared to the year ended June 30, 2007. Our telecom segment revenues for the year ended June 28, 2008 increased by $23.1 million, to $176.9 million, from $153.8 million in the year ended June 30, 2007, primarily related to a $22.3 million increase in sales of our tunable products. Our non-telecom segment revenues for the year ended June 28, 2008 increased by $9.6 million, to $58.6 million, from $49.0 million in the year ended June 30, 2007, primarily related to increased sales of photonics and measurement products, high power lasers, industrial filters and VSCEL products.

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Revenues for the year ended June 30, 2007 decreased by $28.8 million, or 12%, compared to the year ended July 1, 2006. Revenues in our telecom segment decreased by $41.7 million, from $195.5 million in the year ended July 1, 2006, to $153.8 million in the year ended June 30, 2007, primarily related to a decrease in revenues from Nortel Networks of $70.6 million, to $39.9 million in the year ended June 30, 3007 from $110.5 million in the year ended July 1, 2006. The decrease in revenues from Nortel Networks was a result of the expiration of Nortel Networks’ purchase obligations under our Supply Agreement, and the addendums thereto, described below. The decrease was partially offset by revenues from customers other than Nortel Networks which increased by $41.8 million in the year ended June 30, 2007 compared to the year ended July 1, 2006, primarily due to increased sales volumes, a reflection we believe of our strategic efforts to diversify our revenue base to customers other than Nortel Networks. Pursuant to the second addendum to our Supply Agreement with Nortel Networks, entered into in May 2005, Nortel Networks issued non-cancelable purchase orders, based on revised pricing, totaling approximately $100 million, for certain products delivered through March 2006, which included $50 million of products we were discontinuing, which we refer to as Last-Time Buy products. Our revenues in the year ended June 30, 2007, included $3.0 million of revenues from Last-Time Buy products, as compared to $40.6 million in revenues attributable to Last-Time Buy products in the year ended July 1, 2006. In addition, Nortel Networks was obligated to, and did, purchase a minimum of $72 million of our products pursuant to the third addendum to the Supply Agreement, which was entered into in January 2006. These purchase obligations expired at the end of calendar 2006.

Revenues from our non-telecom segment increased by $12.9 million in the year ended June 30, 2007, to $49.0 million from $36.1 million in the year ended July 1, 2006, primarily as a result of increased sales of photonics and measurement products and high power lasers.

Cost of Revenues

Our cost of revenues for the year ended June 28, 2008 increased by 5% compared to the year ended June 30, 2007, primarily associated with increased sales volumes in both our telecom and non-telecom segments associated with our increased revenues during the period, partially offset by a lower manufacturing cost resulting from the restructuring and cost reduction plans substantially completed in the second half of the fiscal year ended June 30, 2007. During the years ended June 28, 2008 and June 30, 2007, $2.3 million and $1.9 million, respectively, of stock based compensation expense was recorded to cost of revenues under SFAS No. 123R.

Our cost of revenues for the year ended June 30, 2007 decreased by 9% compared to the year ended July 1, 2006, primarily due to lower costs corresponding to lower sales volumes and our restructuring efforts. Our restructuring efforts produced reductions in our manufacturing overhead costs primarily as a result of the transition of our assembly and test facilities, and related activities, which was completed during the year ended June 30, 2007, from Paignton, U.K. to our facility in Shenzhen, China, resulting in a lower cost base, as well as cost reductions in our Caswell U.K. wafer fabrication facility. During each of the years ended June 30, 2007 and July 1, 2006, $1.9 million of stock based compensation expense was recorded to cost of revenues under SFAS No. 123R.

Gross Margin

Our gross margin rate increased to 22% for the year ended June 28, 2008 compared to 14% for the year ended June 30, 2007. The increase in gross margin was primarily associated with increased sales volumes in both of our operating segments for the year ended June 28, 2008 as compared to June 30, 2007, spread against a manufacturing overhead cost base which had decreased for the year ended June 28, 2008 as compared to the year ended June 30, 2007 as a result of restructuring and cost reduction programs substantially completed in the second half of the fiscal year ended June 30, 2007.

Our gross margin rate decreased to 14% for the year ended June 30, 2007 compared to 18% for the year ended July 1, 2006. The decrease in gross margin rate was primarily due to decreased revenues from sales of products to Nortel Networks as a result of the expiration of Nortel Networks’ purchase obligations under the Supply Agreement, including its obligation to purchase Last-Time Buy products, all of which had favorable

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pricing terms. These decreased revenues were partially offset by lower costs of operating our assembly and test facility in Shenzhen, China compared to our previous assembly and test facility in Paignton, U.K.

In addition, in the year ended June 30, 2007, we had negligible revenues from the sale of inventory carried on our books at zero value, which we obtained in connection with our 2003 purchase of the optical components business of Nortel Networks, compared to revenues of $9.5 million, and related profits, on such inventory in the year ended July 1, 2006.

Research and Development Expenses

Research and development expenses decreased to $32.6 million in the year ended June 28, 2008 compared to $43.0 million in the year ended June 30, 2007, primarily as a result of decreases in personnel and related costs associated with restructuring and cost reduction plans substantially completed in the second half of the fiscal year ended June 30, 2007. In the year ended June 28, 2008 and the year ended June 30, 2007, our research and development expenses included $2.0 million and $1.5 million, respectively, of stock-based compensation expense recorded under SFAS 123R.

Research and development expenses were $43.0 million in the year ended June 30, 2007, relatively consistent with $42.6 million in the year ended July 1, 2006. Increases related to the costs of new product introduction efforts, as well as the classification of additional costs as research and development expenses in connection with a change in the profile of our Paignton, U.K. site from primarily an assembly and test site to primarily a research and development site, were offset by the results of our various cost reduction programs. In the year ended June 30, 2007 and the year ended July 1, 2006, our research and development expenses included $1.5 million and $1.9 million, respectively, of stock-based compensation expense recorded under SFAS 123R.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses were relatively consistent at $47.9 million in the year ended June 28, 2008, compared to $47.8 million in the year ended June 30, 2007. Decreases in professional fees including audit and accounting services and information systems costs savings were offset by an increase in stock-based compensation related to stock awards with performance-based vesting. In the years ended June 28, 2008 and June 30, 2007, our selling, general and administrative expenses included $4.5 million and $2.9 million, respectively, of stock-based compensation expense recorded under SFAS No. 123R.

Our selling, general and administrative expenses decreased to $47.8 million in the year ended June 30, 2007 compared to $52.2 million in the year ended July 1, 2006, primarily due to a reduction of $1.5 million in our stock-based compensation expense and decreases in insurance, office and equipment costs. In the years ended June 30, 2007 and July 1, 2006, our selling, general and administrative expenses included $2.9 million and $4.4 million, respectively, of stock-based compensation expense recorded under SFAS No. 123R.

Amortization of Intangible Assets

Decreases in our amortization of intangible assets to $4.6 million in the year ended June 28, 2008 from $8.9 million in the year ended June 30, 2007, and to $8.9 million in the year ended June 30, 2007 from $10.0 million in the year ended July 1, 2006, were due to the balances of certain of the purchased intangible assets associated with these acquisitions becoming fully amortized in the year ended June 30, 2007 and the year ended June 28, 2008.

Restructuring and Severance Charges

Decreases in our restructuring and severance charges to $3.5 million in the year ended June 28, 2008 from $10.3 million in the year ended June 30, 2007, and to $10.3 million in the year ended June 30, 2007 from $11.2 million in the year ended July 1, 2006, were due to progress in our restructuring and cost reduction programs, as described below.

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On January 31, 2007, we adopted an overhead cost reduction plan which included workforce reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations within existing U.K. facilities and the transfer of certain research and development activities to our Shenzhen, China facility. We began implementing this overhead cost reduction plan in the quarter ended March 31, 2007, and the related actions also included consolidation of certain head office functions in our San Jose, California facility. A substantial portion of the costs associated with this plan were personnel severance and retention related expenses. As of December 29, 2007 the plan was substantially complete. We have incurred related expenses of $7.7 million associated with this plan. As a result of the completion of this plan, we have saved approximately $8.0 million per fiscal quarter in expenses when compared to the quarter ended December 30, 2006.

In May, September and December 2004, we announced restructuring plans, including the transfer of our assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in research and development and selling, general and administrative expenses. These cost reduction efforts were expanded in November 2005 to include the transfer of our chip-on-carrier assembly from Paignton to Shenzhen. The transfer of these operations was completed in the quarter ended March 31, 2007. In May 2006, we announced further cost reduction plans, which included transitioning all remaining manufacturing support and supply chain management, along with pilot line production and production planning, from Paignton to Shenzhen, and these plans were also substantially complete in the quarter ended June 30, 2007. In total we spent $32.8 million on these restructuring programs. The substantial portion of our restructuring and severance charges for termination payments to employees and related costs were associated with these programs.

Our recent restructuring efforts have included the transfer of certain non-telecom manufacturing activities from our San Jose, California facility to our Shenzhen facility.

In connection with these restructuring plans, earlier restructuring plans, and the assumption of restructuring accruals upon the March 2004 acquisition of New Focus, we continue to make scheduled payments drawing down the related lease cancellations and commitments. In the years ended June 28, 2008, June 30, 2007 and July 1, 2006, we recorded $1.2 million, $0.9 million and $1.9 million, respectively, in expenses for revised estimates related to these lease cancellations and commitments. Restructuring and severance charges for the year ended June 30, 2007 also include $0.3 million related to a non-cash charge for acceleration of restricted stock and $0.8 million related to cash payments, each made in connection with a separation agreement we executed in May 2007 with our former chief executive officer.

Impairment of Goodwill and Other Intangible Assets

We recorded no impairment charges related to goodwill and other intangible assets in the year ended June 28, 2008 or in the year ended June 30, 2007. In the year ended July 1, 2006, in connection with our annual review for impairment, we recorded $760,000 of impairment charges related to purchased intangible assets associated with our acquisition of Ignis Optics.

Impairment/(Recovery) of Other Long-Lived Assets

We had no impairments or recoveries of other long-lived assets in the year ended June 28, 2008.

During the year ended June 30, 2007, we designated the assets underlying our Paignton, U.K. manufacturing site as held for sale and subsequently sold the site to a third party for proceeds of £4.8 million (approximately $9.4 million based on an exchange rate of $1.96 to £1.00 in effect on the date of sale), net of selling costs. In connection with this designation we recorded an impairment charge of $1.9 million. During the year ended June 30, 2007 we also recovered $0.3 million from an escrow account related to our 2004 acquisition of Onetta, Inc. and recorded this amount as a recovery of previously impaired goodwill of Onetta.

During the year ended July 1, 2006, we sold a parcel of land in Swindon, U.K., which had previously been accounted for as held for sale, and for which the recorded book value had previously been written down as impaired. The proceeds from the sale of this parcel of land were $15.5 million, resulting in a recovery of previous impairment of $1.3 million, net of transaction costs. In the fourth quarter of fiscal 2006, in connection

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with a review of our long-lived assets for impairment, we recorded $433,000 of impairment charges, which partially offset the recovery related to this land sale.

Gain on Sale of Property and Equipment and Other Long-lived Assets

Gain on sale of property and equipment and other long lived assets in the year ended June 28, 2008 was $2.6 million compared to $3.0 million in the year ended June 30, 2007 and $2.1 million in the year ended July 1, 2006. Gain on sale of property and equipment and other long lived assets in each of these years was primarily associated with the sale of fixed assets which became surplus as a result of our various restructurings and cost reduction programs, which included the shutting down of sites and transfers of certain manufacturing operations, primarily to Shenzhen, China. Because our restructuring programs are substantially complete, we expect gain on sale of property and equipment and other long lived assets to decrease in the next fiscal year compared to the year ended June 28, 2008.

Legal Settlement

In the year ended June 28, 2008 we recorded a gain from legal settlements of $2.9 million, net of costs, associated with the settlement of a legal action connected with our sale of land in Swindon, U.K. to a third party in 2005.

In the year ended June 30, 2007, we recorded a charge of $0.5 million for additional legal fees and other professional costs related to a settlement of the litigation with Howard Yue, the former sole stockholder of Globe Y. Technology, Inc. (a company acquired by New Focus, Inc. in February 2001). This settlement was reached in the fiscal year ended July 1, 2006, and net charges of $5.0 million were recorded in our consolidated statements of operations in that year.

Other Income/(Expense), Net Interest Income, Interest Expense, Other Income/(Expense) net, Gain/(Loss) on Foreign Exchange

On January 13, 2006, we entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of these convertible debentures we issued approximately 10.5 million shares of common stock and warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt (see Note 16 to our consolidated financial statements appearing elsewhere in this joint proxy statement/prospectus for additional information regarding the conversion of the convertible debentures and early extinguishment of debt).

Interest income, primarily from cash, cash equivalents and short-term investment accounts, was relatively consistent in the years ended June 28, 2008, June 30, 2007 and July 1, 2006.

Interest expense was $0.7 million in the year ended June 28, 2008, relatively consistent with $0.6 million in the year ended June 30, 2007, and consistent with bank charges and costs primarily associated with our $25 million senior secured credit facility with Wells Fargo Foothill, Inc. Interest expense of $0.6 million in the year ended June 30, 2007 decreased from $5.1 million in the year ended July 1, 2006 primarily due to our conversion and extinguishment of outstanding convertible notes and payment of promissory notes issued to Nortel Networks, pursuant to a series of agreements entered into in January 2006 and described above.

Gain/(loss) on foreign exchange includes the net impact from the re-measurement of intercompany balances and monetary accounts not denominated in functional currencies, other than the U.S. dollar, and realized and unrealized gains or losses on foreign currency contracts not designated as hedges. The net results for the fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006 are largely a function of exchange rate changes between the U.S. dollar and the U.K. pound sterling and to a lesser degree a function of exchange rate changes between the U.S. dollar and the Swiss franc and the Chinese Yuan.

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Income Tax Provision /(Benefit)

We have incurred substantial losses to date, and may incur additional losses in the future. Based upon the weight of available evidence, which includes our historical operating performance and the recorded cumulative net losses in all prior periods, we provided a full valuation allowance against our net deferred tax assets of $277.2 million at June 28, 2008, $391.8 million at June 30, 2007 and $320.0 million at July 1, 2006.

During fiscal 2006, in connection with our acquisition of Creekside in August 2005, which is described below under “Liquidity and Capital Resources — Cash Flows from Investing Activities — Acquisition of Creekside,” we recorded a one time tax gain of $11.8 million related to our anticipated use of tax attributes to offset deferred tax liabilities assumed.

Liquidity and Capital Resources

Cash Flows from Operating activities


	Six Months Ended						Year Ended
	December 27,			December 29,			June 28,			June 30,			July 1,
	2008			2007			2008			2007			2006
	(Thousands)

Net loss	$	(4,268	)	$	(16,141	)	$	(23,440	)	$	(82,175	)	$	(87,497	)
Non-cash adjustments:
Accretion on short-term investments		(102	)		—			—			—			—
Acquired in-process research and development		—			—			—			—			118
Amortization of deferred gain on sale-leaseback		(486	)		(714	)		(1,384	)		(1,435	)		(278	)
Amortization of interest expense for warrants and beneficial conversion feature		—			—			—			—			1,292
Depreciation and amortization		6,720			9,604			16,869			23,167			30,231
(Gain) loss on sale of property and equipment		8			(1,716	)		(2,562	)		(3,009	)		(2,070	)
Impairment (recovery) of goodwill, intangible assets and other long-lived assets		7,881			—			—			1,621			(72	)
Impairment of short-term investments		706			—			—			—			—
Legal actions, settlements and related costs		—			—			—			—			4,997
Loss on conversion and early extinguishment of debt		—			—			—			—			18,842
One time tax gain		—			—			—			—			(11,785	)
Stock-based compensation		2,241			4,409			8,812			6,666			8,863

Total non-cash adjustments		16,968			11,583			21,735			27,010			50,138
Increase in working capital		(3,010	)		(4,383	)		(14,300	)		(15,608	)		(18,828	)

Net cash provided by (used in) operating activities	$	9,690		$	(8,941	)	$	(16,005	)	$	(70,773	)	$	(56,187	)

Six Months Ended December 27, 2008

Net cash provided by operating activities for the six months ended December 27, 2008 was $9.7 million, resulting from non-cash adjustments of $17.0 million, primarily consisting of a $7.9 million charge for impairment of goodwill, $6.7 million of expense related to depreciation and amortization of certain assets and $2.2 million of expense related to stock-based compensation. These were partially offset by a net loss of $4.3 million, and a decrease in cash from a net change in our operating assets and liabilities of $3.0 million due to an increase in inventories and a decrease in accounts payable, partially offset by decreases in accounts

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receivable and prepaid expenses and other current assets, and an increase in accrued expenses and other liabilities. Included in net loss for the period are a gain of approximately $6.3 million related to the revaluation of U.S. dollar denominated operating intercompany receivables on the books of our U.K. subsidiary, and a gain of approximately $0.9 million related to the revaluation of foreign currency denominated operating intercompany receivables on the books of our Shenzhen subsidiary.

Six Months Ended December 29, 2007

Net cash used in operating activities for the six months ended December 29, 2007 was $8.9 million, primarily resulting from the net loss of $16.1 million, offset by non-cash adjustments of $11.6 million, primarily consisting of $9.6 million of expense related to depreciation and amortization of certain assets, $4.4 million of expense related to stock-based compensation and a $1.7 million gain on sale of property and equipment. A net change in our operating assets and liabilities of $4.4 million due to increases in accounts receivable and inventories, both associated with our increasing revenues, as well as increases in accrued expenses and other liabilities, partially offset by decreases in accounts payable, prepaid expenses and other current assets, also contributed to the use of cash. Included in net loss for the period are a gain of approximately $0.4 million related to the revaluation of U.S. dollar denominated operating intercompany receivables on the books of our U.K. subsidiary, and a gain of approximately $1.6 million related to the revaluation of foreign currency denominated operating intercompany receivables on the books of our Shenzhen subsidiary.

Year ended June 28, 2008

Net cash used in operating activities for the year ended June 28, 2008 was $16.0 million, primarily resulting from the net loss of $23.4 million, offset by non-cash accounting charges of $21.7 million, primarily consisting of $8.8 million of expense related to stock based compensation and $16.9 million of expense related to depreciation and amortization of certain assets. Increases in working capital of $14.3 million also contributed to the use of cash, primarily due to decreases in accounts payables and accrued expenses and other liabilities, and increases in prepaid expenses and other assets, partially offset by decreases in accounts receivable and inventories.

Year ended June 30, 2007

Net cash used in operating activities for the year ended June 30, 2007 was $70.8 million, primarily resulting from the net loss of $82.2 million, offset by non-cash accounting charges of $27.0 million, primarily consisting of $6.7 million of expense related to stock based compensation and $23.2 million of expense related to depreciation and amortization of certain assets. Increases in working capital of $15.6 million also contributed to the use of cash, primarily due to decreases in accounts payables and accrued expenses and other liabilities, partially offset by increases in accounts receivable, inventories, prepaid expenses and other assets.

Year ended July 1, 2006

Net cash used in operating activities for the year ended July 1, 2006 was $56.2 million, primarily resulting from the net loss of $87.5 million, offset by non-cash accounting charges of $50.1 million, primarily consisting of an $18.8 million loss on conversion and early retirement of debt, $10.3 million of expense related to stock based compensation, including non-cash restructuring and severance and expenses related to warrants, $5.0 million of common stock issued to settle a legal claim brought by Howard Yue, and $30.2 million related to depreciation and amortization of certain assets, net of an $11.8 million one-time tax gain. Increases in working capital of $18.8 million also contributed to the use of cash, primarily due to decreases in accounts payables and accrued expenses and other liabilities and an increase in accounts receivable offset by a decrease in prepaid expenses and other assets.

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Cash Flows from Investing Activities

Net cash provided by investing activities for the six months ended December 27, 2008 was $2.1 million, primarily consisting of $15.4 million in sales and maturities of available-for-sale investments and $0.6 million from the release of restricted cash, which were partially offset by $6.9 million in purchases of available-for-sale investments and $6.9 million used in capital expenditures.

Net cash provided by investing activities for the six months ended December 29, 2007 was $0.6 million, primarily consisting of $4.5 million from the release of restricted cash which had been security on an unoccupied leased facility and $1.8 million in proceeds from the sale of fixed assets, which were partially offset by $5.7 million used in capital expenditures.

In the year ended June 28, 2008, we used $19.0 million of cash in investing activities, primarily related to our investment of $17.8 million of cash in available for sale securities and investments, as well as $9.1 million in capital spending, offset by $3.0 million in proceeds from the sale of property, equipment and long-lived assets and $5.0 million of cash relieved of restrictions.

We generated net cash of $7.9 million from investing activities in the year ended June 30, 2007, primarily from $9.4 million in proceeds, net of costs, from the sale of our Paignton, U.K. site (as described further below), and $5.4 million in proceeds from the sale of property and equipment. These sources of cash were partially offset by $6.4 million in capital expenditures.

During the quarter ended December 30, 2006, Bookham Technology plc, our wholly-owned subsidiary, sold our Paignton U.K. manufacturing site to a third party for proceeds of £4.8 million (approximately $9.4 million based on an exchange rate of $1.96 to £1.00 in effect on the date of the sale), net of selling costs. In connection with this transaction, we recorded a loss of $0.1 million which is included in loss on sale of property and equipment and other long-lived assets.

We generated net cash of $42.7 million from investing activities in the year ended July 1, 2006, primarily from $14.7 million in proceeds, net of costs, from the sale of a parcel of land in Swindon, U.K., $9.6 million of cash assumed in connection with the two acquisitions completed during the year, $23.4 million from the sale of land and building in Caswell pursuant to a sale-leaseback transaction, as described further below, and $2.4 million in proceeds from the sale of property and equipment. These sources of cash were partially offset by $10.1 million in capital expenditures. A substantial portion of the capital spending during this year was incurred in connection with the introduction of our Shenzhen assembly and test operations.

Caswell Sale-Leaseback

On March 10, 2006, Bookham Technology plc, our wholly-owned subsidiary, entered into multiple agreements with a subsidiary of Scarborough Development, which we refer to as Scarborough, for the sale and leaseback of the land and buildings located at our Caswell, U.K., manufacturing site. The sale transaction, which closed on March 30, 2006, resulted in proceeds to Bookham Technology plc of £13.75 million (approximately U.S. $24.0 million using an exchange rate of £1.00 to $1.7455). Under these agreements, Bookham Technology plc leases back the Caswell site for an initial term of 20 years, with options to renew the lease term for 5 years following the initial term and for rolling 2 year terms thereafter. Annual rent is £1.1 million during the first 5 years of the lease, approximately £1.2 million during the next 5 years of the lease, approximately £1.4 million during the next 5 years of the lease and approximately £1.6 million during the next 5 years of the lease. Rent during the renewal terms will be determined according to the then market rent for the site. We have guaranteed the obligations of Bookham Technology plc under these agreements. In addition, Scarborough, Bookham Technology plc and Bookham, Inc. entered into a pre-emption agreement under which Bookham Technology plc, within the next 20 years, has a right to purchase the Caswell site in whole or in part on terms acceptable to Scarborough if Scarborough agrees to terms with or receives an offer from a third party to purchase the Caswell facility.

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Acquisition of Creekside

On August 10, 2005, Bookham Technology plc, our wholly owned subsidiary, entered into a share purchase agreement pursuant to which Bookham Technology plc purchased all of the issued share capital of City Leasing (Creekside) Limited, a subsidiary of Deutsche Bank, for consideration of £1.00, plus professional fees of approximately £455,000 (approximately $837,000, based on an exchange rate of £1 to $1.8403). We entered into this transaction primarily for the business purpose of raising money to fund our operations by realizing the economic value of certain of the deferred tax assets of Bookham Technology plc to the third parties described more fully below. In compliance with U.K. tax law, the transaction was structured to enable certain U.K. tax losses in Bookham Technology plc to be surrendered in order to reduce U.K. taxes otherwise due on sub-lease revenue payable to Creekside. While we continue to retain additional deferred tax assets of a similar characteristic, we have no current plans or opportunities to enter into similar transactions to raise additional financing, although we believe that we would consider such opportunities should any become available. The parties to the share purchase agreement are Bookham Technology plc, Deutsche Bank and London Industrial Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as London Industrial. Creekside was utilized by Deutsche Bank in connection with the leasing of four aircraft to a third party. The leasing arrangement was structured as follows: Phoebus Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as Phoebus, leased the four aircraft to Creekside under the primary leases and Creekside in turn sub-leases the aircraft to a third party. Under the sub-lease arrangement, the third party lessee who utilized the aircraft, whom we refer to as the Sub-Lessee, made sublease payments to Creekside, who in turn was required to make lease payments to Phoebus under the primary leases. To insulate Creekside from any risk that the Sub-Lessee failing to make payments under the sub-lease arrangement, prior to the execution of the share purchase agreement, Creekside assigned its interest in the Sub-Lessee payments to Deutsche Bank in return for predetermined deferred consideration amounts, which we refer to as Deferred Consideration, which were paid directly from Deutsche Bank. Additionally, on closing the transaction, Deutsche Bank loaned Creekside funds to (i) pay substantially all of the rentals under the primary lease with Phoebus, excluding an amount equal to £400,000 (approximately $736,000), and (ii) repay an existing loan made by another wholly owned subsidiary of Deutsche Bank to Creekside. The obligation of Creekside to repay the Deutsche Bank loans could be fully offset against the obligation of Deutsche Bank to pay the Deferred Consideration to Creekside.

As a result of these transactions, Bookham Technology plc had available through Creekside cash of approximately £6.63 million (approximately $12.2 million, based on an exchange rate of £1.00 to $1.8403). Under the terms of the agreement, Bookham Technology plc received £4.2 million (approximately $7.5 million) of available cash when the transaction closed on August 10, 2005. An additional £1 million (approximately $1.8 million) has since been received on October 14, 2005, £1 million (approximately $1.8 million) was received on July 14, 2006 and the balance of approximately £431,000 (approximately $793,000) was received on July 16, 2007.

At the closing of this transaction, Creekside had receivables (including services and interest charges) of £73.8 million (approximately $135.8 million) due from Deutsche Bank in connection with certain aircraft subleases of Creekside and cash of £4.7 million (approximately $8.6 million), of which £4.2 million was immediately available. The receivables resulted from the assignment by Creekside to Deutsche Bank prior to Closing of the benefit of receivables under four lease agreements pursuant to which Creekside subleases certain aircraft that are subject to head lease agreements with Phoebus Leasing Limited, a subsidiary of Deutsche Bank and Creekside as head lessee. The assignment was made in exchange for the receivables, which are to be paid by Deutsche Bank to Creekside in three installments, and the last payment was made on July 16, 2007.

Creekside and Deutsche Bank entered into two facility agreements relating to a loan in the principal amount of £18.3 million (approximately $33.7 million) and a loan in the principal amount of £42.5 million including interest (approximately $78.2 million), which together have accrued approximately £3.6 million (approximately $6.6 million) in interest during the term of these loans. At the closing, Creekside used the loans to repay amounts outstanding under a loan dated April 12, 2005 between Creekside, as borrower, and

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City Leasing (Donside) Limited, a subsidiary of Deutsche Bank, as lender, and to pay part of Creekside’s rental obligations under the lease agreements.

At August 10, 2005, Creekside had long-term liabilities to Deutsche Bank under the loans, an agreement to pay Deutsche Bank £8.3 million (approximately $15.3 million), including principal and interest, to cover settlement of current Creekside tax liabilities and £0.4 million (approximately $0.7 million) of outstanding payments due to Deutsche Bank under the lease agreements; we refer to these collectively as the Obligations.

Creekside has used the Deferred Consideration to pay off the Obligations over a period of two years, or the Term, such that the Obligations have been offset in full by the receivables and resulted in Bookham Technology plc having excess cash of approximately £6.63 million (approximately $12.2 million) available to it during the Term. Bookham Technology plc expects to surrender certain of its tax losses against any U.K. taxable income that may arise as a result of the Deferred Consideration, to reduce any U.K. taxes that would otherwise be due from Creekside.

The loans issued by Deutsche Bank could be prepaid in whole at any time with 30 days’ prior written notice to Deutsche Bank. The loan for £18.3 million plus interest was repaid by Creekside on October 14, 2005, and the loan for £42.5 million was repaid by Creekside in installments: the first installment of £23.5 million (approximately $43.2 million) was paid on July 14, 2006; and the second installment of £22.5 million (approximately $41.4 million) was paid on July 16, 2007. Events of default under the loan include failure by Creekside to pay amounts under the loans when due, material breach by Creekside of the terms of the lease agreements and related documentation, a judgment or order made against Creekside that is not stayed or complied with within seven days or an attachment by creditors that is not discharged within seven days, insolvency of Creekside or failure by Creekside to make payments with respect to all or any class of its debts, presentation of a petition for the winding up of Creekside, and appointment of any administrative or other receiver with respect to Creekside or any material part of Creekside’s assets. Deutsche Bank could have accelerated repayment under the facility agreements upon an event of default, in which case the loan would have been fully offset against the receivables, as described above.

Pursuant to the terms of the agreements governing this transaction, we believe that we have not assumed any material credit risk in connection with these arrangements. The material cash flow obligations associated with Creekside are directly related to Deutsche Bank’s obligations to pay Creekside the Deferred Consideration, and Creekside’s obligation to repay the loans to Deutsche Bank. The obligations of Creekside to repay the Deutsche Bank loan can be fully offset against Deutsche Bank’s obligation to pay the Deferred Consideration. Any Sub-Lessee default has no impact on Deutsche Bank’s obligation to pay Creekside the Deferred Consideration. Regarding the primary leases between Phoebus and Creekside, all amounts have now been paid as has the loans to Deutsche Bank. For these reasons, we believe we do not bear a material risk and have no substantial continuing payments or obligations.

Under the share purchase agreement and related documents, London Industrial and Deutsche Bank have indemnified us, Bookham Technology plc and Creekside with respect to contractual obligations and liabilities entered into by Creekside prior to the closing of the transaction and certain tax liabilities of Creekside that may arise in taxable periods both prior to and after the closing.

Pursuant to an administration agreement between Creekside, City Leasing Limited, a subsidiary of Deutsche Bank, and Deutsche Bank, Creekside is to be administered during the Term by City Leasing Limited to ensure Creekside complies with its obligations under the lease agreements.

In accordance with the terms of the primary leases and the sub-leases, Phoebus is ultimately entitled to the four aircraft in the event of default by the Sub-Lessee. An event of default will not impact the payment obligations described above.

Cash Flows from Financing Activities

There were no significant cash flows from financing activities for the six months ended December 27, 2008.

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Net cash provided by financing activities for each of the six months ended December 29, 2007 and year ended June 28, 2008 was $37.1 million, primarily consisting of $40.9 million in proceeds, net of expenses and commissions, from an underwritten public offering of 16 million shares of our common stock at a price to the public of $2.75 a share, offset by the repayment of $3.8 million, net, which had been previously drawn under our senior secured credit facility with Wells Fargo Foothill, Inc., described below.

In the year ended June 28, 2008, we generated $37.0 million in cash from financing activities, consisting primarily of $40.8 million in proceeds, net of expenses and commissions, from an underwritten public offering of 16 million shares of our common stock at a price to the public of $2.75 a share, partially offset by the repayment of $3.8 million drawn under our $25 million senior secured credit facility with Wells Fargo Foothill, Inc., described below.

In the year ended June 30, 2007, we generated $59.1 million of cash from financing activities, primarily consisting of $55.4 million of net proceeds from private placements of our common stock and warrants to purchase our common stock on March 22, 2007 and on September 1, 2006, as described below, and $3.8 million drawn on our senior secured credit facility with Wells Fargo Foothill, Inc.

On March 22, 2007, we entered into a definitive agreement for a private placement, pursuant to which we issued, on March 22, 2007, 13,640,224 shares of common stock and warrants to purchase up to 4,092,066 shares of common stock with certain institutional accredited investors for net proceeds of approximately $26.9 million. The warrants have a five-year term, expiring March 22, 2012, and are exercisable beginning on September 23, 2007 at an exercise price of $2.80 per share, subject to adjustment based on a weighted average anti-dilution formula if we effect certain equity issuances in the future for consideration per share that is less than the then current exercise price of such warrants.

On August 31, 2006, we entered into an agreement for a private placement of common stock and warrants pursuant to which we issued and sold 8,696,000 shares of common stock and warrants to purchase up to 2,174,000 shares of common stock on September 1, 2006, and issued and sold an additional 2,898,667 shares of common stock and warrants to purchase up to an additional 724,667 shares of common stock in a second closing on September 19, 2006. In both cases such shares of common stock and warrants were issued and sold to certain institutional accredited investors. Our net proceeds from this private placement, including the second closing, were $28.7 million. The warrants are exercisable during the period beginning on March 2, 2007 through September 1, 2011, at an exercise price of $4.00 a share.

In the year ended July 1, 2006, we generated $25.2 million of cash from financing activities, primarily consisting of $49.5 million of net proceeds from a public offering of our common stock in October 2005, offset by $24.3 million used in connection with the early retirement of two promissory notes originally issued to Nortel Networks in connection with our acquisition of their optical components business and the payment of certain amounts in connection with the conversion of our convertible debentures which were issued in December 2004.

On January 13, 2006, we entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of these convertible debentures we issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended June 28, 2008 for loss on conversion and early extinguishment of debt. (See Note 16 — Debt to our consolidated financial statements appearing elsewhere in this joint proxy statement/prospectus for additional disclosures regarding the conversion of the convertible debentures and early extinguishment of debt).

Effect of Exchange Rates on Cash and Cash Equivalents for the Six Months Ended December 27, 2008 and December 29, 2007

The effect of exchange rates on cash and cash equivalents for the six months ended December 27, 2008 was a decrease of $9.3 million, primarily consisting of approximately $2.2 million in net gain due to the

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revaluation of foreign currency cash balances to the functional currency of the respective subsidiaries, a gain of approximately $6.3 million related to the revaluation of U.S. dollar denominated operating intercompany receivables on the books of our U.K. subsidiary, and a gain of approximately $0.9 million related to the revaluation of foreign currency denominated operating intercompany receivables on the books of our Shenzhen subsidiary.

The effect of exchange rates on cash and cash equivalents for the six months ended December 29, 2007 was a decrease of $2.3 million, primarily consisting of approximately $0.3 million in net gain due to the revaluation of foreign currency cash balances to the functional currency of the respective subsidiaries, a gain of approximately $0.4 million related to the revaluation of U.S. dollar denominated operating intercompany receivables on the books of our U.K. subsidiary, and a gain of approximately $1.6 million related to the revaluation of foreign currency denominated operating intercompany receivables on the books of our Shenzhen subsidiary.

Return/(Loss) on Investments

Return/(loss) on investments represents net interest, which is the difference between interest received on our cash and interest paid on our debts. Return on investments was $0.1 million in the six months ended December 27, 2008. Return on investments was $0.8 million in the year ended June 28, 2008 and $0.6 million in the year ended June 30, 2007, and loss on investments was $4.0 million in the year ended July 1, 2006. The changes in return/(loss) on investment over these periods is due to the elimination of interest on balances outstanding from the $45.9 million of notes issued to Nortel Networks in November 2002 and the elimination of the amortization of interest, costs and warrants associated with our issuance of $25.5 million of convertible debt in December 2004, resulting from the payment and retirements of the notes issued to Nortel Networks and the conversion of $25.5 million of convertible debt into common stock pursuant to a series of agreements entered into on January 13, 2006.

Credit Facility

On August 2, 2006, we, with Bookham Technology plc, New Focus and Bookham (US) Inc., each a wholly-owned subsidiary, which we collectively refer to as the Borrowers, entered into a credit agreement, or Credit Agreement, with Wells Fargo Foothill, Inc. and other lenders regarding a three year $25.0 million senior secured revolving credit facility. Advances are available under the Credit Agreement based on 80 percent of “qualified accounts receivable”, as defined in the Credit Agreement, at the time the advance is requested.

The obligations of the Borrowers under the Credit Agreement are guaranteed by us, Ignis Optics, Inc., Bookham (Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., each also a wholly-owned subsidiary (which we refer to collectively as the Guarantors and together with the Borrowers, as the Obligors), and are secured pursuant to a security agreement, or the Security Agreement, by the assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in some of their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a guaranty agreement in substantially the same form and join in the Security Agreement.

Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage points or the bank’s prime rate plus 1.25 percentage points. In the absence of an event of default, any amounts outstanding under the Credit Agreement may be repaid and re-borrowed at any time until maturity, which is August 2, 2009.

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level of earnings before interest, taxes, depreciation and amortization, or EBITDA, if the Borrowers have not maintained “minimum liquidity”, defined as $30 million of qualified cash and excess availability, each as also defined in the Credit Agreement, as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the Borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business and transactions with affiliates. As of December 27, 2008 and June 28, 2008, there were no amounts outstanding under this line of credit. At December 27, 2008, we were in compliance with all covenants under the Credit Agreement and we had $0.3 million in an outstanding standby letter of credits with a vendor secured under the Credit Agreement which expires in February 2009. At June 28, 2008, we had $4.8 million in outstanding standby letters of credits with vendors secured under this credit agreement.

In connection with the Credit Agreement, we agreed to pay a monthly servicing fee of $3,000 and an unused line fee equal to 0.375 percentage points per annum, payable monthly on the unused amount of revolving credit commitments. To the extent there are letters of credit outstanding under the Credit Agreement, the Borrowers are obligated to pay the administrative agent a letter of credit fee at a rate equal to 2.75 percentage points per annum.

Future Cash Requirements

As of December 27, 2008, we held $35.3 million in cash and cash equivalents, $0.5 million in restricted cash and $8.9 million in short-term investments. We expect that our cash generated from operations, together with our current cash balances, short-term investments, and amounts expected to be available under our senior secured $25.0 million credit facility, which are based on a percentage of accounts receivable at the time the advance is requested, will provide us with sufficient financial resources in order to operate as a going concern through our next four fiscal quarters subsequent to the quarter ended December 27, 2008. To further strengthen our financial position, in the event of unforeseen circumstances, or in the event needed to fund growth in future financial periods, either as a standalone company or in connection with our proposed merger with Avanex, we may raise additional funds by any one or a combination of the following: issuing equity, debt or convertible debt or the sale of certain product lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines, technologies and businesses. In addition to our proposed merger with Avanex, we continue to consider potential acquisition candidates. Any of these transactions could involve the issuance of a significant number of new equity securities, debt, and/or cash consideration. We may also be required to raise additional funds to complete any such acquisition, through either the issuance of equity securities or borrowings. If we raise additional funds or acquire businesses or technologies through the issuance of equity securities, our existing stockholders may experience significant dilution.

Contractual Obligations

Our contractual obligations at June 28, 2008, by nature of the obligation and amount due over identified periods of time, are set out in the table below:


	FY 2009		FY 2010		FY 2011		FY 2012		FY 2013		Thereafter		Total
	(In thousands)

Purchase obligations	$	28,386	$	—	$	—	$	—	$	—	$	—	$	28,386
Operating lease obligations		6,489		6,347		5,872		3,742		2,974		38,512		63,936
Long-term obligations		54		54		54		54		13		—		229

Net commitments	$	34,875	$	6,401	$	5,926	$	3,796	$	2,987	$	38,512	$	92,551

The purchase obligations consist of our total outstanding purchase order commitments as at June 28, 2008. Any capital purchases to which we are committed are included in these outstanding purchase orders under standard terms and conditions. Operating leases are future annual commitments under non-cancelable

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operating leases, including rents payable for land and buildings. The long-term obligations are associated with our Swiss subsidiary’s unsecured loan payable to a third party

Off-Balance Sheet Arrangements

In connection with the sale by New Focus of its passive component line to Finisar, Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property sold to Finisar. This indemnification obligation expires in May 2009 and has no limitation on maximum liability.

We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and executive officers. We have not recorded a liability associated with these indemnification arrangements as we historically have not incurred any costs associated with such indemnification arrangements and do not expect to in the future. Costs associated with such indemnification arrangements may be mitigated by insurance coverage that we maintain, however such insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay. In addition, we may not be able to maintain such insurance coverage in the future.

We also have indemnification clauses in various contracts that we enter into in the normal course of business, such as those issued by our bankers in favor of several of our suppliers or indemnification clauses in favor of customers in respect of liabilities they may incur as a result of purchasing our products should such products infringe the intellectual property rights of a third party. We have not historically paid out any amounts related to these indemnification obligations and do not expect to in the future, therefore no accrual has been made for these indemnification obligations.

Other than as set forth above, we are not currently party to any material off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk

Interest rates

We finance our operations through a mixture of the issuance of equity securities, finance leases, working capital and by drawing on a three year $25.0 million senior secured revolving credit facility under a credit agreement we entered into on August 2, 2006. Our only exposure to interest rate fluctuations is on our cash deposits and for amounts borrowed under the credit agreement. As of December 27, 2008 and June 28, 2008, there were no amounts outstanding under this line of credit. As of December 27, 2008, we had $0.3 million in outstanding standby letters of credits with a vendor secured under this credit agreement. We monitor our interest rate risk on cash balances primarily through cash flow forecasting. Cash that is surplus to immediate requirements is invested in short-term deposits with banks accessible with one day’s notice and invested in overnight money market accounts. We believe our interest rate risk is immaterial.

Foreign currency

We are exposed to fluctuations in foreign currency exchange rates and interest rates. As our business has grown and become multinational in scope, we have become increasingly subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. Despite our change in domicile from the United Kingdom to the United States in 2004, and our movement of certain functions, including assembly and test operations, from the United Kingdom to China, in the future we expect that a majority of our revenues will continue to be denominated in U.S. dollars, while a significant portion of our expenses will continue to be denominated in U.K. pounds sterling. Fluctuations in the exchange rate between the U.S. dollar and the U.K. pound sterling and, to a lesser extent, other currencies in which we collect revenues and pay expenses, could affect our operating results. This includes the Chinese yuan and the Swiss franc in which we pay expenses in connection with operating our facilities in Shenzhen, China, and Zurich, Switzerland. To the extent the exchange rate between the U.S. dollar and the Chinese yuan were to fluctuate more significantly than experienced to date, our exposure would increase.

As of December 27, 2008, our U.K. subsidiary had $9.5 million in U.S. dollar denominated operating intercompany receivables and $32.5 million in U.S. dollar denominated accounts receivable related to sales to

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external customers. It is estimated that a 10 percent fluctuation in the U.S. dollar relative to the U.K. pound sterling would lead to a profit of $4.2 million (U.S. dollar strengthening), or loss of $4.2 million (U.S. dollar weakening) on the translation of these receivables, which would be recorded in gain (loss) on foreign exchange in our statement of operations.

Hedging Program

We enter into foreign currency forward exchange contracts in an effort to mitigate a significant portion of our exposure to such fluctuations between the U.S. dollar and the U.K. pound sterling. We do not currently hedge our exposure to the Swiss franc or the Chinese yuan, but we may in the future if conditions warrant. We also do not currently hedge our exposure related to our U.S. dollar denominated intercompany payables and receivables. We may be required to convert currencies to meet our obligations. Under certain circumstances, foreign currency forward exchange contracts can have an adverse effect on our financial condition. As of December 27, 2008, we held nineteen foreign currency forward exchange contracts with a notional value of $22.0 million which include put and call options which expire, or expired, at various dates from January 2009 to December 2009 and we have recorded an unrealized loss of $3.3 million to accumulated other comprehensive income in connection with marking these contracts to fair value. It is estimated that a 10 percent fluctuation in the dollar between December 27, 2008 and the maturity dates of the put and call instruments underlying these contracts would lead to a profit of $1.3 million (U.S. dollar weakening), or loss of $1.0 million (U.S. dollar strengthening) on our outstanding foreign currency forward exchange contracts, should they be held to maturity.

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

Certain statements contained in the following discussion that are not purely historical are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding Avanex’s liquidity, anticipated cost of revenue, operating expenses, gross margins, anticipated savings from Avanex’s restructuring and cost reduction plans, and statements regarding Avanex’s 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 joint proxy statement/prospectus, including but not limited to those presented under “Risks Relating to Avanex” and elsewhere in this joint proxy statement/prospectus. Avanex assumes 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 Avanex’s unaudited condensed consolidated financial statements for the three and six month periods ended December 31, 2008 and the notes thereto included herein and Avanex’s audited consolidated financial statements and notes for the year ended June 30, 2008, also included herein.

Critical Accounting Policies and Estimates

Avanex designs, manufactures and markets fiber optic-based products which increase the performance of optical networks. Avanex sells its products to telecommunications system integrators and their network carrier customers. Avanex was incorporated in October 1997 in California and reincorporated in Delaware in January 2000. Avanex began making volume shipments of its products during the quarter ended September 30, 1999.

In fiscal 2004, Avanex assumed restructuring liabilities with fair values of $64.1 million at the date of acquisition of the optical components businesses of Alcatel-Lucent and Corning, which were included in the purchase price. Subsequent to these acquisitions, Avanex has continued to restructure its organization, primarily through the downsizing of its workforce and the abandonment of excess facilities. As of December 31, 2008, Avanex’s accrued restructuring liability balance was $6.7 million, consisting primarily of excess facilities costs payable through fiscal 2011.

The restructurings have resulted in, among other things, a significant reduction in the size of Avanex’s workforce, consolidation of its facilities, and increased reliance on outsourced, third-party manufacturing. In March 2005, Avanex announced that it had opened an operations center in Bangkok, Thailand to centralize global manufacturing and operational overhead functions in a lower-cost region. In July 2005, Avanex announced the opening of a development and marketing office in Shanghai, China. In April 2007, Avanex sold ninety percent (90%) of the share capital and voting rights of its wholly owned subsidiary, Avanex France, which operated its semiconductor fabs and associated product lines located in Nozay, France. In September 2008, Avanex implemented a workforce reduction of 47 employees and announced the closure of its Melbourne, Florida facility and the transfer of the respective product lines, inventory, and fixed assets to another office.

Although Avanex has relocated most of its manufacturing operations to reduce its production costs, it expects to continuously take actions to further reduce costs and improve its gross margins. However, there can be no assurance that Avanex’s cost structure will not increase in the future or that it will be able to align its cost structure with its expectations.

Following the close of market on August 12, 2008, Avanex 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

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on August 13, 2008. Unless indicated otherwise, all Avanex share amounts and per share prices appearing in this joint proxy statement/prospectus 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 Avanex’s 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 Avanex’s products can be lengthy, and the practice of customers in the communications industry to sporadically place orders with short lead time may cause its net revenue, gross margin, operating results and the identity of its largest customers to vary significantly and unexpectedly from quarter to quarter.

To date, a substantial proportion of Avanex’s sales have been concentrated with a limited number of customers. Two customers accounted for 33% and 12% of Avanex’s net revenue, respectively, for the three months ended December 31, 2008. Two customers accounted for 23% and 22% of Avanex’s net revenue, respectively, for the three months ended December 31, 2007. During fiscal 2008, two customers accounted for 25% and 21% of Avanex’s net revenue, respectively. During fiscal 2007, two customers accounted for 29% and 17% of Avanex’s net revenue, respectively. During fiscal 2006, two customers accounted for 27% and 11% of Avanex’s net revenue, respectively. Avanex expects that a substantial portion of its sales will remain concentrated with a limited number of customers, as indicated by the increase in customer concentration.

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

Avanex writes off the cost of inventory that it specifically identifies and considers obsolete or in excess of future sales estimates. Avanex defines obsolete inventory as products that it no longer markets, 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 Avanex. The combined cost of write-offs of excess and obsolete inventory and losses from purchase commitments was $2.3 million and $1.8 million in the three months ended December 31, 2008 and 2007, respectively, and $3.9 million and $3.1 million in the six months ended December 31, 2008 and 2007, respectively. Avanex wrote off excess and obsolete inventory of $4.7 million in fiscal 2008, $12.9 million in fiscal 2007, and $12.8 million in fiscal 2006.

Gross Profit. Gross profit represents revenue less cost of revenue. During the three months ended December 31, 2008, gross margin decreased to 15% of revenue, which was a decrease in gross margin of 16 percentage points over Avanex’s gross margin of 31% in the three months ended December 31, 2007. During the six months ended December 31, 2008, gross margin decreased to 16% of revenue, which was a decrease in gross margin of 13 percentage points over Avanex’s gross margin of 29% in the six months ended December 31, 2007. The decline in gross margin percentage was primarily due to a decrease in revenue, an increase in the write off of excess and obsolete inventory, and a mix shift to products with lower gross margins. During fiscal 2008, gross margin increased to 31% of revenue, which was an increase in gross margin of 13 percentage points over Avanex’s fiscal 2007 gross margin of 18%. The Global Distributor Agreement and legal settlement with 3S Photonics comprised 2 percentage points of this increase. The remainder of the increase was due to a more profitable mix of products sold to Avanex’s customers, decreased vendor costs, improved yields, the introduction of new products with lower production costs, and cost reductions resulting from having Avanex’s design and operations teams working with its contract manufacturers to lower production costs.

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,

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non-recurring engineering charges, and prototype costs related to the design, development, testing, pre-manufacturing of new products, and significant improvements to Avanex’s existing products. Avanex expenses its research and development costs as they are incurred. Avanex believes that research and development is critical to its strategic product development objectives. Avanex further believes that, in order to meet the changing requirements of its customers, it 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, 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.

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

Impairment of Goodwill and Intangibles. Impairment charges consist of the write off of goodwill and intangible assets. Goodwill is assessed for impairment at least annually, or if there are indications of impairment.

Gain on Disposal of Property and Equipment. Gain on disposals includes gains incurred as a result of the disposal of property, plant, or equipment for an amount greater than the net book value.

Gain (loss) on Sale of Subsidiary. Gain (loss) on sale of subsidiary consists of the net gain (loss) from the sale of Avanex’s subsidiary in France in April 2007.

Interest and Other Income (Expense), Net. Interest and other income consist primarily of interest earned from the investment of Avanex’s cash and cash equivalents, short-term investments, and foreign currency exchange rate loss. Interest and other expense consist primarily of interest expense associated with borrowings under its capital lease obligations.

Income Taxes. In accordance with Financial Accounting Standard Board (“FASB”) Statement No. 109, “Accounting for Income Taxes”, Avanex recognizes income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in Avanex’s consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law, and the effects of future changes in tax laws or rates are not anticipated.

The preparation of Avanex’s 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. Avanex believes its estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from these estimates. Avanex believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Liquidity. During the six months ended December 31, 2008, Avanex incurred a net loss of $26.5 million, and its 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. Avanex expects these balances of cash, cash equivalents, and investments to continue to decline in future periods. These factors cast substantial uncertainty on Avanex’s ability to continue as an ongoing enterprise for a reasonable period of time. Avanex’s ability to

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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. Avanex 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 Avanex be unable to continue as an ongoing enterprise.

Revenue Recognition. Avanex’s revenue recognition policy complies with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Avanex recognizes product revenue when persuasive evidence of an arrangement exists, the product has been shipped, risk of loss has been transferred, collectibility is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. Deferred revenue consists of shipped products where risk of loss has not transferred. Avanex records a provision for estimated sales returns and price adjustments in the same period as when the related revenues are recorded. These estimates are based on historical sales returns and adjustments, other known factors, and Avanex’s return policy. If future sales returns or price adjustment levels differ from the historical data Avanex uses to calculate these estimates, changes to the provision may be required. Avanex generally does not accept product returns from customers; however, Avanex does sell its products under warranty. The specific terms and conditions of Avanex’s warranties vary by customer and region in which Avanex does business; the warranty period is generally one year.

Allowance for Doubtful Accounts. In the last three years, Avanex’s uncollectible accounts experience has been almost zero. When Avanex becomes aware, subsequent to delivery, of a customer’s potential inability to meet its obligations, it records a specific allowance for doubtful accounts. If the financial condition of Avanex’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Such an allowance may be magnified due to the concentration of Avanex’s sales to a limited number of customers. At December 31, 2008, Avanex determined that an allowance of $0.2 million was required due to a customer filing for bankruptcy protection in January 2009.

Excess and Obsolete Inventory. Avanex writes off the cost of inventory that it specifically identifies and considers obsolete or excessive to fulfill future sales estimates. Avanex defines obsolete inventory as products that it no longer markets or 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 Avanex.

In estimating excess inventory, Avanex uses a twelve-month demand forecast. Avanex assesses inventory on a quarterly basis and writes down those inventories which are obsolete or in excess of its forecasted usage to their estimated realizable value. Avanex’s estimates of realizable value are based upon its 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 its forecasts or actual demand from its customers is lower than its estimates, Avanex 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.

Stock-based Compensation Expense. Avanex accounts for employee stock-based compensation costs in accordance with FASB Statement No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) and SAB No. 107, “Share-Based Payment” (“SAB 107”). Avanex utilizes 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 Avanex’s 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, Avanex has estimated the time-to-exercise based on historical exercise patterns of employee and director populations. Further, as required under SFAS 123(R), Avanex now estimates forfeitures for options granted that are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of

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estimated fair value of Avanex’s 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, Avanex’s estimate of fair value may not represent the value assigned by a third-party in an arms-length transaction. While Avanex’s estimate of fair value and the associated charge to earnings materially impacts its results of operations, it has no impact on Avanex’s cash position.

Goodwill. SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) prescribes a two-step process for impairment testing of goodwill. 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. Avanex 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, Avanex would record an impairment charge for the difference.

As of December 31, 2008, Avanex 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 the forecasted revenue for the remainder of fiscal 2009. Avanex operates 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, Avanex has written off the book value of $9.4 million of goodwill as of December 31, 2008.

Impairment of Long-lived Assets. Avanex evaluates 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, Avanex performed a SFAS 144 analysis and concluded that the intangible assets are impaired. Avanex wrote off the remaining book value of $0.2 million as of December 31, 2008.

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

Restructuring. During the past few years Avanex has 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 Avanex believes that these estimates accurately reflect the costs of the restructuring programs, actual results may differ, thereby requiring it to record additional provisions or reverse a portion of such provisions.

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Purchase Accounting. Avanex accounts for business combinations under the purchase method of accounting and accordingly, the assets acquired and liabilities assumed are recorded at their fair values. The recorded values of assets and liabilities are based on management estimates, or if market price information is not available, based on the best information available. The values are based on Avanex’s judgments and estimates, and accordingly, its financial position or results of operations may be affected by changes in these estimates and judgments. Specifically, Avanex’s valuation of intangible assets is based on a discounted cash flow valuation methodology that incorporates estimates of future revenue, revenue growth, expenses, estimated useful lives, balance sheet assumptions and weighted-average cost of capital.

Contingencies. Avanex is or has been subject to proceedings, lawsuits and other claims related to its initial public offering and other matters. Avanex evaluates 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, Avanex accrues 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, Avanex reassesses the potential liability related to its pending claims and litigation and may revise its estimates.

In addition to product warranties, Avanex, from time to time, in the normal course of business, indemnifies certain customers with whom it enters into contractual relationships. Avanex has agreed to hold the other party harmless against third party claims that its 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, Avanex has not incurred any costs related to claims under these provisions, and no amounts have been accrued in its financial statements.

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

While Avanex has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event Avanex was to determine that it would be able to realize its 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, Avanex 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 Avanex’s estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities.

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Change in Accounting Policy

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This pronouncement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position using prospective application. SFAS No. 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, this statement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. Avanex adopted this statement in fiscal 2007. Upon adoption, Avanex recorded an adjustment of $0.3 million to the ending balance of accumulated other comprehensive income for pension benefit plan.

Results of Operations for the Three Month and Six Month Periods Ended December 31, 2008

The following table sets forth, for the periods indicated, Avanex’s Condensed Consolidated Statements of Operations (unaudited), expressed as amounts in thousands and as percentages of net revenue.


	Three Months Ended December 31,												Six Months Ended December 31,
	2008			2007			2008			2007			2008			2007			2008			2007
	Amounts						% of Net Rev.						Amounts						% of Net Rev.

Net revenue	$	38,001		$	52,007			100	%		100	%	$	83,275		$	106,716			100	%		100	%
Cost of revenue		32,159			35,888			85	%		69	%		69,660			75,405			84	%		71	%
Gross profit		5,842			16,119			15	%		31	%		13,615			31,311			16	%		29	%
Operating expenses:
Research and development		6,037			7,604			16	%		15	%		12,722			14,378			15	%		13	%
Sales and marketing		2,827			4,202			8	%		8	%		6,879			8,117			8	%		7	%
General and administrative		3,777			4,980			10	%		9	%		8,665			9,455			10	%		9	%
Amortization of intangibles		53			101			0	%		0	%		107			660			0	%		1	%
Restructuring		157			2			0	%		0	%		2,476			(333	)		3	%		0	%
Impairment of goodwill and intangibles		9,615			—			25	%		0	%		9,615			—			12	%		0	%

Total operating expenses		22,466			16,889			59	%		32	%		40,464			32,277			48	%		30	%

Loss from operations		(16,624	)		(770	)		(44	)%		(1	)%		(26,849	)		(966	)		(32	)%		(1	)%
Interest and other income (expense), net		(179	)		1,083			0	%		2	%		(351	)		1,598			(1	)%		2	%

Income (loss) before income taxes		(16,803	)		313			(44	)%		1	%		(27,200	)		632			(33	)%		1	%
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, 2008 was $38.0 million, which represents a decrease of $14.0 million, or 27%, from net revenue of $52.0 million for the three months ended December 31, 2007. 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 decrease in net revenue for both the three and six month periods ended December 31, 2008 was primarily attributable to the current recessionary macro economic environment, as well as a decrease in revenue due to the termination of the Global Distributor Agreement with 3S Photonics, consisting of $3.2 million and $10.1 million for 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 shipped to a customer now in bankruptcy.

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To date, a substantial portion of Avanex’s sales has been concentrated with a limited number of customers. For the three and six months ended December 31, 2008 and 2007, sales to customers that each comprised 10% or more of net revenue were as follows:


	Percentage of Net Revenue
	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007

Company A		33	%		23	%		34	%		24	%
Company B		12	%		*			*			*
Company C		*			22	%		*			19	%

		45	%		45	%		34	%		43	%


*		less than 10%

While Avanex has substantially diversified its customer base, Avanex expects that a substantial portion of its sales will remain concentrated with a limited number of customers. Sales to its major customers vary significantly from period to period, and Avanex does 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 Avanex’s U.S. customers more than its international customers.

Cost of Revenue and Gross Margin

Cost of revenue for the three months ended December 31, 2008 was $32.2 million, compared to $35.9 million for the three months ended December 31, 2007, a decrease of $3.7 million. Cost of revenue for the six months ended December 31, 2008 was $69.7 million, compared to $75.4 million for the six months ended December 31, 2007, a decrease of $5.7 million. This decrease was primarily due to a decrease in revenue, partially offset by an increase in excess and obsolete inventory. In addition, cost of revenue for the three and six months ended December 31, 2008 includes $0.3 million for products shipped to a customer now in bankruptcy, but for which Avanex recognized no revenue.

The combined cost of write-offs of excess and obsolete inventory and losses from purchase commitments was $2.3 million and $1.8 million for the three months ended December 31, 2008 and 2007, respectively, and $3.9 million and $3.1 million for the six months ended December 31, 2008 and 2007, respectively. 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, Avanex sold inventory previously written-off with original costs totaling $0.3 million and $0.9 million, respectively, and for the six months ended December 31, 2008 and 2007, it sold inventory previously written-off with original costs totaling $0.5 million and $1.2 million, respectively, due to unforeseen demand for such inventory. As a result, cost of revenue associated with the sale of this inventory was zero. There can be no assurance that there will not be additional excess and obsolete inventory write-offs in the future.

Cost of revenue as a percentage of net revenue increased from both the three and six months ended December 31, 2007 to the three and six months ended December 31, 2008 due to an increase in manufacturing overhead and direct manufacturing costs as a percentage of net revenue, combined with higher write-offs of excess and obsolete inventory. Consequently, Avanex’s gross margin percentage decreased from 31% for the three months ended December 31, 2007 to 15% for the three months ended December 31, 2008, and from 29% for the six months ended December 31, 2007 to 16% for the six months ended December 31, 2008. The decline in gross margin percentage was primarily due to a decrease in revenue, an increase in excess and obsolete inventory, and a mix shift to products with lower gross margins.

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Avanex’s 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. Avanex expects cost of revenue, as a percentage of net revenue, to fluctuate from period to period. Avanex expects gross margin in fiscal 2009 to decline as compared to fiscal 2008 due to the expected decrease in revenue.

Research and Development

Research and development expenses decreased by $1.6 million to $6.0 million for the three months ended December 31, 2008 from $7.6 million for the three months ended December 31, 2007. As a percentage of net revenue, research and development expenses increased to 16% for the three months ended December 31, 2008 from 15% for the three months ended December 31, 2007 due to the decrease in revenue. In the three months ended December 31, 2008, the decrease in research and development expenses was primarily due to decreased personnel costs of $1.2 million due to lower headcount (largely due to the closure of Avanex’s Melbourne, Florida facility), as well as lower consulting expenses of $0.2 million. For the six months ended December 31, 2008, research and development expenses decreased by $1.7 million to $12.7 million from $14.4 million in the six months ended December 31, 2007. As a percentage of net revenue, research and development expenses increased to 15% from 13% for the same period last year. In the six months ended December 31, 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 $0.3 million, and decreased consulting expenses of $0.2 million. Avanex expects its research and development expenses to decrease in absolute dollars in fiscal 2009 as compared to fiscal 2008. Despite its continued efforts to reduce expenses, there can be no assurance that Avanex’s research and development expenses will not increase in the future.

Sales and Marketing

For the three months ended December 31, 2008, sales and marketing expenses decreased by $1.4 million to $2.8 million from $4.2 million for the three months ended December 31, 2007. As a percentage of net revenue, sales and marketing expenses remained level at 8% for the three months ended December 31, 2008 and 2007. For the six months ended December 31, 2008, sales and marketing expenses decreased by $1.2 million to $6.9 million from $8.1 million for the six months ended December 31, 2007. As a percentage of net revenue, sales and marketing expenses increased to 8% for the six months ended December 31, 2008 from 7% for the six months ended December 31, 2007 due to the decrease in 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. Avanex expects its sales and marketing expenses to decrease in absolute dollars in fiscal 2009 as compared to fiscal 2008. Despite Avanex’s continued efforts to reduce expenses, there can be no assurance that its sales and marketing expenses will not increase in the future.

General and Administrative

General and administrative expenses were $3.8 million for the three months ended December 31, 2008, a decrease of $1.2 million from expenses of $5.0 million for the three months ended December 31, 2007. In the three months ended December 31, 2008, the decrease in general and administrative expenses was primarily driven by decreased personnel costs of $1.1 million due to lower headcount, and decreased outside services and consulting expenses of $0.3 million, offset by bad debt expense of $0.2 million. For the six months ended December 31, 2008, general and administrative expenses decreased by $0.8 million to $8.7 million from $9.5 million for the six months ended December 31, 2007. In the six months ended December 31, 2008, the decrease in general and administrative expenses was primarily due to decreased personnel costs due to lower headcount. As a percentage of net revenue, general and administrative expenses increased to 10% in both the three and six months ended December 31, 2008 from 9% in the same periods the prior year due to the decrease in revenue. Avanex expects its general and administrative expenses to decrease in absolute dollars in fiscal 2009 as compared to fiscal 2008. Despite Avanex’s continued efforts to reduce expenses, there can be no assurance that its general and administrative expenses will not increase in the future.

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Amortization of Intangible Assets

Amortization of intangible assets remained level at $0.1 million for the three months ended December 31, 2008 and 2007, and was $0.1 million and $0.7 million, for the six months ended December 31, 2008 and 2007, respectively. While a significant portion of Avanex’s intangible assets became fully amortized in fiscal 2008, it wrote-off the remaining balance as of December 31, 2008.

Restructuring

Over the past several years, Avanex has implemented various restructuring programs to realign resources in response to the changes in its industry and customer demand, as well as integration of acquired businesses, and it continues to assess its current and future operating requirements accordingly.

For the three months ended December 31, 2008 and 2007, restructuring expenses were $0.2 million and $0, respectively, and for the six months ended December 31, 2008 and 2007, restructuring expenses were $2.5 million and ($0.3) million. The recovery in restructuring expense in the first quarter of fiscal 2008 was due to Avanex’s ability to sublease excess facilities at its Fremont site.

In the three months ended September 30, 2008, Avanex implemented a workforce reduction of 47 employees to reduce costs, streamline operations, and improve its cost structure. In the second quarter of fiscal 2009, Avanex 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 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, Avanex 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. Avanex operates 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, Avanex 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.

Provision for Income Taxes

Avanex recorded an income tax provision of $11,000 for the three months ended December 31, 2008. Avanex had a tax benefit of $0.7 million for the six months ended December 31, 2008. The six month provision consists of $0.4 million related to state and foreign income taxes, and a benefit of $1.1 million related to federal and foreign research tax credits. 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. Avanex’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. Avanex maintained a full valuation allowance on its net deferred tax assets as of December 31, 2008. The valuation allowance was determined in accordance with the provisions of Statement

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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. Avanex intends to maintain a full valuation allowance on the deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

Results of Operations for the Fiscal Years Ended June 30, 2008 and June 30, 2007

The following table sets forth, for the periods indicated, the percentage of net revenue of certain items in Avanex’s Consolidated Statements of Operations:


	Years Ended June 30,
	2008			% of rev			2007			% of rev			2006			% of rev

Net revenue	$	208,094			100	%	$	212,755			100	%	$	162,944			100	%
Cost of revenue		144,509			69	%		174,550			82	%		154,484			95	%

Gross profit		63,585			31	%		38,205			18	%		8,460			5	%
Operating expenses:
Research and development		28,325			14	%		25,231			12	%		23,471			15	%
Sales and marketing		16,735			8	%		15,261			7	%		13,236			8	%
General and administrative		18,238			9	%		23,278			11	%		16,652			10	%
Amortization of intangibles		771			0	%		2,703			1	%		5,448			3	%
Restructuring		(164	)		0	%		1,511			1	%		1,912			1	%
Gain on disposal of property and equipment		(23	)		0	%		(527	)		0	%		(5,064	)		(3	)%
(Gain) loss on sale of subsidiary		(1,996	)		(1	)%		3,216			1	%		—			0	%

Total operating expenses		61,886			30	%		70,673			33	%		55,655			34	%

Income (loss) from operations		1,699			1	%		(32,468	)		(15	)%		(47,195	)		(29	)%
Interest and other income		4,100			2	%		2,292			1	%		2,787			1	%
Interest and other expense		(152	)		0	%		35			0	%		(10,284	)		(6	)%

Income (loss) before income taxes		5,647			3	%		(30,141	)		(14	)%		(54,692	)		(34	)%
Provision for income taxes		(927	)		(1	)%		(464	)		0	%		—			0	%

Net income (loss)	$	4,720			2	%	$	(30,605			(14	)%	$	(54,692	)		(34	)%

Net Revenue

Net revenue for fiscal 2008 was $208.1 million, which represents a decrease of $4.7 million or 2% from net revenue of $212.8 million for fiscal 2007. The decrease in revenue was attributable to a slight decrease in demand for Avanex’s products from existing customers.

Net revenue for fiscal 2007 was $212.8 million, which represents an increase of $49.9 million or 31% from net revenue of $162.9 million for fiscal 2006. The increase in revenue was attributable to an overall increase in demand for Avanex’s products from existing customers and the introduction of new products.

During fiscal 2008, sales to Alcatel-Lucent and Tellabs accounted for 25% and 21% of Avanex’s net revenue, respectively. During fiscal 2007, sales to Alcatel-Lucent and Tellabs accounted for 29% and 17% of Avanex’s net revenue, respectively. During fiscal 2006, sales to Alcatel and Nortel accounted for 27% and 11% of Avanex’s net revenue, respectively.

Net revenue from customers outside the United States accounted for $137.2 million, $137.6 million and $113.8 million of total net revenue, or 66%, 65% and 70%, for the years ended June 30, 2008, 2007 and 2006, respectively.

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Cost of Revenue and Gross Margin

Cost of revenue decreased to $144.5 million for fiscal 2008 from $174.6 million for fiscal 2007. The decrease was primarily due to the decrease in excess and obsolete inventory and manufacturing overhead. Cost of revenue increased to $174.6 million for fiscal 2007 from $154.5 million for fiscal 2006. The increase was primarily due to the increase in total net revenue.

Avanex wrote off excess and obsolete inventory of $4.7 million in fiscal 2008, $12.9 million in fiscal 2007 and $12.8 million in fiscal 2006. These write-offs were primarily due to lower demand for certain products and lower expected usage of previously purchased inventory. The reduction in the write-off of excess and obsolete inventory in fiscal 2008 was primarily due to improved accuracy in predicting the demand for Avanex’s products and the product mix ordered by its customers. Avanex sold inventory previously written-off with original cost totaling $2.9 million, $1.2 million and $0.2 million for fiscal 2008, 2007 and 2006, respectively, due to unforeseen demand for such inventory. As a result, cost of revenue associated with the sale of this inventory was zero. The selling price of the finished goods that included these components was similar to the selling price of products that did not include components that were written-off. These items were subsequently used or sold because customers ordered products that included these components in excess of Avanex’s estimates.

Gross margin as a percentage of net revenue improved to 31% in fiscal 2008 from 18% in fiscal 2007 due to a number of factors. Manufacturing overhead as a percentage of net revenue decreased as Avanex improved productivity of its centralized supply-chain operational center in a lower-cost region. Also, direct manufacturing costs as a percentage of net revenue decreased due to improvements in Avanex’s supply chain procurement. These favorable factors were assisted by a higher volume of sales of products with higher gross margin, as well as lower write-offs of excess and obsolete inventory. Additionally, Avanex reduced cost of goods sold by approximately $3.7 million in fiscal 2008 due to the Global Distributor and legal settlement with 3S Photonics, accounting for approximately 2% of the increase. Avanex’s gross margin percentage improved to 18% for fiscal 2007 from 5% for fiscal 2006, primarily due to cost reductions associated with shifting global manufacturing operations to contract manufacturers in lower-cost regions and increased focus on design for manufacturability to achieve lower costs. In addition, the improvement in gross margin percentage was driven by a shift to products with higher volume and higher gross margin.

Avanex’s gross margin is 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 production yields.

Research and Development

Research and development expenses increased $3.1 million to $28.3 million for fiscal 2008 from $25.2 million for fiscal 2007. As a percentage of net revenue, research and development expenses increased to 14% for fiscal 2008 from 12% for fiscal 2007. The increase in research and development expenses was primarily due to increased personnel-related costs due to increased headcount in the U.S. and China, as well as increased prototype-parts spending.

Research and development expenses increased $1.7 million to $25.2 million for fiscal 2007 from $23.5 million for fiscal 2006. As a percentage of net revenue, research and development expenses decreased to 12% for fiscal 2007 from 15% for fiscal 2006. The increase in research and development expenses was primarily due to increased personnel-related costs (such as stock-based compensation expenses and increased headcount in China, offset by closure of Avanex’s R&D office in Thailand and sale of Avanex’s office in France) and patent-related legal expenses.

Sales and Marketing

Sales and marketing expenses increased $1.4 million to $16.7 million for fiscal 2008 from $15.3 million for fiscal 2007. As a percentage of net revenue, sales and marketing expenses increased to 8% in fiscal 2008

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from 7% in fiscal 2007. The increase in sales and marketing expenses was primarily due to personnel-related costs (such as commissions) and increased travel expenses.

Sales and marketing expenses increased $2.1 million to $15.3 million for fiscal 2007 from $13.2 million for fiscal 2006. As a percentage of net revenue, sales and marketing expenses decreased to 7% in fiscal 2007 from 8% in fiscal 2006. The increase in sales and marketing expenses was primarily due to personnel-related costs (such as stock-based compensation expense and commissions), increased travel expenses and increased corporate marketing expenses.

General and Administrative

General and administrative expenses decreased $5.1 million to $18.2 million for fiscal 2008 from $23.3 million for fiscal 2007. As a percentage of net revenue, general and administrative expenses decreased to 9% in fiscal 2008 from 11% in fiscal 2007. The primary reasons for the decrease were decreased personnel-related expenses, audit and legal expenses, and consulting due diligence expenses than in the prior year. General and administrative expenses increased $6.6 million to $23.3 million for fiscal 2007 from $16.7 million for fiscal 2006. As a percentage of net revenue, general and administrative expenses increased to 11% in fiscal 2007 from 10% in fiscal 2006. The primary reasons for the increase were increased audit and legal expenses, consulting due diligence expenses related to a potential acquisition that Avanex decided not to pursue, and increased personnel-related expenses (such as stock-based compensation expense).

Amortization of Intangible Assets

Amortization of intangible assets decreased by $1.9 million to $0.8 million for fiscal 2008, from $2.7 million for fiscal 2007. The decrease was primarily attributable to the remaining intangible assets becoming fully amortized during fiscal 2008, which resulted in less expense during the remainder of fiscal 2008.

Amortization of intangible assets decreased by $2.7 million to $2.7 million for fiscal 2007, from $5.4 million for fiscal 2006. The decrease was primarily attributable to some of the intangible assets becoming fully amortized during fiscal 2007, which resulted in less expense during the remainder of fiscal 2007.

Restructuring

Over the past several years, Avanex has implemented various restructuring programs to realign resources in response to the changes in its industry and customer demand, and Avanex continues to assess its current and future operating requirements accordingly.

For fiscal 2008, Avanex had a recovery in restructuring expenses of $0.2 million due to changes in its estimate of sublease income from excess facilities at its Fremont site. For fiscal 2007, restructuring expenses of $1.5 million resulted from an additional provision for severance benefits totaling $0.3 million, combined with expenses for abandoned facilities in the amount of $1.2 million. Avanex’s accrued restructuring liability balance at June 30, 2008 was $8.0 million and will be payable through 2011.

(Gain) loss on Sale of Subsidiary

In April 2007, Avanex sold ninety percent (90%) of the share capital and voting rights of its wholly owned subsidiary, Avanex France, which operated its semiconductor fabs and associated product lines located in Nozay, France, to 3S Photonics. In fiscal 2007, the sale resulted in a loss to Avanex of approximately $3.2 million primarily as a result of the approximately $24.9 million cash paid, transaction expenses incurred of approximately $1.0 million, and transfer of approximately $4.3 million of assets, partially offset by approximately $15.9 million of liabilities written-off, the assumption of approximately $6.7 million of liabilities by 3S Photonics, the write-off of cumulative translation gain related to Nozay of approximately $3.3 million, and a reduction of the pension obligation of approximately $1.1 million related to the sale.

In July 2007, Avanex entered into a Settlement Agreement with 3S Photonics that finalized the cash payments between the two parties under the share purchase agreement entered into in February 2007. As part

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of the Settlement Agreement, Avanex 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 Avanex and recognized as a gain on the subsidiary sale.

Interest and Other Income

Interest and other income increased $1.8 million to $4.1 million in fiscal 2008 from $2.3 million in fiscal 2007. The primary reason for this increase was foreign currency transaction gains.

Interest and other income decreased $0.5 million to $2.3 million in fiscal 2007 from $2.8 million in fiscal 2006. The primary reason for this decrease was the release of a previously accrued property tax accrual in the prior year, partially offset by a slight increase in interest income.

Interest and Other Expense

Interest and other expense decreased slightly by $0.2 million in fiscal 2008 to $0.2 million from a credit of $35,000 in fiscal 2007. Interest and other expense decreased by $10.3 million in fiscal 2007 to a credit of $35,000 from $10.3 million in fiscal 2006. The primary reason for the decrease was the loss on extinguishment of debt recorded in fiscal 2006, a decrease in interest expense due to the conversion of the senior convertible notes, and a decrease in foreign currency transaction gains.

Provision for Income Taxes

The provisions for income taxes of $0.9 million and $0.5 million were recorded for estimated taxes due on income generated in certain foreign and state tax jurisdictions for fiscal 2008 and 2007, respectively. The income tax provision for fiscal 2008 and fiscal 2007 reflects an effective tax rate of 16% and (2)%, respectively, which differs from the statutory tax rate due to the tax impact of income from foreign operations and unbenefited losses on U.S. taxes due to the full valuation allowance on Avanex’s net deferred tax assets in accordance with FASB Statement No. 109.

As of June 30, 2008, Avanex’s net 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 to occur. Based upon the weight of available evidence, which includes its historical operating performance and reported cumulative net losses since inception, Avanex provides a full valuation allowance against its net deferred tax assets. Avanex reassesses the need for its valuation allowance on a quarterly basis.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Avanex adopted FIN 48 on July 1, 2007 and the adoption did not have a material impact on Avanex’s consolidated balance sheet and statement of operations for fiscal 2008.

Liquidity and Capital Resources

Prior to its initial public offering, Avanex financed its operations primarily through private sales of convertible preferred stock. In February 2000, Avanex received net proceeds of approximately $238.0 million from the initial public offering of its common stock and a concurrent sale of stock to corporate investors. Subsequent to its initial public offering, Avanex has financed its operations through the sale of equity securities, issuance of convertible notes and warrants, bank borrowings, equipment lease financing and acquisitions.

On March 6, 2006, Avanex sold 1.6 million shares of common stock at a price per share of $30.00 for an aggregate purchase price of $48.1 million. The net proceeds from such sale of the shares of common stock

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were $44.7 million, after deducting the placement fee and offering expenses. The purchasers also received warrants to purchase up to an aggregate of 0.5 million shares of common stock at an exercise price of $40.95 per share, subject to adjustment for anti-dilution, exercisable on and after September 9, 2006 and on or before March 9, 2010.

In connection with Avanex’s March 1, 2007 financing, the holders of such warrants received an antidilution adjustment pursuant to the terms of such warrants resulting in up to 7,815 additional shares to be 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. The sale of common stock and issuance of the warrants was made pursuant to an effective registration statement on Form S-3.

On March 1, 2007, Avanex sold 719,670 shares of its common stock at a price per share of $27.79 for an aggregate purchase price of $20 million. The purchaser also received a warrant to purchase up to an additional 179,918 shares of common stock. The warrant is exercisable at an exercise price of $32.18 per share and for a term starting March 31, 2007 and ending March 1, 2011. For more information, please see Note 12 in the Notes to Avanex’s Consolidated Financial Statements.

As of December 31, 2008, Avanex had cash and cash equivalents of $13.9 million and short-term investments of $19.5 million for an aggregate of $33.4 million, excluding restricted cash of $3.8 million.

Net cash used by operating activities of $19.0 million for the six months ended December 31, 2008 was due primarily to a net loss of $26.5 million, partially offset by $17.7 million of non-cash charges (consisting primarily of the impairment to goodwill and intangibles assets of $9.6 million). Changes in operating assets and liabilities during the six months ended December 31, 2008 used $10.2 million of cash.

Net cash provided by investing activities during the six months ended December 31, 2008 was $17.9 million, which was primarily due to net maturities of short-term investments of $21.2 million, partially offset by capital expenditures of $3.3 million due to the expansion of Avanex’s contract manufacturing capabilities in Thailand.

Net cash provided by financing activities was $0.1 million during the six months ended December 31, 2008, which was the result of proceeds generated through the sale of common stock through the Employee Stock Purchase Plan.

Contractual Obligations

Avanex’s contractual obligations and commercial commitments have not materially changed from June 30, 2008. Avanex’s contractual obligations at June 30, 2008 were as follows (in thousands):


	Contractual Obligations Due by Period
	Less than						After
	1 year		1-3 years		3-5 years		5 years		Total

Capital lease obligations	$	15	$	18	$	3	$	—	$	36
Operating leases, net of subleases		4,767		6,969		183		—		11,919
Pension		—		—		—		306		306
Severance*		1,031		82		—		—		1,113
Unconditional purchase obligations		24,512		—		—		—		24,512

	$	30,325	$	7,069	$	186	$	306	$	37,886


*		Includes executive terminations subsequent to year-end of approximately $1.0 million.

Avanex has unconditional purchase obligations to certain of its suppliers and contract manufacturers that support its ability to manufacture its products. As of June 30, 2008, Avanex had approximately $24.5 million of unconditional purchase obligations, none of which is included on its balance sheet in accounts payable.

Under operating leases and capital leases described in the table above, Avanex has included total future minimum rent expense under non-cancelable leases for both current and abandoned facilities and equipment

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leases. Avanex has included in the balance sheet $2.9 million and $5.0 million in current and long-term restructuring accruals, respectively, for the abandoned facilities as of June 30, 2008.

During the six months ended December 31, 2008, Avanex incurred a net loss of $26.5 million, and its 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. Avanex expects these balances of cash, cash equivalents, and investments to continue to decline in future periods. These factors cast substantial uncertainty on Avanex’s ability to continue as an ongoing enterprise for a reasonable period of time. Avanex’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. Avanex’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 Avanex be unable to continue as an ongoing enterprise.

As of December 31, 2008, Avanex does not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosure 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 securities, and maturities can range from overnight to 36 months. The average maturity of the portfolio 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. We believe our interest rate risk is immaterial.

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, 2008 and June 30, 2008:


	December 31,			June 30,
	2008			2008

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

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.

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

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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.

Recent Accounting Pronouncements

In September 2006, the 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 is effective for Avanex’s fiscal year beginning July 1, 2008. The adoption of Statement 157 did not have a material impact on Avanex’s consolidated balance sheet and statement of operations.

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 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. Statement 159 is effective for Avanex’s fiscal year beginning July 1, 2008. The adoption of Statement 159 did not have a material impact on Avanex’s consolidated balance sheet and statement of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes the principles and requirements for how an acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R makes significant changes to existing accounting practices for acquisitions, including the requirement to expense transaction costs and to reflect the fair value of contingent purchase price adjustments at the date of acquisition. SFAS 141R is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008. Avanex will implement the new standard effective in fiscal 2010.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other applicable accounting literature. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. As of December 31, 2008, Avanex has written off the remaining book value of $9.6 million of goodwill and intangible assets in the three months ended December 31, 2008.

DESCRIPTION OF BOOKHAM CAPITAL STOCK

The following is only a summary of the material terms of Bookham’s capital stock. Because it is only a summary, it does not contain all the information that may be important to you. Accordingly, you should read carefully the more detailed provisions of Bookham’s restated certificate of incorporation and bylaws, each of which has been filed with the SEC, as well as applicable Delaware law.

Authorized Capital Stock

Our authorized capital stock currently consists of 175,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par value per share. As of December 27, 2008, there

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were 100,867,920 shares of Bookham common stock outstanding held of record by 10,518 stockholders and no shares of preferred stock outstanding.

Common Stock

Under our restated certificate of incorporation, holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend or other rights of outstanding preferred stock. Upon our dissolution or liquidation, the holders of common stock are entitled to receive proportionately our net assets available after the payment of all debts and other liabilities and subject to the preferential or other rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future.

Our common stock is quoted on the NASDAQ Global Market under the symbol “BKHM.” Pursuant to the merger agreement, Bookham and Avanex will take all actions necessary to ensure that the name of the combined company following the merger will be the name mutually agreed to by Bookham and Avanex. The name change has not yet been determined between the parties; however, when (and if) a name change is effected, a change in Bookham’s trading symbol may be effected as well.

The transfer agent and registrar of our common stock is The Bank of New York.

Preferred Stock

Under our restated certificate of incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the designations, rights, preferences, privileges, qualifications, limitations and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

Equity Compensation Awards

As of December 27, 2008, there were 8,659,038 shares of our common stock issuable upon the exercise of outstanding stock options, having a weighted-average exercise price of $4.36 per share, and 550,529 shares of our common stock issuable upon the vesting of outstanding restricted stock awards and units. As of December 27, 2008, an aggregate of 7,925,115 shares of our common stock were reserved for future issuance under our equity compensation plans.

Warrants

As of December 27, 2008, warrants to purchase a total of 10,081,819 shares of our common stock at a weighted average exercise price of $4.24 per share were outstanding.

Effects of Authorized but Unissued Stock

We have shares of common stock and preferred stock available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of the NASDAQ Global Market. We may utilize these additional shares for a variety of corporate purposes, including for future public offerings to raise additional capital or facilitate corporate acquisitions or for payment as a dividend on our capital stock. The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer,

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proxy contest or otherwise, thereby protecting the continuity of our management. In addition, if we issue preferred stock, the issuance could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation.

Registration Rights

Pursuant to certain registration rights agreements, we have agreed to and filed registration statements covering an aggregate of 46,624,102 shares of Bookham common stock and shares of Bookham common stock underlying warrants to purchase Bookham common stock held by the holders of registration rights under these agreements, in each case, at the time of filing these registration statements. Pursuant to these registration rights agreements, we may in the future be required to file additional registration statements covering shares of Bookham common stock then held by holders of registration rights under these agreements upon the occurrence of certain events.

Delaware Law and Charter and Bylaw Provisions

Anti-Takeover Provisions

We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware. Subject to certain exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within the prior three years did own, 15% or more of the corporation’s voting stock.

Staggered Board of Directors

Our restated certificate of incorporation divides our board of directors into three classes serving staggered three-year terms. In addition, our restated certificate of incorporation provides that our directors may be removed only for cause by the affirmative vote of at least 75% of our shares of capital stock issued and outstanding entitled to vote. Any vacancy on our board of directors may only be filled by vote of a majority of our directors then in office, or by a sole remaining director. The classification of our board of directors and the limitations on the removal of directors and filling of vacancies could make it more difficult for a third party to acquire or discourage a third party from acquiring, control of our company.

Stockholder Action; Special Meeting of Stockholders and Advance Notice Requirements for Stockholder Proposals

Our restated certificate of incorporation provides that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before the meeting and may not be taken by written consent in lieu of a meeting. Our restated certificate of incorporation further provides that special meetings of the stockholders may only be called by our board of directors, chairman of the board or chief executive officer. Under our bylaws, in order for any matter to be considered “properly brought” before a meeting, a stockholder must comply with advance notice requirements. These provisions could have the effect of delaying, until the next stockholders’ meeting, stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage a third party from making a tender offer for our common stock, because even if it acquired a majority of our outstanding voting securities, the third party would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders’ meeting, and not by written consent.

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Super-Majority Voting

The General Corporation Law of the State of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our restated certificate of incorporation and bylaws require the affirmative vote of the holders of at least 75% of the shares of our capital stock issued and outstanding and entitled to vote to amend or repeal any of the provisions described in the prior two paragraphs.

Limitation of Liability and Indemnification of Officers and Directors

Our restated certificate of incorporation contains provisions permitted under the General Corporation Law of the State of Delaware relating to the liability of directors and officers. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty as a director, except in some circumstances involving wrongful acts, such as the breach of a director’s duty of loyalty or acts or omissions that involve intentional misconduct or a knowing violation of law. Further, our restated certificate of incorporation contains provisions to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of the State of Delaware. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors and officers.

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COMPARATIVE RIGHTS OF BOOKHAM STOCKHOLDERS AND AVANEX STOCKHOLDERS

Both Bookham and Avanex are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the Delaware General Corporation Law, or the DGCL. Before the consummation of the merger, the rights of holders of Avanex common stock are also governed by the amended and restated certificate of incorporation of Avanex, the bylaws of Avanex, as amended, and the Rights Agreement between Avanex and Computershare Trust Company, N.A., as amended. After the consummation of the merger, Avanex stockholders will become stockholders of Bookham, and their rights will be governed by the DGCL, the restated certificate of incorporation of Bookham, and the amended and restated bylaws of Bookham, as amended.

The following is a summary of the material differences between the rights of Avanex stockholders and the rights of Bookham stockholders. While we believe that this summary covers the material differences between the two, this summary may not contain all of the information that is important to you. This summary is not intended to be a complete discussion of the respective rights of Avanex and Bookham stockholders and is qualified in its entirety by reference to the DGCL and the various documents of Bookham and Avanex that we refer to in this summary. You should carefully read this entire joint proxy statement/prospectus and the other documents we refer to in this joint proxy statement/prospectus for a more complete understanding of the differences between being a stockholder of Bookham and being a stockholder of Avanex. Bookham and Avanex have filed their respective documents referred to herein with the SEC and will send copies of these documents to you upon your request. See “Where You Can Find More Information.”


	Avanex	Bookham

Authorized Capital Stock	Avanex’s certificate of incorporation, as amended, authorizes the issuance of 32,000,000 shares, consisting of two classes: 30,000,00 shares of common stock, $0.001 par value per share, and 2,000,000 shares of preferred stock, $0.001 par value per share.	Bookham’s restated certificate of incorporation authorizes the issuance of 180,000,000 shares, consisting of two classes: 175,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par value per share.
Number of Directors	Avanex’s bylaws, as amended, provide that the number of directors shall be seven.	Bookham’s restated certificate of incorporation provides that the number of directors shall be established by the board of directors.
Cumulative Voting	Avanex’s certificate of incorporation, as amended, does not provide for cumulative voting in connection with the election of directors.	Bookham’s restated certificate of incorporation does not provide for cumulative voting, and as a result, holders of Bookham common stock have no cumulative voting rights in connection with the election of directors.
Classification of Board of Directors	Avanex has a classified board. Avanex’s certificate of incorporation, as amended, provides that the board is divided into three classes, with board members serving three-year terms, and that directors shall be assigned to each class in accordance with a resolution adopted by Avanex’s board of directors.	Bookham has a classified board. Bookham’s restated certificate of incorporation provides that the board is divided into three classes, with board members serving three-year terms. Bookham’s bylaws provide that the allocation of directors among classes shall be determined by resolution of the board.
Removal of Directors	Avanex’s certificate of incorporation, as amended,	Bookham’s restated certificate of incorporation provides that

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	Avanex	Bookham

	provides that any director, or the entire board of directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the voting stock of Avanex entitled to vote in the election of directors, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least 662/3% of the voting power of all of the then- outstanding shares of the voting stock of Avanex entitled to vote in the election of directors.	directors may be removed from office only for cause and only by the affirmative vote of the holders of at least 75% of the votes which all the stockholders would be entitled to cast at an election of directors.
Vacancies on the Board of Directors	Avanex’s bylaws, as amended, provide that any vacancy occurring in the board of directors as a result of any removal or resignation of a director, and any newly created directorship resulting from any increase in the authorized number of directors, may be filled by a majority of the directors then in office, although less than a quorum, by a sole remaining director, or by a plurality of votes cast at a meeting of the stockholders.	Bookham’s restated certificate of incorporation provides that any vacancy or newly created directorship shall be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the board, or a sole remaining director. A director elected to fill a vacancy shall hold office until the next election of the class for which for which such director shall have been elected.
Stockholder Action by Written Consent	Avanex’s certificate of incorporation, as amended, specifies that no action shall be taken by the stockholders except at an annual or special meeting of the stockholders and Avanex’s bylaws specify that no action shall be taken by the stockholders by written consent.	Bookham’s restated certificate of incorporation specifies that no action shall be taken by the stockholders by written consent.
Amendment to Certificate of Incorporation	Avanex’s certificate of incorporation, as amended, may be amended in any manner otherwise permitted by law, with the exception that in order to in order to alter, amend or repeal Article VII (relating to the composition of the board, alterations and amendments to Avanex’s bylaws, stockholder meetings and removal of directors) or Article IX (relating to amendments and alterations to Avanex’s certificate of incorporation) the affirmative vote of the holders of at least 662/3% of	Bookham’s restated certificate of incorporation may be amended in any manner otherwise permitted by law, with the exception that amendment to Article NINTH (relating to the composition of the board, stockholder nominations for the election of directors and proposals for other business), Article TENTH (relating to stockholder action by written consent), and Article ELEVENTH (relating to special meetings of the stockholders) require the affirmative vote of the holders of

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	Avanex	Bookham

	the voting power of all of the then- outstanding shares of the voting stock, voting together as a single class, is required.	75% of the votes which all the stockholders would be entitled to cast in any annual election of directors. In addition, any amendment or repeal of Article SEVENTH (relating to personal liability of directors for monetary damages) shall not apply to or have any effect on the liability of any director for or with respect to acts or omissions of such director occurring prior to such amendment or repeal.
Amendment to Bylaws	The Avanex certificate of incorporation, as amended, provides that the board of directors may make, alter, amend or repeal the bylaws and has exclusive right to amend the authorized number of directors. The Avanex bylaws, as amended, provide that the Avanex bylaws, may be adopted, amended or repealed by the stockholders entitled to vote.	Bookham’s bylaws may be amended by the affirmative vote of the holders of at least 75% of the votes which all the stockholders would be entitled to cast in any annual election of directors. Bookham’s restated certificate of incorporation and bylaws also permit the board to adopt, amend or repeal the bylaws.
Special meetings of Stockholders	Avanex’s bylaws, as amended, provide that special meetings of the stockholders may be called, at any time by the (i) board of directors (ii) the chairman of the board, (iii) the president or (iv) the chief executive officer.	Bookham’s bylaws provide that special meetings of the stockholders may be called, for any purpose, by(i) the board of directors, (ii) the chairman of the board, or (iii) the chief executive officer or president.
Notice of Stockholder Meetings	Avanex’s bylaws, as amended, require that notice of a meeting shall be given to stockholders not less than 10 days or more than 60 days before the date of the meeting.	Bookham’s bylaws require that notice of a meeting shall be given to stockholders not less than 10 days or more than 60 days before the date of the meeting.
		Bookham’s bylaws provide that in order for a stockholder to make a nomination or propose business at an annual meeting of the stockholders, the stockholder must give timely written notice to Bookham’s secretary not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided however, that if the date of the annual meeting has been advanced by more than 20 days or delayed by more than 60 days from the first anniversary of the previous year’s annual meeting, notice by the stockholder to be

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	Avanex	Bookham

		timely must be received not earlier than the 120^th day prior to such annual meeting and not later than the close of business on the later of(a) the 90^th day prior to such annual meeting and(b) the 10^th day following the day on which notice of the date of the meeting was mailed or public disclosure thereof was made, whichever occurs first.
		In the case of an election of directors at a special meeting of the stockholders, a stockholder’s notice must be received not earlier than the 120^th day prior to such special meeting and not later than the close of business on the later of(a) the 90^th day prior to such special meeting and(b) the 10^th day following the day on which notice of the date of such special meeting was mailed or public disclosure of thereof was made, whichever occurs first.
Delivery and Notice Requirements of Stockholder Nominations and Proposals	Avanex’s bylaws, as amended, provide that in order for a stockholder to make a nomination or propose business at an annual meeting of the stockholders, the stockholder must give timely written notice to Avanex’s secretary not less than 120 calendar days before the one year anniversary of the date on which the corporation first mailed its proxy statement to stockholders in connection with the previous year’s annual meeting of the stockholders. The Avanex stockholder’s written notice must set forth: (i) (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the corporation’s books, of the stockholder proposing such business, (C) the class and number of shares of the corporation that are beneficially owned by the stockholder, (D) any material interest of the stockholder in such	The stockholder’s notice to the secretary shall set forth as to the stockholder giving notice and as to the beneficial owner, if any, on whose behalf the nomination or proposal is being made:(i) such stockholder’s name and address, as they appear on the corporation’s books; (ii) the class and number of shares of stock of the corporation which are owned, beneficially and of record, by such stockholder; (iii) a description of all arrangements or understandings between(a) such stockholder and each proposed nominee and any other person(s) (including their names) pursuant to which the nomination(s) are to be made by such stockholder, and(b) such stockholder and any other person(s) (including their names) in connection with the proposal of such business by such stockholder and any material interest of the stockholder in such business; (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to either nominate the person(s)

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		Avanex		Bookham

		business, and (E) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, in his capacity as a proponent to a stockholder proposal and (ii) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation that are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.		named in its notice or bring such business before the meeting; and(v) a representation whether the stockholder intends or is part of a group which intends(a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to elect the nominee or adopt the proposal, and/or(b) otherwise solicit proxies from stockholders in support of such nomination or proposal. In the case of director nominations, the Bookham stockholder’s written notice must also set forth as to each proposed nominee:(i) such person’s name, age, business address and, if known, residence address, (ii) such person’s principal occupation or employment, (iii) the class and number of shares of stock of the corporation which are beneficially owned by such person, and (iv) any other information concerning such person that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934. In addition, the stockholder’s notice must be accompanied by the written consent of the proposed nominee to serve as a director if elected. In the case of a stockholder proposal, the Bookham stockholder’s written notice must also set forth:(i) a brief description of the business desired to be brought before the annual meeting, (ii) the text relating to the business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the bylaws, the language of the proposed amendment) and (iii) reasons for conducting such business at the annual meeting. In addition, the proposed business must constitute a proper matter under Delaware law for stockholder action.

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	Avanex	Bookham

Proxy	Avanex’s bylaws, as amended, provide that each person entitled to vote at a meeting of the stockholders may authorize another person or persons to act for such stockholder by written proxy signed by the stockholder and filed with the secretary of Avanex. No proxy shall be voted after three years from its date of creation unless the proxy expressly provides for a longer period.	Bookham’s bylaws provide that every stockholder entitled to vote at a meeting of stockholders may do so in person or may authorize another person(s) to act for such stockholder by delivering a proxy to the corporation’s secretary, executed in a manner permitted by Delaware law. No proxy shall be voted after three years from its date of its execution unless the proxy expressly provides for a longer period.
Preemptive Rights	Avanex’s certificate of incorporation, as amended, does not grant any preemptive rights. Avanex’s bylaws are silent as to preemptive rights.	Bookham’s restated certificate of incorporation does not grant any preemptive rights. Bookham’s bylaws are silent as to preemptive rights.
Dividends	Avanex’s bylaws, as amended, provide that the board of directors, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares capital stock. The directors may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purpose shall include but not be limited to equalizing dividends, repairing or maintaining any property of Avanex, and meeting contingencies.	Bookham’s restated certificate of incorporation provides that the board may declare and pay dividends on the corporation’s common stock from funds lawfully available therefor, subject to any preferential dividend or other rights of any then outstanding preferred stock.
Limitation of Personal Liability of Directors	Avanex’s certificate of incorporation, as amended, provides that: to the fullest extent permitted by the Delaware General Corporation Law, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.	Bookham’s restated certificate of incorporation provides that no director shall be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability, except to the extent that Delaware law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty.
Indemnification of Officers and Directors	Avanex’s bylaws, as amended, provide that the corporation shall indemnify any person who was or	Bookham’s restated certificate of incorporation provides that the corporation shall indemnify each

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		Avanex		Bookham

		is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of Avanex, or is or was serving at the request of Avanex as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation		person who was or is a party or threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was, or has agreed to become, a director or officer of the corporation, or is or was serving, or has agreed to serve, at the request of the corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another business entity, or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by or on behalf of such person in connection with that proceeding, provided such person acted in good faith and in a manner which such person reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that such person did not act in such manner or in good faith. In any action or suit by or in the right of the corporation, the corporation shall indemnify such person against all expenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by or on behalf of such person in connection with such proceeding, if such person acted in the manner described above, except that no indemnification shall be made in respect of any claim, issue or

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	Avanex	Bookham

		matter as to which such person shall have been adjudged to be liable to the corporation, unless, and only to the extent that, the Court of Chancery of Delaware shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of Delaware shall deem proper. Bookham will be entitled to participate in and/or assume the defense of a person who has notified the corporation of an action, suit, proceeding or investigation for which indemnity will or could be sought. If Bookham does not assume the defense, it shall pay any expenses (including attorneys’ fees) incurred by on behalf of such person in defending an action, suit, proceeding or investigation or any appeal therefrom in advance of the final disposition of such matter; provided however that such advance payment of expenses shall be made only upon receipt of an undertaking by or on behalf of such person to repay all amounts so advanced in the event that it shall ultimately be determined that such person is not entitled to be indemnified.
Stockholder Rights Plan	In January 2001, Avanex adopted a Rights Agreement with EquiServe Trust Company, N.A. (now known as Computershare Trust Company, N.A.) as rights agent, and has subsequently entered into five amendments to the rights agreement (on March 18, 2002, May 12, 2003, May 16, 2005, March 6, 2006 and January 27, 2009).	Bookham does not have any stockholder rights plan or “poison pill” in effect, including without limitation any agreement with a third party trust or fiduciary entity with respect thereto.
	The following description of the rights agreement, as amended, is qualified in its entirety by reference to the full text of the rights agreement, as amended. You

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		Avanex		Bookham

		should read the rights agreement, as amended, carefully. For information on how to get a copy of the rights agreement, as amended, see “Where You Can Find More Information” below.
		The Avanex rights agreement was amended in connection with the execution of the merger agreement to exclude Bookham, Inc., Ultraviolet Acquisition Sub, Inc. or any their affiliates from the definition of “Acquiring Person.” Accordingly, none of the provisions of the rights agreement will be triggered by the proposed merger with Bookham described in this joint proxy statement/prospectus. Exercisability of Rights. The rights will become exercisable on the earlier of: (i) the close of business on the tenth day following a public announcement by Avanex or any person or group that any person or group has acquired, subject to certain exceptions, without the approval of the board, beneficial ownership of 15% or more of Avanex’s outstanding common stock (or such earlier date that the board becomes aware that any such person or group has acquired, without the approval of the board, beneficial ownership of 15% or more of Avanex’s outstanding common stock or (ii) the close of business on the tenth day after the date that a tender or exchange offer is first published or sent or given, the consummation of which will result in any person or group acquiring, subject to certain exceptions, beneficial ownership of 15% or more of Avanex’s outstanding common stock.
		“Flip- In” Feature. In the event any person or group, subject to certain exceptions, becomes the beneficial owner of more than 15% of the outstanding common stock of Avanex, then each holder of a right (other than such person or group acquiring such beneficial ownership) will have the right to

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		Avanex		Bookham

		receive upon exercise and payment of the exercise price that number of shares of Avanex common stock having a market value of two times the exercise price of the right. If Avanex does not have enough authorized but unissued shares of common stock to satisfy this obligation, then Avanex will deliver an amount in cash equivalent in value to the common stock issuable upon exercise of a right. “Flip- Over” Feature. In the event that at any time after the distribution date Avanex is acquired in a merger or another business combination, then each holder of a right shall have the right to purchase the number of shares of validly issued, fully paid and nonassessable and freely tradable common stock of the acquiring company equal to the result obtained by dividing the exercise price of the right by 50% of the current market price of such common stock of the acquiring company.
		“Exchange” Feature. At any time after a person or group, subject to certain exceptions, has become the beneficial owner of more than 15% of the outstanding common stock of Avanex but before that person has acquired a majority of the outstanding common stock, the board may exchange all or some of the rights at an exchange ratio of one common share per right.
		Redemption of Rights. The corporation may, with the approval of the board of directors, at any time prior to the close of business on the earlier of (i) the fifth day following the first public announcement that a person or group, subject to certain exceptions, has acquired beneficial ownership of more than 15% of Avanex’s outstanding common stock or September 1, 2011, redeem all, but not less than all, of the then outstanding rights at a

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	Avanex	Bookham

	redemption price of $0.001 per right. Amendment to Rights.
	At any time prior to the close of business on the tenth day following a public announcement that any person or group has acquired, subject to certain exceptions, without the approval of the board, beneficial ownership of 15% or more of Avanex’s outstanding common stock or the close of business on the tenth day after the date of a tender or exchange offer is first published, the terms of the rights may be amended by a resolution of the board without the consent of the holders of the rights to: (i) cure any ambiguity; (ii) correct or supplement any provision which may be defective or inconsistent; (iii) shorten or lengthen any time period, subject to certain exceptions contained in the rights agreement; or (iv) change or supplement the provisions of the rights agreement in any manner that the corporation deems desirable and that does not adversely affect the interests of the holders of rights.
	Final Expiration Date. The rights will expire at the close of business on September 1, 2011 unless the expiration date is extended or the rights are earlier redeemed or exchanged by Avanex. Anti-takeover Effects. The Avanex rights agreement is designed to cause significant dilution to a person or group that attempts to acquire or merge with Avanex in a manner or on terms that are not approved by Avanex’s board.
Dissenters’ Rights	Appraisal rights are not available to Avanex stockholders with respect to the merger.	Appraisal rights are not available to Bookham stockholders with respect to the merger.
Certain Business Combination Restrictions	Section 203 of the Delaware General Corporation Law generally protects publicly traded Delaware corporations from hostile takeovers and from certain actions following such takeovers. The restrictions set forth in Section 203 of the Delaware	Under Delaware law a corporation can elect not to be governed by Section 203 of the Delaware General Corporation Law, which generally protects publicly traded Delaware corporations from hostile takeovers and from certain actions following such takeovers.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Beneficial Ownership of Bookham Shares

The following table and the notes thereto present information with respect to the beneficial ownership of shares of Bookham common stock, as of March 18, 2009 (except as noted in the footnotes), by: (1) each of Bookham’s current and former executive officers named in the Bookham Summary Compensation Table included in this joint proxy statement/prospectus, (2) each of Bookham’s current directors, (3) the current directors and executive officers of Bookham as a group and (4) by each person or group who is known to the management of Bookham to be the beneficial owner of more than five percent of the Bookham common stock outstanding as of March 18, 2009. This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC. Where information regarding stockholders is based on Schedules 13D and 13G, the number of shares owned is as of the date for which information was provided in such Schedules. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable and the voting agreements entered into by a director and certain executive officers of Bookham with Avanex, Bookham believes that each of the persons named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 100,959,545 shares outstanding on March 18, 2009, adjusted as required by rules promulgated by the SEC. Shares of Bookham common stock subject to options that are currently exercisable or are exercisable and restricted stock units that will vest within 60 days after March 18, 2009 are treated as outstanding and beneficially owned by the person holding them for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated below, the address for each person and entity named in the table is: c/o Bookham, Inc., 2584 Junction Avenue, San Jose, California 95134.


Beneficial Owner	Number of Shares		Percent of Totals

5% Stockholders
Gruber and McBaine Capital Management, LLC and affiliated persons(1)		8,551,334		8.47	%
50 Osgood Place, Penthouse,
San Francisco, California 94133
JDS Capital Management, Inc.(2)		7,500,000		7.43	%
100 Park Avenue, 17th Floor
New York, New York 10017
Sun Life Financial Inc.(3)		6,686,219		6.62	%
150 King Street West
Toronto, Ontario, Canada M5H 1J9
Named Executive Officers and Directors
Stephen Abely(4)		178,616		*
Alain Couder(5)		482,276		*
Jim Haynes		292,324		*
Adrian Meldrum		187,560		*
Stephen Turley(6)		32,121		*
Kate Rundle		42,984		*
Peter Bordui		92,650		*
Joseph Cook		67,783		*
Lori Holland		83,031		*
W. Arthur Porter		75,420		*
David Simpson(7)		88,231		*
Edward Collins		10,000		*
Bernard Couillaud		10,000		*
All executive officers and directors as a group (13 persons)		1,642,996		1.63	%

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*		Less than 1%

(1)		The information is based on a Schedule 13G filed with the SEC on January 29, 2009, which may not be current as of March 18, 2009, by Gruber and McBaine Capital Management, LLC, Jon D. Gruber, J. Patterson McBaine, Eric Swergold and Lagunitas Partners. Gruber and McBaine Capital Management, LLC, Jon D. Gruber, J. Patterson McBaine, and Eric Swergold reported that they had shared voting power and shared dispositive power over 6,588,031 of such shares of common stock. Messrs. Gruber and McBaine reported that they had sole voting and dispositive power with respect to 1,963,303 of such shares and 174,993 of such shares, respectively. Messrs. Gruber and McBaine are the managers, controlling persons and portfolio managers of Gruber and McBaine Capital Management, LLC. Lagunitas Partners reported that it had shared voting power and shared dispositive power over 3,788,601 of such shares. Lagunitas Partners is an investment limited partnership of which Gruber and McBaine Capital Management, LLC is the general partner.

(2)		The information is based on a Schedule 13G filed with the SEC on October 2, 2008, which may not be current as of March 18, 2009, by JDS Capital Management, Inc.

(3)		The information is based on a Schedule 13G filed with the SEC on July 18, 2008, which may not be current as of March 18, 2009, by Sun Life Financial, Inc.

(4)		Mr. Abely served as our Chief Financial Officer until his resignation which was effective as of July 31, 2008.

(5)		Mr. Couder became our President and Chief Executive Officer and a director in August 2007.

(6)		Mr. Turley served as our Chief Commercial Officer until his resignation which was effective as of April 30, 2008.

(7)		Of these shares, 10,000 are jointly owned by Dr. Simpson’s spouse.

Beneficial Ownership of Avanex Shares

The following table sets forth certain information concerning the beneficial ownership of Avanex common stock, as of March 18, 2009 (except as noted in the footnotes), by: (1) each person or entity who is known by Avanex to own beneficially more than 5% of the outstanding shares of Avanex common stock; (2) each of Avanex’s non-employee directors; (3) each of Avanex’s executive officers named in the Summary Compensation Table that was part of Avanex’s Proxy Statement for its 2008 Annual Meeting of Stockholders, filed with the SEC on October 14, 2008; and (4) all current directors and executive officers of Avanex as a group. Unless

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otherwise indicated below, the address for each person and entity named in the table is: c/o Avanex Corporation, 40919 Encyclopedia Circle, Fremont, California, 94538.

Common Stock

Percentage

Beneficially

Name

Owned (1)

Owned (2)

Pirelli & C. SpA(3)

1,886,391

12.07

Via Gaetano Negri, 10

Milan

Italy

Lawrence W. Lytton(4)

1,020,878

6.53

467 CPW

New York, NY 10025

Barclays Global Investors, NA(5)

796,530

5.10

400 Howard Street

San Francisco, CA 94105

Jo S. Major, Jr.(6)

5,483

Vinton Cerf(7)

15,029

Greg Dougherty(8)

12,413

Joel A. Smith, III(9)

16,708

Paul Smith(10)

35,344

Susan Wang(11)

14,578

Dennis Wolf(12)

1,640

Giovanni Barbarossa(13)

118,495

Patrick Edsell(14)

922

Brad Kolb(15)

35,560

Yves LeMaitre

—

Marla Sanchez(16)

9,882

All directors and Executive Officers (10 Persons)(17)

276,632

1.75


*		Less then one percent of the outstanding common stock.

(1)		The number and percentage of shares beneficially owned are determined in accordance with Rule 13d-3 of the Exchange Act, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares over which the individual or entity has voting power or investment power and any shares of common stock that the individual has the right to acquire within 60 days of March 18, 2009, through the exercise of any stock option or other right, without taking into account the effect of the merger on such stock option or right. Unless otherwise indicated in the footnotes, each person or entity has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned.

(2)		The total number of shares of common stock outstanding as of March 18, 2009 was 15,623,421.

(3)		As indicated in the Schedule 13G jointly filed by Pirelli & C. SpA (“Pirelli”) and by Pirelli Finance (Luxembourg) SA (“Pirelli Finance”) pursuant to the Exchange Act on November 8, 2007, which may not be current as of March 18, 2009. Each of Pirelli and Pirelli Finance may be deemed to beneficially own an aggregate of 1,886,391 shares. Pirelli Finance is a wholly-owned subsidiary of Pirelli with principal business offices at 35 boulevard du Prince, L-1724 Luxembourg, Luxembourg.

(4)		As indicated in the Schedule 13G filed by Lawrence W. Lytton pursuant to the Exchange Act on March 13, 2009, which may not be current as of March 18, 2009.

(5)		As indicated in the Schedule 13G filed by Barclays Global Investors, NA pursuant to the Exchange Act on February 5, 2009, which may not be current as of March 18, 2009. Barclays Global Investors, NA

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		reported sole voting power over 364,271 shares listed and sole dispositive power over 478,979 shares listed. Barclays Global Fund Advisors reported sole voting power and sole dispositive power over 317,551 shares listed. Barclays Global Investors, Ltd, Barclays Global Investors Japan Limited, Barclays Global Investors Canada Limited, Barclays Global Investors Australia Limited and Barclays Global Investors (Deutschland) AG reported no sole voting or dispositive power over listed shares. The shares listed are held in trust accounts for the economic benefit of the beneficiaries of those accounts.

(6)		Represents 5,483 shares held by Dr. Major, based on the last information provided to Avanex, which may not be current as of March 18, 2009.

(7)		Represents 3,534 shares held by Mr. Cerf and 11,495 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(8)		Represents 5,748 shares held by Mr. Dougherty and 6,665 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(9)		Represents 7,799 shares held by Mr. Joel Smith individually, 80 shares held by his spouse and 8,829 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(10)		Represents 34,010 shares held by Mr. Paul Smith and 1,334 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(11)		Represents 5,914 shares held by Ms. Wang and 8,664 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(12)		Represents 306 shares held by Mr. Wolf and 1,334 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(13)		Represents 14,322 shares held by Dr. Barbarossa and 104,173 shares issuable pursuant to options exercisable and restricted stock units scheduled to vest within 60 days of March 18, 2009.

(14)		Represents 922 shares held by Mr. Edsell, based on the last information provided to Avanex, which may not be current as of March 18, 2009.

(15)		Represents 6,106 shares held by Mr. Kolb and 29,454 shares issuable pursuant to options exercisable and restricted stock units scheduled to vest within 60 days of March 18, 2009.

(16)		Represents 9,882 shares held by Ms. Sanchez, based on the last information provided to Avanex, which may not be current as of March 18, 2009.

(17)		Includes 177,968 shares issuable upon the exercise of options exercisable and restricted stock units scheduled to vest within 60 days of March 18, 2009.

Beneficial Ownership of Bookham Shares Following the Merger

The following table shows certain information regarding the beneficial ownership of Bookham common stock immediately following consummation of the merger held by:


	•	each person or group who is known to Bookham and Avanex to become the beneficial owner of more than 5% of Bookham’s common stock upon consummation of the merger;

	•	each expected director of Bookham following the consummation of the merger;

	•	each expected executive officer immediately following the consummation of the merger (which is currently expected to be the current executive officers of Bookham); and

	•	all directors and executive officers as a group of Bookham upon consummation of the merger.

The percentage of shares “beneficially owned” is computed on the basis of shares of Bookham common stock outstanding upon consummation of the merger and assumes that the exchange ratio to be used in the merger is 5.426 shares of common stock for each share Bookham common stock.

The number of shares beneficially owned by each 5% stockholder, director or executive officer is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has

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the sole or shared voting power or investment power, and includes any shares that the individual has the right to acquire within 60 days of March 18, 2009 through the exercise of any stock option or other right.

Shares of common stock that a person has the right to acquire within 60 days of March 18, 2009, including shares that may be acquired upon exercise of stock options or warrants or vesting of restricted stock units, are deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. To Bookham’s and Avanex’s knowledge, except as set forth in the footnotes to this table, the Voting Agreements and subject to applicable community property laws, each person or entity named in the table has sole voting and dispositive power with respect to the shares set forth opposite such person’s or entity’s name.


	Number of		Percent of
Beneficial Owner	Shares		Totals(1)

5% Stockholders
Pirelli & C. SpA(2)		10,235,557		5.48	%
Via Gaetano Negri, 10
Milan, Italy
Executive Officers and Directors
Alain Couder(3)		482,276		*
Jim Haynes(4)		292,324		*
Adrian Meldrum(5)		187,560		*
Jerry Turin(6)		141,675		*
Kate Rundle(7)		42,984		*
Lori Holland(8)		83,031		*
Edward Collins(9)		10,000		*
Bernard Couillaud(10)		10,000		*
Giovanni Barbarossa(11)		642,953		*
Greg Dougherty(12)		67,352		*
Joel A. Smith, III(13)		90,657		*
All executive officers and directors as a group (11 persons)		2,050,812		1.10	%


*		Less than 1%

(1)		Assumes that 85,783,567 shares of Bookham common stock are issued to holders of Avanex capital stock in connection with the merger and shares of Avanex common stock are held by holders of Avanex common stock prior to the merger.

(2)		As indicated in the Schedule 13G jointly filed by Pirelli & C. SpA (“Pirelli”) and by Pirelli Finance (Luxembourg) SA (“Pirelli Finance”) pursuant to the Exchange Act on November 8, 2007, which may not be current as of March 18, 2009. Each of Pirelli and Pirelli Finance may be deemed to beneficially own an aggregate of 10,235,557 shares, as converted according to the assumed Exchange Ratio. Pirelli Finance is a wholly-owned subsidiary of Pirelli with principal business offices at 35 boulevard du Prince, L-1724 Luxembourg, Luxembourg.

(3)		Represents 274,463 shares held by Mr. Couder and 207,813 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(4)		Represents 98,749 shares held by Mr. Haynes and 193,575 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(5)		Represents 61,944 shares held by Mr. Meldrum and 125,616 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(6)		Represents 12,820 shares held by Mr. Turin and 128,855 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

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(7)		Represents 28,817 shares held by Ms. Rundle and 14,167 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(8)		Represents 30,000 shares held by Ms. Holland and 53,031 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(9)		Represents 5,000 shares held by Mr. Collins and 5,000 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(10)		Represents 5,000 shares held by Mr. Couillaud and 5,000 shares issuable pursuant to options exercisable within 60 days of March 18, 2009.

(11)		Represents 77,711 shares held by Dr. Barbarossa and 565,242 shares issuable pursuant to options exercisable and restricted stock units scheduled to vest within 60 days of March 18, 2009, as converted according to the assumed exchange ratio.

(12)		Represents 31,188 shares held by Mr. Dougherty and 36,164 shares issuable pursuant to options exercisable within 60 days of March 18, 2009, as converted according to the assumed exchange ratio.

(13)		Represents 42,317 shares held by Mr. Smith individually, 434 shares held by his spouse and 47,906 shares issuable pursuant to options exercisable within 60 days of March 18, 2009, as converted according to the assumed exchange ratio.

EXECUTIVE COMPENSATION AND RELATED MATTERS

The following compensation discussion and analysis sections provide information regarding the compensation, compensation philosophy, and objectives for Bookham as a standalone entity in relation to the individuals who served as Bookham’s principal executive officer (Alain Couder and Peter Bordui) and principal financial officer (Steve Abely) during fiscal 2008, Bookham’s three other most highly compensated executive officers (Jim Haynes, Adrian Meldrum and Kate Rundle) who received annual compensation in excess of $100,000 during fiscal 2008, and one additional individual (Steve Turley), who would have been among the three other most highly compensated executive officers, but for the fact that he was not serving as an executive officer at the end of Bookham’s last completed fiscal year. These individuals are referred to as the “named executive officers” in the compensation discussion and analysis sections below and in the tables that follow.

It is currently expected that the executive officers of Bookham following the effective time of the merger will be substantially similar to the current executive officers of Bookham (composed of Alain Couder, Jerry Turin, James Haynes, Adrian Meldrum and Kate Rundle). Following the effective time of the merger, however, Bookham contemplates that certain employees of Avanex may join Bookham as officers or executive officers of Bookham, in which case, the persons who are Bookham’s executive officers following the merger may differ from the persons currently serving as executive officers of Bookham. In this regard, in the event that current Avanex personnel join Bookham in executive officer capacities following the merger, certain persons who currently serve as executive officers of Bookham may no longer serve in such capacity following the appointment of such new executive officers. As of the date of this joint proxy statement/prospectus it is not known which Avanex employees, if any, will join Bookham in an executive officer capacity and no determinations by the Bookham board of directors have been made in this regard. Accordingly, the executive compensation discussion and analysis and related disclosures that follow cover only the current executive officers of Bookham, with the exception of Mr. Turin. Mr. Turin was appointed as Chief Financial Officer of Bookham after the end of Bookham’s last completed fiscal year so his compensation is not discussed below. The executive compensation discussion and analysis and related disclosures that follow also cover certain former executive officers of Bookham who were “named executive officers” under applicable SEC rules during Bookham’s last completed fiscal year.

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Bookham Compensation Discussion and Analysis

The compensation committee of our board of directors oversees our executive compensation program. In this role, the compensation committee reviews and approves all compensation decisions relating to our named executive officers. Our board of directors also reviews compensation arrangements with respect to our Chief Executive Officer.

In accordance with the rules of the SEC, the following discussion provides certain compensation-related information with respect to our “named executive officers” for fiscal 2008.

Mr. Bordui, who had served as our interim Chief Executive Officer, resigned from such position on August 12, 2007 and, on such date, Mr. Couder was appointed Chief Executive Officer. Mr. Turley resigned as our Chief Commercial Officer effective as of April 30, 2008 and, as of such date, was no longer an employee of Bookham.

In addition, subsequent to June 28, 2008, Mr. Abely resigned as Chief Financial Officer effective as of July 30, 2008 and as of such date, was no longer an employee of Bookham. As noted above, Mr. Turin was appointed as Chief Financial Officer of Bookham after the end of Bookham’s last completed fiscal year.

Overview

Our executive compensation program is designed to recognize our executives’ contributions to our business and provide incentives for them to deliver performance that meets our objectives and increases stockholder value.

The following provides a brief overview of the more detailed disclosures set forth below in this Compensation Discussion and Analysis:


	•	The objectives of our compensation programs are to: (i) attract and retain the best executive talent; (ii) align the financial interests of executives with those of our stockholders; and (iii) pay for performance.

	•	Our executive compensation consists primarily of: (i) base salary; (ii) incentive based compensation, and (iii) long-term equity awards.

	•	In making fiscal year 2008 compensation decisions, the compensation committee and the board of directors consulted with third party compensation consultants and benchmarked the compensation of our executives with a peer group of 15 other optical component companies with characteristics similar to Bookham.

	•	We encourage a “pay-for-performance” environment by linking short-term incentive-based compensation to the achievement of overall company performance goals.

	•	We use equity-based compensation as a means to align the interests of our executives with those of our stockholders and to retain key talent.

	•	We have entered into severance and change of control agreements with our executives during fiscal year 2008 which are designed to encourage executive retention.

Objectives and Philosophy of Our Executive Compensation Program

The compensation committee establishes our executive compensation philosophy and oversees our executive compensation programs. Under the compensation committee’s supervision and with its approval, for fiscal year 2008, we implemented compensation policies, plans and programs intended to achieve the following objectives:


	•	attract, retain and motivate the best executive talent;

	•	align executives’ incentives with the creation of stockholder value; ensure executive compensation is aligned with our corporate strategies and business objectives; and

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	•	promote the achievement of key corporate strategic and financial performance goals by linking short- and long-term compensation incentives to the achievement of measurable corporate and individual performance goals.

We believe that the performance of our executives and our executive team should be the basis for determining the overall compensation of each of our executives and the compensation committee establishes compensation packages that it believes are competitive with those of other companies in our industry that compete with us for executive talent. Compensation decisions are based on, among other things:


	•	our operating performance;

	•	the effectiveness of our executive team in managing our company;

	•	geographic location of the executive; and

	•	incentivizing executives to maximize stockholder value.

Base salary is used to recognize experience, skill, knowledge and responsibility and is an important element in retaining our named executive officers.

Certain performance objectives, which play an important role in our cash bonus and equity compensation programs, are established by the compensation committee and relate to, among other things, our overall performance and the achievement of key company-wide operating objectives, such as sales growth, operating earnings, cash flow, and earnings per share factors that, if met, we believe will ultimately and positively affect stockholder value. As a result, these objectives formed the basis for rewarding executives through our cash incentive bonus plan and equity incentive program.

A portion of our executive compensation consists of stock options and restricted stock grants that vest either over time or upon the achievement of defined performance criteria. We award equity compensation in an effort to retain our executives and align their interests with those of our stockholders by allowing the executives the opportunity to participate in the long-term success of our company since the value of the award or the return generated, increases only if our share price increases and they remain employed with us at the time the equity award vests.

We compete with many other companies for executive personnel. Accordingly, the compensation committee generally targets overall compensation for executives near the median of compensation paid to executives at similarly situated companies in our peer group, as described below. Variations to this general target may occur as dictated by the experience level of the individual, geographic location and market factors, including risk of retention and ability of the executives to find equivalent positions outside of our industry.

Role of Executives and Compensation Consultants in Compensation Decisions:

The compensation committee solicits recommendations from our Chief Executive Officer and our Vice President of Human Resources for all of our executives and then reviews and approves the total compensation for all of our executives. In the case of the Chief Executive Officer, the board of directors also reviews his compensation arrangements.

In making compensation decisions, the compensation committee also surveys available information regarding the executive compensation paid by similarly sized publicly traded companies in the optical component and semiconductor industries, which we refer to as our peer group. The committee reviews publicly available compensation data of companies in our peer group as well as surveys from consultants in the executive compensation field. In fiscal 2008, the compensation committee reviewed two sources of this information. First, it reviewed the Compensation & Benefit Survey provided by Radford Surveys and Consulting, a division of AON Consulting, Inc., which provides compensation data for similarly-sized companies in the optical component industry. Second, the compensation committee, in August, 2007, engaged an independent third-party compensation consultant, F.W. Cook & Company, to provide a report with specific benchmarking, peer group analysis and recommendations regarding our executive compensation practices.

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In generating this report, F.W. Cook & Company selected a peer group of companies in the optical component market with comparable revenues and organization size, based on the number of employees and location of operations which compete with us for executives and other employees. For fiscal 2008, this peer group consisted of Avanex Corporation, Exfo Electro Optical Inc., Finisar Corporation, Harmonic, IPG Photonics, MRV Communications, Coherent, Inc., Newport Corporation, JDS Uniphase Corporation, Optium Corporation, Oplink Communications, Optical Communications Products, Stratos International, Opnext, Inc., and Zygo for United States executive compensation and ARM Holdings plc, Spirent Communications plc, Filtronic plc, Renishaw plc, Telent plc, and Dialight plc for United Kingdom executive compensation.

F.W. Cook & Company provided our compensation committee with analysis of the competitiveness of our total compensation and rewards program for our executives, including base pay, bonus and long-term incentives against those in our peer group. Their report included information on equity practices, such as the rate at which options are awarded, the percentage of shares utilized in equity programs in relation to the total shares outstanding, and forms of equity and allocation of awards. The report also included information on industry trends, including allocation between short-term and long-term incentives in total executive compensation.

As an initial step in setting executive compensation, the compensation committee determines the median for short-term cash compensation (salary plus bonus) of the executives in the peer group of companies. The compensation committee, when making a final determination on short-term compensation, then either increases or decreases that amount for each executive position based on some or all of the following factors: geography, market, experience level, individual performance, prior employment compensation, current compensation, tenure, seniority, scope of responsibilities, availability of similar talent, strength of succession plans and the individual’s short-term to long-term compensation ratio.

Components of Our Executive Compensation Program

During fiscal 2008, the primary elements of our executive compensation program were:


	•	base salary;

	•	incentive-based cash compensation;

	•	equity awards; and

	•	severance and change in control benefits.

This mix of compensation components allows us to provide an overall executive compensation package which directly addresses our goals of retention, alignment of executive and stockholder interests and linking pay with performance.

Other components of executive compensation consisted of severance and change of control benefits as well as benefits and other compensation made available to all of our employees, including various geographically specific benefit plans made available to our employees in such locations, such as pension or retirement plans, private medical coverage, and group life insurance.

We do not have any formal or informal policy or target for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, the compensation committee, after reviewing information provided by F.W. Cook & Company and the Compensation & Benefit Survey provided by Radford Surveys and Consulting, determines independently what it believes to be the appropriate level and mix of the various compensation components in line with this market data.

Base Salary

Bookham pays each of its executives a base salary in cash on either a bi-weekly or monthly basis. Base salary is used to recognize the experience, skills, knowledge and responsibilities of our executives and is an important element in retaining these individuals.

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In establishing base salary, the compensation committee reviews and considers information regarding the base salary paid by comparable companies in our peer group, as determined by F.W. Cook & Company and as described above, and based on data provided by Radford Surveys and Consulting. In addition to considering this market data, the compensation committee also takes into account other factors when determining base salary, such as the seniority and tenure of the individual, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual at his or her prior employment, if applicable, and the number of well qualified candidates to assume the individual’s role. In keeping with our compensation philosophy of attracting and retaining individuals of high quality on our management team, executive base salaries have been targeted at the median of the range of salaries for executives in similar positions at comparable companies in our peer group. For some or all of the reasons enumerated above, Messrs. Turley and Abely and Ms. Rundle were paid base salaries above the median.

Base salaries are reviewed annually by our compensation committee, and, in certain cases, the compensation committee adjusts an executive officer’s base salary to realign salaries with the peer group after taking into account individual responsibilities, performance, experience, and current compensation.

For example, in October 2007, the compensation committee reviewed all executive officers’ base salaries at the request of Mr. Couder at the time he was appointed as Chief Executive Officer. The committee recommended adjustments to the base salary of Mr. Haynes and Mr. Meldrum after reviewing peer group data from F.W. Cook & Company which showed that the base salary component for such named executive officers were below the median of the peer group in terms of competitive pay packages for the executive positions held by these individuals. Mr. Haynes’ base salary increased from $331,000 to $350,000 and Mr. Meldrum’s base salary increased from $257,000 to $280,000, both effective October 1, 2007.

Incentive-Based Compensation

Performance-Based Cash Bonuses

In October 2007 and January 2008, we established performance-based cash bonus programs for our executives. These incentive-bonus plans are an important component of the executive compensation program as they (1) reward performance and therefore instill a pay-for-performance philosophy and (2) support and reinforce the achievement of specific company strategic, operational and financial goals and objectives, and creation of stockholder value.

In establishing these cash bonus plans, the compensation committee reviewed market data for 2007 presented in the report from F.W. Cook & Company which showed that we were below our peer group in terms of total target cash compensation. The target bonus amounts (expressed as a percentage of base salary) set for each named executive officer for fiscal 2008 are targeted at the median of the peer group for the executive positions held by these individuals. The compensation committee during fiscal 2008 established two performance-based bonus plans. The first bonus plan was adopted in October 2007, and established and measured awards based on performance metrics for the first half of fiscal 2008 and the second bonus plan was adopted in January 2008, and established and measured awards based on performance metrics for the second half of fiscal 2008. Amounts payable under the performance-based bonus plans were calculated based on established eligible target bonus, or the eligible bonus levels, of between 35% and 45% of annual compensation for all participants in the bonus plan, other than Mr. Couder. With respect to Mr. Couder, the board of directors established an eligible target bonus level of 67% of his annual compensation for fiscal 2008.

The compensation committee worked with the Chief Executive Officer to develop a set of measurable corporate goals for the performance-based bonus plans in order to tie the executive officers’ performance to achievement of the internal operating plans approved by the board of directors. The target levels set forth in the performance-based bonus plans, as further described below, could be characterized as challenging, while the stretch goals, as also described below, which lead to increased compensation, required increasingly demanding levels of performance. At the time they were set, all of the targets and objectives were substantially uncertain to be achieved.

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For the first half of fiscal 2008, the compensation committee established “trigger,” “target” and “stretch” goals weighted (i) two-thirds on the achievement of a specified level of non-GAAP EBITDA for the second quarter of fiscal 2008, ending December 28, 2007 and (ii) one-third on the achievement of a specified level of net cash for the first two quarters of fiscal 2008. The compensation committee selected these goals as they are important measures of progress toward the company’s operating goals, including achieving profitability.

For the second half of fiscal 2008, the compensation committee established “trigger,” “target” and “stretch” goals weighted (i) two-thirds on the achievement of a specified level of non-GAAP EBITDA for the fourth quarter of fiscal 2008, ending June 28, 2008, and (ii) one-third on the achievement specified operating cash flow goals for the last two quarters of fiscal 2008. The compensation committee selected these goals as they are important measures of progress toward the company’s operating goals, including achieving profitability.

If the designated “trigger” goals in the applicable periods were achieved, the executives were entitled to receive an amount equal to 25% of their eligible bonus level, and if designated “target” goals identified for the period were met, participants would receive an amount equal to 50% of their eligible annual bonus level. No bonus would be payable under the performance-based bonus plans if “trigger” goals for both financial metrics in the applicable performance-based bonus plan were not met; any bonus between the “trigger” and “target” goals was calculated linearly. If the “stretch” goals identified in the bonus plans were achieved, participants were entitled to receive an amount equal to 75% of their eligible annual bonus level. Any bonus between the target goals and stretch goals were calculated linearly. Payments under the performance-based bonus plans, if any, were made only after the compensation committee certified that the financial metrics set forth in the performance-based bonus plans were satisfied. The goals were set such that target performance should be attained approximately 70% of the time, with some payout (i.e. trigger or above) occurring about 90% of the time. In determining whether a performance metric was satisfied, the metric was calculated after accounting for the cost of the bonus.

The cash bonus payable upon achievement of the “target” goal under the performance-based bonus plan for the first half of fiscal 2008 was at or very near the median bonus level for our executives’ counterparts at companies in our peer group identified in F.W. Cook’s report. The cash bonus payable upon achievement of the “target” goal under the performance-based bonus plan for the second half of fiscal 2008 was at or very near the median bonus level for our executives’ counterparts at companies in our peer group identified in F.W. Cook’s report.

For the first half of fiscal 2008, the non-GAAP EBITDA “target” goal of negative $2.5 million and the available cash “target” goal of $22 million were surpassed and, therefore, the named executive officers received pro rata cash bonuses based on achievement of that goal. For the second half of fiscal 2008, neither the non-GAAP EBITDA “trigger” goal of $0.5 million nor the cash flow “trigger” goal of negative $7.0 million were achieved, and therefore no cash bonus was paid to the named executive officers for this period.

Equity Incentive Awards

Performance Based Awards

During fiscal 2008, we awarded each of our executive’s performance-based restricted stock awards. These restricted stock awards were granted pursuant to our Amended and Restated 2004 Stock Incentive Plan, which allows the compensation committee to issue performance-based equity awards. The equity incentive awards granted by the compensation committee during fiscal 2008 under the Amended and Restated 2004 Stock Incentive Plan were intended to reinforce the compensation goals and philosophy established by the compensation committee. In order to reward performance, the vesting criteria of the performance-based restricted stock awards are linked to overall company performance. Furthermore, by offering equity, to complement our cash incentives, we believe that we can better align our executive’s interests with those of our stockholders. When equity incentives are combined with base salaries and performance-based cash incentives, the total direct compensation for each named executive officer is at or near the median of our peer group.

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The terms of the performance based restricted stock awards granted in fiscal year 2008 provided that the shares subject to the award would vest to the extent that certain fiscal year 2008 corporate-level financial targets were achieved. Upon attainment of the stated non-GAAP adjusted EBITDA “base” goal of $0, 50% of the restricted stock would vest and upon attainment of the stated non-GAAP adjusted EBITDA “stretch” goal of $2.5 million, 100% of the shares would vest. Any result between the base goal and the stretch goal would result in a prorated vesting of the restricted shares. In recognition of our financial improvements during the fiscal year, the board of directors provided for the acceleration of the shares of common stock granted to the named executive officers.

Long-term Equity Awards

Our equity award program is the primary vehicle for offering long-term incentives to our executives. We believe that time based equity grants provide our executives with a strong link to our long-term performance as increases in stock price increase the value of the underlying option grants. As a result, the long-term, time based, equity awards help to create an ownership culture, and help to align the interests of our executives and our stockholders around a common goal of increasing stock price. In addition, the vesting feature of our equity grants provides an incentive to our executives to remain in our employ during the vesting period.

We routinely grant eligible employees equity awards at the time of hire and also provide equity grants to key contributing employees annually. All equity based grants are made by the compensation committee, or a sub-committee of the compensation committee. The time-based options and restricted stock vest as to 25% of the shares subject to the option on the first anniversary of the date of grant and 1/48 of the shares subject to the option monthly thereafter over the remaining 36 months. The exercise price of all stock options is set at the closing price of our common stock on the NASDAQ Global Market on the date of grant.

Beginning in January 2008, in accordance with our Stock Option Grant Policy, all new-hire option awards are granted on the 10th day of the month following the first date of employment. Annual equity awards to on-going employees, if any, are granted on the 15th of August each year, subject to exceptions in certain limited instances.

In determining the size of equity grants to our executives in fiscal 2008, our compensation committee considered comparative share ownership of executives in our peer group identified above, Radford and F.W. Cook surveys, our company-level performance, the applicable executive’s performance, the amount of equity previously awarded to the executive, the vesting of such awards and the recommendations of management. The compensation committee reviews all components of the executive’s compensation when determining equity awards to ensure that an executive’s total compensation conforms to our overall philosophy and objectives. For fiscal 2008, the compensation committee awarded equity to our executives that were at or near the median for equity awards granted to comparable executives in the peer group and those identified in the Radford survey.

All grants of options and restricted stock to our executives are made by the compensation committee in accordance with our Stock Option Grant Policy. In fiscal 2008, the compensation committee granted our executives a combination of time-based options and restricted stock. The committee chose to grant a combination of options and restricted stock to each named executive officer based on the recommendations of F.W. Cook & Company. The restricted shares provide both annual payouts and retention value under all stock price scenarios while minimizing the impact on stockholder dilution. The stock option component is designed to create upside potential if our stock price increases and retention value. The quantity, mix, and potential value of options and restricted stock granted to each named executive officer were consistent with our peer group median for those positions.

Benefits and Other Compensation

We maintain broad-based benefits that are provided to all employees, including health and medical insurance, life and disability insurance and a 401(k) plan or, for executives and employees residing outside the U.S., a similar retirement plan. All executives are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees depending on their geographic location. We provide car

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and/or commuting allowances to a number of our executives, including Messrs. Meldrum and Haynes and prior to their resignations, Messrs. Abely and Turley.

Severance and Change-of-Control Benefits

In May 2008, each of the named executive officer entered into an Executive Severance and Retention Agreement. These agreements superseded any prior severance or change of control provisions contained in each individual’s employment contract, if any. The Executive Severance and Retention Agreement provides, under certain circumstances, for payments upon termination of employment following a change of control of the company or termination without “cause” or for “good reason,” each as defined in the Executive Severance and Retention Agreement. Change of control payments of salary and accrued bonuses made under the agreement are subject to a “double trigger,” meaning that both a change of control and a termination are required. In other words, the change of control does not itself trigger benefits; rather, benefits are paid only if the employment of the executive is terminated during a specified period after the change of control. We believe a “double trigger” benefit maximizes stockholder value because it prevents an unintended windfall to executives in the event of a friendly change of control, while still providing them appropriate incentives to cooperate in negotiating any change of control in which they believe they may lose their jobs. We have provided more detailed information about these benefits, along with estimates of their value under various circumstances, under the caption “Employment, Change of Control and Severance Arrangements” below. Acceleration of stock is subject to a single trigger, meaning only the change of control is required to trigger the acceleration of vesting of equity awards.

We believe providing these benefits helps us compete for executive talent. After reviewing the practices of companies represented in the peer group, we believe that our severance and change of control benefits are generally comparable with severance packages offered to executives by the companies in the peer group.

Tax and Accounting Considerations

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our other officers whose compensation is required to be disclosed to our stockholders under the Exchange Act by reason of being among our four most highly compensated officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We periodically review the potential consequences of Section 162(m) and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, the compensation committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

SFAS 123R requires us to recognize in our statement of operations all share-based payments to employees, including grants of stock options and restricted stock to executives, based on their fair values. The application of SFAS 123R involves significant amounts of judgment in the determination of inputs into the Black-Scholes-Merton valuation model which we use to determine the fair value of share-based awards. These inputs are based upon highly subjective assumptions as to the volatility of the underlying stock, risk free interest rates and the expected life of the options. Judgment is also required in estimating the number of share-based awards that are expected to be forfeited. As required under accounting principles generally accepted in the U.S., we review our valuation assumptions at each grant date, and, as a result, our valuation assumptions used to value stock-based awards granted in future periods may vary from the valuation assumptions we have used previously. For performance based grants we also must apply judgment in determining the periods when, and if, the related performance targets become probable of being met.

Overall Analysis

We operate in a highly competitive industry. One of our principal goals is to achieve profitability by reducing expenses and increasing revenues. While we did not achieve all of our financial goals in fiscal year

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2008, significant progress was made. We believe that our executives directly contributed to this progress. We believe it is vital to retain and motivate our executive officers if we are to achieve our business and financial goals. The total compensation packages paid to our named executive officers are intended to compensate them for services rendered and to retain them over the long-term. We use equity-based and performance-based compensation to align the interests of our executives with those of the stockholders and to provide a further retention incentive. Finally, our short-term incentives support our pay for performance philosophy by linking the vesting of restricted stock grants and payment of cash bonuses to the achievement of overall company performance goals. Thus we believe that our compensation program is designed to successfully achieve our objectives.

During fiscal 2009, we intend to continue monitoring the appropriate level of compensation of our executives through the use of third-party compensation consultants, review of the data provided by Radford Surveys and Consulting and comparison to the compensation practices of our peer group.

Bookham Summary Compensation

The following table sets forth certain information concerning the compensation for fiscal 2008 for each individual who served as our principal executive officer (Mr. Couder and Mr. Bordui) and our principal financial officer (Mr. Abely) during fiscal 2008, our three other most highly compensated executive officers (Messrs. Haynes and Meldrum and Ms. Rundle) who received annual compensation in excess of $100,000 during fiscal 2008 and one additional individual (Mr. Turley), who would have been among the three other most highly compensated executive officers, but for the fact that he was not serving as an executive officer at the end of the last completed fiscal year, collectively, the “named executive officers.”

Bookham Summary Compensation Table


												Non-Equity			Equity
						Stock			Option			Incentive Plan			Incentive Plan			All Other
	Year		Salary			Awards			Awards			Compensation			Compensation			Compensation			Total
Name and Principal Position	(1)		($)			($)(2)			($)(2)			($)			($)			($)			($)

Alain Couder		2008	$	432,692		$	660,688		$	199,234		$	127,004	(3)	$	—		$	1,050	(13)	$	1,420,668
President and Chief Executive Officer(4)		2007	$	—		$	—		$	—		$	—		$	—		$	—		$	—
Peter F. Bordui		2008	$	143,347	(8)	$	—		$	47,447	(9)	$	—		$	14,350	(14)	$	—		$	205,144
Interim President and Chief Executive Officer(7)		2007	$	284,523	(15)	$	34,948	(16)	$	20,871	(17)	$	—		$	—		$	—		$	340,342
Steve Abely		2008	$	330,846		$	572,813		$	210,617		$	59,500	(3)	$	43,750	(14)	$	21,840	(10)	$	1,239,366
Chief Financial Officer		2007	$	326,661		$	153,760		$	194,394		$	—		$	—		$	21,840	(10)	$	696,655
Jim Haynes		2008	$	327,632	(5)	$	363,406		$	116,740		$	78,587	(5)(3)	$	43,750	(14)	$	49,828	(5)(11)	$	979,943
Chief Operating Officer		2007	$	317,226	(18)	$	77,006		$	188,002		$	—		$	—		$	48,428	(18)(19)	$	630,662
Adrian Meldrum		2008	$	259,625	(5)	$	231,012		$	69,719		$	96,776	(5)(3)	$	43,750	(14)	$	43,287	(5)(12)	$	744,169
Executive VP & GM of		2007	$	245,889	(18)	$	43,230		$	108,937		$	91,239	(18)(22)	$	—		$	42,009	(18)(20)	$	531,304
Telecom Division
Steve Turley		2008	$	262,722	(5)	$	50,250		$	—		$	58,113	(5)(3)	$	43,750	(14)	$	460,438	(5)(6)	$	875,273
Chief Commercial Officer		2007	$	318,782	(18)	$	102,517		$	39,201		$	—		$	—		$	62,432	(18)(21)	$	522,932
Kate Rundle		2008	$	173,077		$	55,082		$	8,764		$	9,781	(3)	$	—		$	400	(13)	$	247,104
Executive VP and General Counsel(23)		2007	$	—		$	—		$	—		$	—		$	—		$	—		$	—


(1)		The fiscal years in this column refer to the fiscal years ended June 30, 2007 and June 28, 2008.

(2)		The amounts in this column reflect the dollar amount computed for financial statement reporting purposes for fiscal 2007 and 2008, as applicable, in accordance with SFAS 123R, of equity awards granted under our equity plans, including equity awards granted in and prior to fiscal 2008. There can be no assurance that the SFAS 123R amounts will ever be realized. The assumptions we used to calculate these amounts are included in Note 1 to our audited financial statements for fiscal 2008, included in our annual report on Form 10-K for fiscal 2008. The options, vest as to 25% of the shares subject to the option on the first anniversary of the date of grant and 1/48 of the shares subject to the option monthly thereafter over the remaining 36 months. Each option has a term of ten years, and generally expires shortly following the termination of the executive’s employment. The restricted stock and restricted stock units vest either (i) in full upon our achievement of targeted adjusted EBITDA at fiscal year end 2008 or (ii) one-half as

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		to 25% on the one-year anniversary of the grant date and an additional 2.083% at the end of each month following the first anniversary of the grant date until the fourth anniversary of the grant date and one-half as to 50% if we generate non-GAAP earnings before interest, taxes, depreciation and amortization (excluding restructuring charges, one-time items and the non-cash compensation expense from stock compensation) that are cumulatively greater than zero for two successive quarters and 50% if we generate non-GAAP earnings before interest, taxes, depreciation and amortization (excluding restructuring charges, one-time items and the non-cash compensation expense from stock compensation) that are cumulatively greater than 8% of revenues for two successive quarters. The options granted to Dr. Bordui, in his capacity as a member of the board of directors, are immediately vested, have a term of ten years and expire after Dr. Bordui ceases to be a director.

(3)		Consists of payments in connection with our Performance-Based Bonus Plan on February 8, 2008.

(4)		Mr. Couder was appointed as our President and Chief Executive Officer effective as of August 13, 2007.

(5)		Converted from British Pounds Sterling to U.S. Dollars using the noon buying rate of exchange on August 1, 2008 of $1.981807 U.S. Dollars per British Pound Sterling.

(6)		Consists of $19,818 car allowance, $1,632 fuel allowance, $33,395 pension contribution, $2,085 private medical allowance, $2,903 of travel allowance, and $400,605 separation payment pursuant to an agreement entered into by Bookham Technology plc and Mr. Turley (as described below under the caption “Employment, Change of Control and Severance Arrangements”). Mr. Turley left Bookham effective as of April 30, 2008.

(7)		Dr. Bordui served as our interim President and Chief Executive Officer from February 13, 2007 through August 12, 2007.

(8)		This amount consists of Dr. Bordui’s employee compensation received for service as our interim President and Chief Executive Officer from July 1, 2007 to August 12, 2007.

(9)		Consists of the grant date fair value of $15,807, computed in accordance with SFAS 123R, of the restricted stock award granted on November 1, 2006 and the grant date fair value of $31,640, computed in accordance with SFAS 123R, of the restricted stock award granted on October 23, 2007. These grants were made to Dr. Bordui as part of his director compensation.

(10)		This amount represents Mr. Abely’s car allowance.

(11)		Consists of $17,836 car allowance, $29,487 pension contribution, $420 long service award and $2,085 private medical allowance.

(12)		Consists of $17,836 car allowance, $23,366 pension contribution and $2,085 private medical allowance.

(13)		This amount represents flexible benefit plan credits under Section 125 of the Internal Revenue Code.

(14)		These shares vested upon our achievement of EBITDA positive in fiscal 2008.

(15)		This amount consists of Dr. Bordui’s director compensation of $93,917 for service as a director and employee compensation of $190,606 received for service as our interim President and Chief Executive Officer from February 13, 2007 to June 30, 2007. Dr. Bordui did not receive any compensation in his capacity as a director during the time he served as our interim President and Chief Executive Officer.

(16)		Consists of the grant date fair value of $10,465, computed in accordance with SFAS 123R, of the restricted stock award granted on November 1, 2006 and the grant date fair value of $24,483, computed in accordance with SFAS 123R, of the restricted stock award granted on November 11, 2005. These shares vest as to 50% of the shares on the one-year anniversary of the grant date and as to 50% of the shares on the second-year anniversary. These grants were made to Dr. Bordui as part of his director compensation.

(17)		Consists of the grant date fair value of $20,871, computed in accordance with SFAS 123R, of the stock option award granted on November 1, 2006. These shares are vested 100% on the grant date. This grant was made to Dr. Bordui as part of his director compensation on November 1, 2006.

(18)		Converted from British Pounds Sterling to U.S. Dollars using the noon buying rate of exchange on September 7, 2007 of $2.0283 U.S. Dollars per British Pound Sterling.

(19)		Consists of $18,255 car allowance, $28,550 pension contribution and $1,623 private medical allowance.

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(20)		Consists of $18,255 car allowance, $22,131 pension contribution and $1,623 private medical allowance.

(21)		Consists of $24,340 car allowance, $7,779 fuel allowance, $28,690 pension contribution and $1,623 private medical allowance.

(22)		Consists of payments in connection with a quarterly sales incentive plan.

(23)		Ms. Rundle was appointed our Executive Vice President, General Counsel and Corporate Secretary effective November 21, 2007.

Bookham Grants of Plan-Based Awards

The following table sets forth information regarding each grant of an award made to a named executive officer during fiscal 2008 under any plan, contract, authorization or arrangement pursuant to which cash, securities, similar instruments or other property may be received.


																All Other			All Other					Grant
																Stock			Option			Exercise or		Date Fair
																Awards:			Awards:			Base Price of		Value of
			Estimated Future Payouts Under						Estimated Future Payouts Under							Number			Number			Option		Stock and
	Grant		Non-equity Incentive Plan Awards						Equity Incentive Plan Awards							of Shares			of Shares			Awards		Options
Name	Date		Threshold		Target		Maximum		Threshold (#)		Target(#)			Maximum (#)		or Units			or Units			($/Sh)		Awards(1)

Alain Couder		8/13/2007	$	—	$	—	$	—		—		187,500	(4)		—		—			475,000	(5)	$	2.89	$	859,922
		8/13/2007	$	—	$	—	$	—		—		187,500	(6)		—		—			—		$	—	$	—
		10/23/2007	$	144,231	$	288,461	$	432,692
Peter F. Bordui		10/23/2007	$	—	$	—	$	—		—		—			—		10,000	(3)		10,000	(2)	$	3.28	$	47,447
Steve Abely		10/23/2007	$	59,500	$	119,000	$	178,500
		11/14/2007	$	—	$	—	$	—		—		25,000	(4)		—		—			—		$	2.49	$	62,250
		1/28/2008	$	—	$	—	$	—		—		29,730	(6)		—		—			82,070	(5)	$	1.75	$	721,180
Jim Haynes		10/23/2007	$	76,919	$	153,838	$	230,757		—
		11/14/2007	$	—	$	—	$	—		—		33,333	(4)		—		—			—		$	2.49	$	82,999
		1/28/2008	$	—	$	—	$	—		—		39,660	(6)		—		—			109,507	(5)	$	1.75	$	397,146
Adrian Meldrum		10/23/2007	$	47,861	$	95,721	$	143,582
		11/14/2007	$	—	$	—	$	—		—		20,833	(4)		—		—			—		$	2.49	$	51,874
		1/28/2008	$	—	$	—	$	—		—		24,780	(2)		—		—			68,437	(5)	$	1.75	$	248,857
Steve Turley		—	$	—	$	—	$	—		—		—			—		—			—		$	—	$	—
Kate Rundle		11/26/2007	$	30,288	$	60,577	$	90,865		—		20,000	(4)		—		—			40,000	(5)	$	2.40	$	63,846
		—										20,000	(6)		—		—			—		$	—	$	—


(1)		The amounts reported in this column are computed in accordance with SFAS 123R.

(2)		These shares vest as to 50% of the shares on the one-year anniversary of the grant date and as to 50% of the shares on the second-year anniversary. This grant was made to Dr. Bordui as part of his director compensation on November 1, 2007.

(3)		These shares are vested 100% on the grant date. This grant was made to Dr. Bordui as part of his director compensation on November 1, 2007.

(4)		These shares vest upon our achievement of adjusted EBITDA target at June 28, 2008.

(5)		These options vest as to 25% of the shares on the first anniversary of the date of grant and 1/48 of the shares monthly thereafter over the remaining 36 months.

(6)		These shares vest as to 25% of the shares on the first anniversary of the date of grant and 1/48 of the shares monthly thereafter over the remaining 36 months.

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Bookham Outstanding Equity Awards at Fiscal Year End

The following table sets forth information concerning share options that have not been exercised, unvested restricted stock and equity incentive plan awards for each of the named executive officers as of June 28, 2008.


				Option Awards						Stock Awards
	Number of			Number of								Number of
	Securities			Securities								Shares or
	Underlying			Underlying								Units of			Market Value of
	Unexercised			Unexercised			Option			Option		Stock that			Shares or Units
	Options (#)			Options (#)			Exercise			Expiration		have not			that have not
Name	Exercisable			Unexercisable			Price ($)			Date		Vested			Vested(1)

Alain Couder		—			475,000	(3)	$	2.89			8/13/2017		—			—
		—			—		$	2.89			8/13/2017		187,500	(7)	$	322,500
		—			—		$	2.89			8/13/2017		187,500	(6)	$	322,500
Peter F. Bordui		10,000	(2)		—		$	3.28			10/23/2017		10,000	(8)	$	17,200
		10,000	(2)		—		$	3.17			11/1/2016		5,000	(8)	$	8,600
		10,000	(2)		—		$	4.91			11/11/2015		—			—
		6,150	(2)		—		$	10.44			6/2/2014		—			—
Steve Abely		—			82,070	(3)	$	1.75			1/28/2018		29,730	(6)	$	51,136
		6,250	(3)		18,750		$	2.01			6/12/2017		—			—
		—			—		$	2.49			11/14/2017		25,000	(7)	$	43,000
		161,458	(3)		88,542		$	4.91			11/11/2015		171,875	(4)	$	295,625
Jim Haynes		—			109,507	(3)	$	1.75			1/28/2018		39,660	(6)	$	68,215
		6,250	(3)		18,750		$	2.01			6/12/2017		—			—
		—			—		$	2.49			11/14/2017		33,333	(7)	$	57,333
		80,729	(3)		44,271		$	4.91			11/11/2015		85,938	(4)	$	147,813
		3,500	(3)		3,500		$	6.73			9/22/2014		—			—
		6,563	(3)		437		$	6.73			9/22/2014		—			—
		15,000	(3)		—		$	15.84	(5)		8/7/2013		—			—
		7,500	(3)		—		$	26.77	(5)		9/25/2013		—			—
		5,000	(3)		—		$	11.58	(5)		6/2/2014		—			—
Adrian Meldrum		—			68,437	(3)	$	1.75			1/28/2018		24,780	(6)	$	42,622
		6,250	(3)		18,750		$	2.01			6/12/2017		—			—
		—			—		$	2.49			11/14/2017		20,833	(7)	$	35,833
		45,208	(3)		24,792		$	4.91			11/11/2015		48,125	(4)	$	82,775
		4,000	(3)		4,000		$	6.73			9/22/2014		—			—
		7,500	(3)		500		$	6.73			9/22/2014		—			—
		2,000	(3)		—		$	22.37	(5)		11/2/2011		—			—
		500	(3)		—		$	15.44	(5)		11/14/2012		—			—
		1,500	(3)		—		$	15.44	(5)		11/14/2012		—			—
		5,000	(3)		—		$	26.77	(5)		9/25/2013		—			—
		10,000	(3)		—		$	11.58	(5)		6/2/2014		—			—
Kate Rundle		—			40,000	(3)	$	2.40			11/26/2017		—			—
		—			—		$	2.40			11/26/2017		20,000	(6)	$	34,400
		—			—		$	2.40			11/26/2017		20,000	(7)	$	34,400


(1)		Calculated by multiplying the number of unvested shares by $1.72, the closing price per share of our common stock on the NASDAQ Global Market on June 27, 2008.

(2)		The total option award was fully vested on the date of grant. Consists of awards made to Dr. Bordui as part of his director compensation.

(3)		The total option award (which is the sum of exercisable, unexercisable and exercised) vests 25% on the first anniversary of the grant date, then 1/48th per month thereafter over the remaining 36 months.

(4)		The total shares subject to the restricted stock option award vests 50% upon Bookham achieving profitability and the remaining 50% vests upon our achieving cash break-even. On September 22, 2008, all of the unvested restricted stock expires.

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(5)		Converted from British Pounds Sterling to U.S. Dollars using the noon buying rate of exchange on August 1, 2008 of $1.981807 U.S. Dollars per British Pound Sterling.

(6)		These shares of restricted stock vest as to 25% on the one-year anniversary of the grant date and an additional 2.083% at the end of each month following the first anniversary of the grant date until the fourth anniversary of the grant date.

(7)		These shares vest upon our achievement of adjusted EBITDA target at fiscal 2008 year-end.

(8)		The restricted stock vests as to 50% after one year and 100% after two years, provided that the director is serving as a director on the applicable vesting date.

Bookham Option Exercises and Stock Vested

The following table sets forth information regarding options exercised by the named executive officers and vesting of restricted stock held by the named executive officers during the fiscal year ended June 28, 2008.


	Option Awards				Stock Awards
					Number of
	Number of		Value		Shares
	Shares		Realized on		Acquired on
	Acquired on		Exercise		Vesting		Value Realized
Name	Exercise (#)		($)(2)		(#)(1)		on Vesting ($)

Alain Couder		—		—		—	$	—
Peter F. Bordui		—		—		10,000	$	27,450
Steve Abely		—		—		56,250	$	113,307
Jim Haynes		—		—		40,625	$	78,528
Adrian Meldrum		—		—		33,750	$	63,226
Steve Turley		—		—		30,208	$	55,672
Kate Rundle		—		—		—	$	—


(1)		Reflects restricted stock that vested in fiscal year 2008.

(2)		Amounts shown represent the difference between the number of shares of restricted stock multiplied by the market value of the shares on the vesting date.

Bookham Employment, Change of Control and Severance Arrangements

Each of Messrs. Haynes and Meldrum has an employment agreement with Bookham Technology plc. These agreements describe the individual’s salary, bonus and other benefits including medical and life insurance coverage, car allowance, vacation and sick days, and pension plan participation. The agreements also contain a prohibition on the use or disclosure of our confidential information, such as trade secrets, patents and customer information, for non-business purposes. These agreements contain a prohibition on being employed by or otherwise involved with any of our competitors for a period of six months after either has stopped working for us. Their agreements also contain a non-competition clause prohibiting each from dealing with our customers or prospective customers, and a non-solicitation clause prohibiting each from dealing with certain of our suppliers, prospective suppliers, senior executives, salespersons and other key employees, for a period of twelve months after each has stopped working for us.

In July 2007, we entered into an employment agreement with Alain Couder with respect to his employment as our President and Chief Executive Officer. The employment agreement provides that Mr. Couder will be entitled to receive an initial base salary at an annualized rate of $500,000 and will be eligible for a yearly bonus of up to 100% of his base salary, subject to achievement of individual and company performance targets. Pursuant to the employment agreement Mr. Couder was to receive a grant of options and restricted stock. Mr. Couder’s employment may be terminated by us with or without cause at any time and by Mr. Couder with 60 days’ notice. If we terminate Mr. Couder’s employment without cause or if Mr. Couder terminates his employment for good reason, Mr. Couder will be entitled to 12 months’ salary and benefits.

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Effective April 30, 2008, in connection with Dr. Turley ceasing to be our Vice President and Chief Commercial Officer, Bookham Technology plc, our wholly-owned subsidiary, entered into an agreement with Dr. Turley, approved by the compensation committee, pursuant to which Dr. Turley received, in lieu of any advance notice, termination or severance payments to which he may otherwise have been entitled, an aggregate payment of £214,061 ($423,769 based on exchange rate on the agreement date) consisting of (i) severance pay equal to 14 months of Dr. Turley’s base salary, (ii) accrued vacation through the effective date of his resignation, (iii) certain reimbursement costs and (iv) payments covering his benefits, pension and car allowance for an equivalent of four months.

Our executive officers are elected by our board of directors and serve at its discretion, subject to a three-month notice period in the case of Messrs. Meldrum and Haynes. The agreements provide that the notice period does not apply if the officer is being terminated for cause, which is defined to include gross misconduct; conduct which our board of directors determines brings the individuals or us into disrepute or a serious breach of the employment agreement.

On May 7, 2007, we entered into a letter agreement with Dr. Bordui with respect to his employment as our interim President and Chief Executive Officer. The agreement was terminated on August 12, 2007 upon the hiring of Mr. Couder as our President and Chief Executive Officer and 30 days’ written notice by Bookham. This agreement provided for an annualized salary of $500,000 for the one-year period commencing on February 13, 2007. This agreement also contains a prohibition on the use or disclosure of our confidential information, such as trade secrets, patents and customer information, for non-business purposes.

Each of our named executive officers entered into a formal Executive Severance and Retention Agreement in May, 2008. These agreements provide for the payment of base salary and accrued bonus in the event of a termination of employment without cause. In addition these agreements provide for the payment of base salary, accrued bonus, and stock acceleration as outlined in the table below, in the event of a change in control or termination of employment without cause or for good reason (as defined in the Executive Severance and Retention Agreement), provided that the individual is employed by us on the date of the closing of the change in control. Payments of salary and accrued bonuses made under the agreement following a change of control are subject to a “double trigger”, meaning that both a change of control and a termination are required. Acceleration of stock is subject to a single trigger, meaning the shares of restricted stock or restricted stock units and stock options will vest in full upon the consummation of a change of control.

A change in control means, in summary: (i) the acquisition by a party or group of 50% or more of the outstanding stock of the company; (ii) a change, without Board of Directors approval, of a majority of the Board of Directors; (iii) the acquisition of the company by means of a reorganization, merger, consolidation or asset sale; or (iv) the approval of a liquidation of the company.

We believe providing these benefits helps us compete for and retain the best possible executive talent. After reviewing the practices of companies represented in our peer group, we believe that our severance and change of control benefits are generally comparable with, if not below, the median of severance packages offered to executives by companies in our peer group. We also believe that a change of control agreement is necessary to diminish the inevitable distraction of executives by virtue of the personal uncertainties and risks created by a pending or threatened change of control. This along with the severance agreement are designed to encourage the executive’s full attention and dedication and to provide a compensation and benefits arrangement satisfactory to the executive officer.

Bookham Indemnification Agreements

In January 2008, Bookham’s board of directors approved a form of indemnification agreement, which we refer to as the Indemnification Agreement, which has been or will be entered into with each of our directors and executive officers. Pursuant to the terms of the Indemnification Agreement, and subject to certain conditions, we will indemnify our officers and directors who have entered into such Indemnification Agreement from liability under specified circumstances identified in the Indemnification Agreement, including, but not limited to, in connection with such director or officer being named as a party (or the threat of being made a party) to a suit or proceeding as a result of any action alleged to have been taken or omitted as a

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result of performing functions for Bookham as a director, officer, employee, agent or fiduciary of Bookham or in certain other designated positions. Bookham expects to enter into an Indemnification Agreement with each of the Bookham directors and executive officers who is not already party to an Indemnification Agreement with Bookham following completion of the merger.

Bookham Potential Payments Upon Termination or Change of Control

The table below shows the benefits potentially payable to each of our named executive officers if he or she was terminated or a change of control occurred. These amounts are calculated on the assumption that the employment termination or change of control took place on June 28, 2008. The closing price per share of our common stock on the NASDAQ Global Market on June 27, 2008 was $1.72.


	Base			Target		Accelerated		Accelerated
	Salary			Bonus		Vesting of		Vesting of		Benefits			Total
Name	($)			($)		Options(3)		Restricted Stock		($)(2)			($)

Alain Couder
— termination without cause	$	536,530		$	—	$	—	$	—	$	25,543		$	562,073
— change of control	$	—		$	—	$	—	$	645,000	$	—		$	645,000
Steve Abely
— termination without cause	$	417,160		$	—	$	—	$	—	$	39,231		$	456,390
— change of control	$	—		$	—	$	—	$	389,761	$	—		$	389,761
Jim Haynes
— termination without cause	$	370,272	(1)	$	—	$	—	$	—	$	11,131	(1)	$	381,403	(1)
— change of control	$	—		$	—	$	—	$	273,360	$	—		$	273,360
Adrian Meldrum
— termination without cause	$	338,677	(1)	$	—	$	—	$	—	$	2,594	(1)	$	341,271	(1)
— change of control	$	—		$	—	$	—	$	161,229	$	—		$	161,229
Kate Rundle
— termination without cause	$	214,726		$	—	$	—	$	—	$	9,844		$	224,570
— change of control	$	—		$	—	$	—	$	38,800	$	—		$	38,800


(1)		All figures converted from British Pounds Sterling to U.S. Dollars using the noon buying rate of exchange on August 1, 2008 of $1.981807 U.S. Dollars per British Pound Sterling.

(2)		Consists of payment for accrued vacation.

(3)		Exercise prices of options granted are higher than the closing market price of $1.72 on the NASDAQ at June 27, 2008, hence calculated value of acceleration is zero.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

None of the persons who as of the date hereof are expected to serve on the compensation committee of Bookham following the completion of the merger (i) has ever been an officer or employee of either Bookham or Avanex nor any subsidiary of Bookham or Avanex, or (ii) except to the extent described under “The Merger — Interests of Bookham’s Directors in the Merger” and “The Merger — Interests of Avanex’s Executive Officers and Directors in the Merger,” engaged in any related person transactions within the meaning of Item 404(a) of Regulation S-K. However, Dr. Bordui, who currently serves on Bookham’s compensation committee, served as Bookham’s interim Chief Executive Officer from February 2007 to August 2007. None of the individuals that as of the date hereof are expected to serve as an executive officer of Bookham following the completion of the merger served during the year ended June 28, 2008 as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on Bookham’s or Avanex’s board of directors or compensation committee.

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Bookham Equity Compensation Plan Information

The following table provides information about the securities authorized for issuance under Bookham’s equity compensation plans as of June 28, 2008:

(c) Number of

Securities Remaining

(a) Number of

(b) Weighted

Available for Future

Securities to be

Average Exercise

Issuance Under Equity

Issued Upon Exercise

Price of

Compensation Plans

of Outstanding

Outstanding

(Excluding Securities

Options, Warrants

Reflected in Column

Plan Category

and Rights(1)

and Rights

(a)(2))

Equity compensation plans approved by security holders(3)

6,516,414

(4)

4.67

13,105,257

(5)

Equity compensation plans not approved by security holders

—

Total

6,516,414

(4)

4.67

13,105,257

(5)


(1)		This table excludes an aggregate of 305,770 shares of common stock issuable upon exercise of outstanding options we assumed in connection with the scheme of arrangement pursuant to which Bookham Technology plc became our wholly owned subsidiary. The weighted average exercise price of these options as of June 28, 2008 was $31.35. At the time of the scheme of arrangement, we provided that no further equity awards would be made under the Bookham Technology plc equity plans.

(2)		In addition to being available for future issuance upon exercise of options that may be granted after June 28, 2008, 12,105,257 shares under the Amended and Restated 2004 Stock Incentive Plan, may instead be issued in the form of restricted stock, restricted stock units, unrestricted stock, stock appreciation rights, performance shares, stock options or other equity based awards.

(3)		Consists of the following equity compensation plans: the Amended and Restated 2004 Stock Incentive Plan, the 2004 Employee Stock Purchase Plan and the 2004 Sharesave Scheme.

(4)		Consists of options granted under the Amended and Restated 2004 Stock Incentive Plan. The number of shares of common stock does not include 1,595,308 shares of restricted stock and restricted stock units granted under the Amended and Restated 2004 Stock Incentive Plan, 12,105,257 shares of common stock currently reserved for issuance under the Amended and Restated Stock Incentive Plan or 500,000 shares of common stock reserved for issuance under the 2004 Employee Stock Purchase Plan or 500,000 shares reserved for issuance under the 2004 Sharesave Scheme.

(5)		Includes 500,000 shares of common stock issuable under the 2004 employee stock purchase plan (inactive) and 500,000 shares of common stock issuable under the 2004 Sharesave Scheme (inactive).

Director Compensation

Bookham Compensation of Directors

Bookham currently reimburses directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors and any meetings of its committees. Each non-employee director receives an annual retainer of $20,000, an additional $3,000 for each in-person meeting of the board of directors that the director attends and $500 for each teleconference of the board of directors or committee of the board of directors that the director attends. The chairman of the board of directors receives an annual retainer of $80,000. In addition, the chairman of the audit committee receives an annual fee of $36,000, the chairman of the compensation committee receives an annual fee of $16,000 and the chairman of the nominating and corporate governance committee receives an annual fee of $16,000. Each member of the compensation committee and each member of the nominating and corporate governance committee receives an annual fee of $4,000 for serving on such committee and each member of the audit committee receives an annual fee of $8,000 for serving on such committee.

Pursuant to a resolution adopted by Bookham’s board of directors, each year at its annual meeting of stockholders, each non-employee director is automatically granted a nonstatutory stock option to acquire

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10,000 shares of Bookham common stock and an award of restricted stock or restricted stock units for 10,000 shares of our common stock under the Amended and Restated 2004 Stock Incentive Plan, provided that the director is serving as a director both immediately before and immediately after the annual meeting. Options granted to non-employee directors provide that the shares subject to such option vest immediately and, with respect to restricted stock granted prior to January 2008 to Bookham’s non-employee directors, such restricted stock vests as to 50% after one year and 100% after two years from the date of grant, provided that the director is serving as a director on the applicable vesting date. In connection with the adoption of the Amended and Restated 2004 Stock Incentive Plan in January 2008, restricted stock awards granted to non-employee directors under the Amended and Restated 2004 Stock Incentive Plan will provide that the shares subject to such award vest in accordance with the following schedule: (i) no more than one-third vests prior to the earlier of the first anniversary of the date of grant or the date of the first annual meeting held after the date of grant, (ii) no more than two-thirds vest prior to the earlier of the second anniversary of the date of grant or the date of the second annual meeting held after the date of grant, and (iii) the balance vests at a rate no more than ratably over the period from the second anniversary of the date of grant to the third anniversary of the date of grant (or, if the date of the third annual meeting held after the date of grant is earlier than the third anniversary of the date of grant, the period from the second anniversary of the date of grant to the third annual meeting held after the date of grant). The shares of restricted stock or restricted stock units vest in full upon a consummation of a change in control of Bookham, provided that the director serves as a director until such date. In its discretion, Bookham may grant additional equity awards to its non-employee directors under the Amended and Restated 2004 Stock Incentive Plan.

In connection with the merger and subject to its closing, all stock options and restricted stock awards held by directors of Bookham who will not be a director of Bookham following the completion of the merger will accelerate in full and be vested and free of restrictions. In addition, all stock options held by such directors may be exercised for a period of one year.

Avanex Compensation of Directors

Overview. Avanex uses a combination of cash and equity compensation to attract and retain qualified candidates to serve on its board of directors. The corporate governance and nominating committee of the board of directors is responsible to evaluate director compensation and, if appropriate, recommend any changes in the type or amount of compensation to the board of directors. Any change in director compensation is approved by the board of directors.

Cash Compensation. Each non-employee director is entitled to receive a quarterly retainer of $5,000 in cash compensation for service on the Avanex board of directors. In addition, non-employee directors are entitled to receive the following cash compensation for service on committees of the board of directors: chair of the audit committee, $3,000 per quarter; chairs of the compensation committee and the corporate governance and nominating committee, $2,000 per quarter; member of the audit committee, $1,500 per quarter; member of the compensation committee and the corporate governance and nominating committee, $1,000 per quarter.

Per Meeting Fees. In fiscal year 2008, each non-employee director was eligible to receive shares of restricted stock for attendance at meetings of the board of directors. For each in-person meeting of the board of directors that a non-employee director attended, such director was eligible to receive a number of shares of restricted stock with an aggregate fair market value of $1,500. For each telephonic meeting of the board of directors that a non-employee director attended, such director was eligible to receive a number of shares of restricted stock with an aggregate fair market value of $500. For each in-person meeting of a committee of the board of directors that a non-employee director attended, such director was eligible to receive a number of shares of restricted stock with an aggregate fair market value of $1,000. For each telephonic meeting of a committee of the board of directors that a non-employee director attended, such director was eligible to receive a number of shares of restricted stock with an aggregate fair market value of $500. The shares of restricted stock were granted once per fiscal quarter at the same time each quarter, and the fair market value and aggregate number of the restricted shares was determined on the day of such grant in accordance with Avanex’s 1998 Stock Plan. Non-employee directors who attended meetings of the board of directors during the

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previous fiscal quarter but who were no longer directors on the date that such restricted stock was granted were not be eligible to receive such grants.

Beginning in fiscal year 2009, each non-employee director is eligible to receive cash compensation for attendance at meetings of the board of directors. For each in-person meeting of the board of directors that a non-employee director attends, such director is eligible to receive cash compensation of $1,500. For each telephonic meeting of the board of directors that a non-employee director attends, such director is eligible to receive cash compensation of $500. For each in-person meeting of a committee of the board of directors that a non-employee director attends, such director is eligible to receive cash compensation of $1,000. For each telephonic meeting of a committee of the board of directors that a non-employee director attends, such director is eligible to receive cash compensation of $500.

Equity Compensation. Directors are also eligible to receive options to purchase Avanex common stock pursuant to Avanex’s 1998 Stock Plan and 1999 Director Option Plan. The 1999 Director Option Plan provides for annual automatic grants of nonstatutory stock options to continuing non-employee directors who beneficially own less than one percent of the voting power represented by the outstanding securities of Avanex. Under the 1999 Director Option Plan, each such director is eligible to receive a nonstatutory stock option grant of 5,333 shares of Avanex common stock upon his or her initial election to the board of directors (an “Initial Grant”). On the date of each annual stockholders’ meeting, each individual who is at the time continuing to serve as a non-employee director meeting the criteria described above and has served on the board of directors for at least the prior six months is automatically granted an option to purchase 1,333 shares of Avanex common stock (a “Subsequent Grant”). All options automatically granted to directors under the 1999 Director Option Plan have an exercise price equal to 100% of the fair market value of Avanex common stock on the date of grant. Each Initial Grant vests and becomes exercisable in four equal annual installments, and each Subsequent Grant vests and becomes exercisable on the first anniversary of the grant date. In addition, the 1999 Director Option Plan provides that each non-employee director who meets the criteria described above and has served on the board of directors for at least the prior six months will receive an automatic annual grant of 667 restricted stock units, to be granted on the date of each annual stockholders meeting and to vest 100% upon the one-year anniversary of such grant.

Change of Control and Option Exercisability. Pursuant to Avanex’s 1999 Director Option Plan, immediately upon a change of control, as defined in the plan, options to purchase Avanex common stock will become fully vested and exercisable. In addition, options to purchase shares of Avanex common stock granted to Dr. Cerf on December 10, 1999, October 18, 2001 and December 18, 2002 under Avanex’s 1998 Stock Plan contain similar provisions. Each of the stock option agreements of Messrs. Dougherty, J. Smith, P. Smith and Wolf, Dr. Cerf and Ms. Wang provide for an exercise period extending until two years after the termination of such person’s service with Avanex, but in no event beyond the options’ normal expiration dates.

Director Compensation Table: Combined Company Directors from Bookham

The following table shows for the fiscal year ended June 28, 2008 certain information with respect to the director compensation of all non-employee directors of Bookham that are currently expected to serve as non-employee directors of Bookham immediately following the merger:


	Fees Earned or		Stock Awards			Option			Total
Name	Paid in Cash ($)		($)(1)			Awards ($)(1)			($)

Lori Holland	$	72,517	$	26,995	(2)	$	20,452	(3)	$	119,963
Edward B. Collins	$	6,083	$	8,683		$	5,205	(4)	$	11,288
Bernard J. Couillaud	$	6,083	$	8,683		$	5,205	(4)	$	11,288


(1)		The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes for fiscal 2008, in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, or SFAS 123R, of equity awards issued under our equity plan, including equity awards granted in and prior to fiscal 2008. There can be no assurance that the SFAS 123R amounts will ever be realized. The assumptions we used to calculate these amounts are included in Note 1 to our audited financial

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		statements for fiscal 2008, included in our annual report on Form 10-K for fiscal 2008 filed on September 5, 2008. The options vest as to 100% of the shares subject to the option on the date of grant. Each option has a term of 10 years, and generally expires after the recipient ceases to be a director. Except with respect to Messrs. Collins and Couillaud whose restricted stock vests over three years, the restricted stock vests as to 50% after one year and 100% after two years, provided that the director is serving as a director on the applicable vesting date.

(2)		Consists of the grant date fair value, computed in accordance with SFAS 123R, of $11,188 of the restricted stock award granted on October 23, 2007 and the grant date fair value, computed in accordance with SFAS 123R, of $15,807 of the restricted stock award granted on November 1, 2006.

(3)		Consists of the grant date fair value, computed in accordance with SFAS 123R, of $20,452 of the stock option award granted on October 23, 2007.

(4)		Consists of the grant date fair value, computed in accordance with SFAS 123R, of $5,205 of the stock option award granted on May 13, 2008.

The following table summarizes the number of outstanding options and stock awards held by all non-employee directors of Bookham that are expected to serve as non-employee directors of Bookham immediately following the merger, as of the end of fiscal 2008.


	Stock		Option
Name	Awards(1)		Awards(2)

Lori Holland		30,000		78,664
Edward B. Collins		5,000		5,000
Bernard J. Couillaud		5,000		5,000


(1)		Stock awards include both vested and unvested shares of common stock subject to such awards.

(2)		Option awards include both vested and unvested shares of common stock subject to such awards.

Director Compensation Table: Combined Company Directors from Avanex

The following table shows for the fiscal year ended June 30, 2008 certain information with respect to the director compensation of all non-employee directors of Avanex that are currently expected to serve as non-employee directors of Bookham immediately following the merger:


						Option
	Fees Earned			Stock		Awards
	or Paid in			Awards		($)
Name	Cash ($)			($)(1)(2)		(1)(3)		Total ($)

Giovanni Barbarossa(4)	$	—		$	—	$	—	$	—
Greg Dougherty	$	46,500	(5)	$	44,496	$	26,843	$	117,839
Joel A. Smith, III	$	21,500	(6)	$	5,994	$	13,617	$	41,111


(1)		Reflects the dollar amount recognized for financial statement reporting purposes (disregarding an estimate of forfeitures related to service-based vesting conditions) for fiscal 2008, in accordance with SFAS 123(R), and thus may include amounts from awards granted in and prior to 2008. The assumptions used in the valuation of these awards are set forth in the notes to our consolidated financial statements, which are included in the Avanex Annual Report on Form 10-K for the year ended June 30, 2008, filed with the SEC on September 5, 2008. These amounts do not correspond to the actual value that will be recognized by the directors.

(2)		In fiscal year 2008, Avanex’s non-employee directors that are expected to serve as non-employee directors of the combined company following the merger received the following options to purchase shares of Avanex common stock pursuant to Avanex’s 1999 Director Option Plan, which vests and becomes exercisable on the first anniversary of the grant date:

267

Number of

Shares

Exercise

Grant Date

Underlying

Price per

Fair Value

Grant Date

Option (#)

Share ($)

($)

11/15/2007

1,333

23.55

31,392


		In fiscal year 2008, Avanex’s non-employee directors that are expected to serve as non-employee directors of the combined company following the merger received the following restricted stock units pursuant to the Company’s 1999 Director Option Plan, which vest and become exercisable on the first anniversary of the grant date:


	Number of
	Shares		Grant Date
	Underlying		Fair Value
Grant Date	RSU (#)		($)

11/15/2007		666	$	15,684


		In fiscal year 2008, Avanex’s non-employee directors that are expected to serve as non-employee directors of the combined company following the merger received the following shares of restricted common stock pursuant to Avanex’s 1998 Stock Plan for attendance at meetings of the Board of Directors and committees of the Board of Directors:


			Number of
			Shares Underlying
			Restricted			Grant Date Fair
			Stock Grants			Value
Name	Grant Date		(#)			($)

Greg Dougherty		10/22/2007		386		$	9,496
		01/21/2008		486		$	6,998
		04/21/2008		384		$	4,493
		07/21/2008		804	*	$	10,492
Joel A. Smith, III		10/22/2007		182		$	4,477
		01/21/2008		243		$	3,499
		04/21/2008		341		$	3,990
		07/21/2008		574	*	$	7,491

* Granted in fiscal 2009 for fees earned in the fourth quarter of fiscal 2008.


(3)	As of June 30, 2008, the aggregate number of shares underlying options and restricted stock units outstanding for each of Avanex’s non-employee directors that is expected to serve as non-employee directors of the combined company following the merger was:


			Aggregate
	Aggregate		Number of
	Number of Shares		Shares
	Underlying		Underlying
Name	Options		RSU’s

Greg Dougherty		6,665		666
Joel A. Smith, III		8,829		666


(4)		Dr. Barbarossa is expected to be a director of the combined company, is currently the chief executive officer of Avanex and since November 13, 2008, has served as a director of Avanex. Dr. Barbarossa did not serve as a director of Avanex in the fiscal year ended June 30, 2008, and, thus, did not receive any compensation as a director of Avanex.

(5)		Includes $10,500 of attendance fees earned in the fourth quarter of fiscal 2008, but paid in 804 restricted stock units on July 21, 2008, with immediate vesting.

(6)		Includes $7,500 of attendance fees earned in the fourth quarter of fiscal 2008, but paid in 574 restricted stock units on July 21, 2008, with immediate vesting.

268

Compensation of Directors of the Combined Company

Bookham has not yet determined whether the compensation for the directors of the combined company will remain the same as that for Bookham directors currently.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF COMBINED COMPANY

Following the merger, Bookham is currently expected to initially have a seven member board of directors, comprised of two individuals who are currently members of the Avanex board of directors, Greg Dougherty and Joel A. Smith, III, one individual who is currently an executive officer and director of Avanex, Giovanni Barbarossa, and four individuals who are currently members of the Bookham board of directors, Alain Couder, Bernard Couillaud, Lori Holland and Edward Collins. However, a final determination as to who will be appointed to the Bookham board of directors immediately following the merger has not been made and the persons who will serve as Bookham directors immediately following the merger may change. See “Management and other Information of the Combined Company — Executive Officers and Directors of Bookham Following the Merger.”

Policies and Procedures for Related Person Transactions of the Combined Company

Bookham’s board or directors has adopted a written policy that contains procedures for the reporting and review of any transaction, arrangement or relationship in which Bookham is a participant, the amount involved exceeds $120,000, and one of its executive officers, directors, director nominees or 5% stockholders (or their immediate family members), each of whom Bookham refers to as a “related person,” has a direct or indirect material interest.

If a related person proposes to enter into such a transaction, arrangement or relationship, which Bookham refers to as a “related person transaction,” the related person must report the proposed related person transaction to our general counsel. Bookham’s policy requires that the proposed related person transaction be reviewed and, if deemed consistent with the standards contained in our policy, approved by the audit committee of our board of directors. Whenever practicable, the reporting, review and approval must occur prior to the effectiveness or consummation of the transaction. If advance review and approval is not practicable, the audit committee must review, and, in its discretion, may ratify the related person transaction. The policy permits the chairman of the audit committee to review and, if deemed consistent with the standards contained in our policy, approve the proposed related person transaction if it arises between audit committee meetings, subject to ratification of the related person transaction by our audit committee at its next meeting. Any related person transaction that is ongoing in nature must be reviewed annually by our audit committee.

A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the audit committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the audit committee must review and consider:


	•	the related person’s interest in the related person transaction;

	•	the approximate dollar value of the amount involved in the related person transaction;

	•	the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss;

	•	whether the transaction was undertaken in the ordinary course of our business;

	•	whether the transaction with the related person is proposed to be, or was, entered into on terms no less favorable to us than terms that could have been reached with an unrelated third party;

	•	the purpose of, and the potential benefits to us of, the related person transaction; and

	•	any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.

269

The audit committee may approve or ratify the transaction only if our audit committee determines that, under all of the circumstances, the transaction is in, or is not inconsistent with, Bookham’s best interests. The audit committee may impose any conditions on the related person transaction that it deems appropriate.

The policy excludes from the definition of “related person transaction” the transactions identified by the SEC as not requiring disclosure under the SEC’s related person transaction disclosure rule. Accordingly, such transactions are not subject to reporting, review, approval or ratification under our policy. In addition, our board of directors has determined that, under certain circumstances, a transaction does not create a material direct or indirect interest on behalf of a related person (and therefore is not a related person transaction under our policy) including if:


	•	the transaction is specifically contemplated by the provisions of our restated certificate of incorporation or bylaws; or

	•	the related person’s interests in the transaction arise solely from his or her position as an executive officer of another entity (whether or not he or she is also a director of such entity) that is a participant in the transaction, where (i) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (ii) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction, and (iii) the amount involved in the transaction equals less than the greater of $200,000 or 5% of the annual consolidated gross revenues of the entity receiving payment under the transaction.

Transactions with Bookham Related Persons

Since the beginning of fiscal year 2008, there have not been any transactions, nor are there any currently proposed transactions, in which Bookham was or is to be a participant, the amount involved exceeded $120,000 or one percent of the average of Bookham’s total assets at year end for the last two completed fiscal years, and any related person had or will have a material direct or indirect interest.

Reference is made to the section entitled “The Merger — Interests of Bookham’s Directors in the Merger.”

Transactions with Avanex Related Persons

In July 2003, in connection with Avanex’s acquisition of the optical components business of Alcatel, Avanex issued 35,369,834 shares of the Avanex common stock to Alcatel, and Avanex entered into an intellectual property licensing agreement, supply agreement, frame purchase agreement and transition services agreement with Alcatel. The supply agreement and transition services agreements were each amended in October 2005. Products sold to Alcatel accounted for $13.3 million, or 24% of Avanex’s net revenue during the first quarter of fiscal 2008.

On October 29, 2007, the Pirelli Group acquired all the shares of Avanex’s common stock then held by Alcatel-Lucent. As of January 30, 2009, the Pirelli Group beneficially owned approximately 12.09% of Avanex’s outstanding common stock. Products sold to the Pirelli Group accounted for $0.1 million, or 0% of Avanex’s net revenue during the last 3 quarters of fiscal 2008. For the six months ended December 31, 2008, products sold to the Pirelli Group accounted for $0.1 million or 0% of Avanex’s net revenue for that period. In addition, Avanex purchased $1.0 million of raw materials and components from the Pirelli Group during the last 3 quarters of fiscal 2008. Avanex purchased $0.8 million of raw materials and components from the Pirelli Group for the six months ended December 31, 2008.

Reference is made to the section entitled “The Merger — Interests of Avanex’s Executive Officers and Directors in the Merger.”

270

CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF BOOKHAM

On February 11, 2008, Bookham dismissed Ernst & Young LLP, or EY, as its independent registered public accounting firm. The decision to dismiss EY was approved by our audit committee.

The reports of EY on Bookham’s financial statements as of June 30, 2007 and July 1, 2006 and for each of the two fiscal years in the period ended June 30, 2007, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, other than to include explanatory paragraphs related to substantial doubt about the our ability to continue as a going concern and for the change of method of accounting for stock based compensation to Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” in the auditors’ report related to fiscal 2006.

During the fiscal years ended June 30, 2007, and July 1, 2006, and in the subsequent interim period through February 11, 2008, there have been no disagreements with EY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of EY, would have caused EY to make reference thereto in its reports on our financial statements for such years.

During the years ended June 30, 2007 and July 1, 2006 and in the subsequent interim period through February 11, 2008, other than as set forth in the following sentence there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K). As previously reported in Bookham’s Annual Report on Form 10-K for the period ended June 30, 2006, Bookham’s management identified a material weakness in its internal control related to the translation of intercompany loan balances in periods prior to July 1, 2006. Management believes that changes made to its internal controls in the quarter ended September 29, 2006 remediated this past material weakness by the end of the quarter ended December 30, 2006.

In connection with the filing of the Current Report on Form 8-K, which was filed on February 14, 2008, Bookham furnished a copy of the above disclosures to EY and requested that EY furnish Bookham with a letter addressed to the Securities and Exchange Commission stating whether or not EY agrees with the above statements. A copy of such letter dated February 13, 2008 was attached as Exhibit 16.1 to such Current Report on Form 8-K.

On February 11, 2008, Bookham engaged Grant Thornton LLP, or Grant Thornton, as its new independent registered public accounting firm to audit its financial statements for the year ended June 28, 2008 and to review the financial statements to be included in the its quarterly report on Form 10-Q for the quarter ending March 29, 2008.

Prior to Bookham’s engagement of Grant Thornton, neither Bookham nor anyone on behalf of Bookham consulted with Grant Thornton during the two most recent fiscal years and through the subsequent interim periods in any manner regarding any matters described in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K.

LEGAL MATTERS

Cooley Godward Kronish LLP, Palo Alto, California, will pass upon the validity of the Bookham common stock offered by this joint proxy statement/prospectus. The material U.S. federal income tax consequences of the merger will be passed upon for Bookham by Cooley Godward Kronish LLP and for Avanex by Wilson Sonsini Goodrich & Rosati, Professional Corporation.

EXPERTS

The consolidated financial statements of Bookham as of and for the year ended June 28, 2008 included in this joint proxy statement/prospectus and registration statement have been audited by Grant Thornton LLP, independent registered public accounting firm, as set forth in their report appearing elsewhere herein (which report includes an explanatory paragraph referring to Bookham’s adoption of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB

271

Statement No. 109”). Such consolidated financial statements are included herein in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Bookham as of June 30, 2007 and for each of the two years in the period ended June 30, 2007 included in this Joint Proxy Statement and made part of this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included herein in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Avanex as of June 30, 2008 and 2007 and for each of the three years in the period ended June 30, 2008 included in this joint proxy statement/prospectus and registration statement, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein (which report expresses an unqualified opinion on the consolidated financial statements and includes explanatory paragraphs referring to (i) Avanex’s change in method of accounting for uncertainties in income taxes upon adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, effective July 1, 2007, and in its method of accounting for defined benefit pension and other postretirement plans upon the adoption of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) as of June 30, 2007 and (ii) Avanex’s ability to continue as a going concern). Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

HOUSEHOLDING OF JOINT PROXY STATEMENT/PROSPECTUS

As permitted by the Securities Exchange Act, only one copy of this joint proxy statement/prospectus is being delivered to stockholders residing at the same address, unless stockholders have notified the company whose shares they hold of their desire to receive multiple copies of the joint proxy statement/prospectus. This is known as householding.

Each of Bookham and Avanex will promptly deliver, upon oral or written request, a separate copy of this joint proxy statement/prospectus to any stockholder residing at an address to which only one copy was mailed. Requests for additional copies should be directed to: Bookham, Inc., 2584 Junction Avenue, San Jose, California 95134, Attention: Investor Relations, (408) 383-1400 or to Avanex Corporation c/o Investor Relations, 40919 Encyclopedia Circle, Fremont California 94538, (510) 897-4188.

WHERE YOU CAN FIND MORE INFORMATION

Bookham and Avanex each file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any materials that the companies file at the SEC’s Public Reference Rooms at 100 F Street, NE Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Bookham’s and Avanex’s public filings are also available to the public from commercial document retrieval services and at the Internet web site maintained by the SEC at http://www.sec.gov.

You may obtain a free copy of Bookham annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on the Internet at http://www.bookham.com or by contacting the Investor Relations Department at Bookham’s corporate office by calling 1-888-528-0788 or making a request in writing to Bookham, Inc., c/o Investor Relations, 2584 Junction Avenue, San Jose, California 95134.

You may obtain a free copy of Avanex annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on the Internet at http://www.avanex.com or by contacting the Investor Relations Department at Avanex’s corporate

272

office by calling (510) 897-4188 or making a request in writing to Avanex Corporation, c/o Investor Relations, 40919 Encyclopedia Circle, Fremont California 94538.

Bookham has filed a Form S-4 registration statement to register with the SEC the offering and sale of the shares of Bookham common stock to be issued in the merger contemplated by the merger agreement. This joint proxy statement/prospectus is a part of that registration statement and constitutes a prospectus and proxy statement of Bookham and a proxy statement of Avanex for the special meeting.

Bookham and Avanex also incorporate by reference the following additional documents:


	•	the Agreement and Plan of Merger and Reorganization attached to this joint proxy statement/prospectus as Annex A;

	•	the Form of Voting Agreement between Bookham and certain Avanex stockholders attached to this joint proxy statement/prospectus as Annex B;

	•	the Form of Voting Agreement between Avanex and certain Bookham stockholders attached to this joint proxy statement/prospectus as Annex C;

	•	the Opinion of Citigroup Global Markets Inc. attached to this joint proxy statement/prospectus as Annex D; and

	•	the Opinion of Banc of America Securities LLC attached to this joint proxy statement/prospectus as Annex E.

Bookham has supplied all information contained in this joint proxy statement/prospectus relating to Bookham or merger sub, and Avanex has supplied all information relating to Avanex.

You should rely only on the information contained in this joint proxy statement/prospectus to vote your shares at the special meeting. We have not authorized anyone to provide you with information that differs from that contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated March 25, 2009. You should not assume that the information contained in this joint proxy statement/prospectus is accurate as of any date other than that date, and neither the mailing of this joint proxy statement/prospectus to stockholders nor the issuance of shares of Bookham common stock in the merger shall create any implication to the contrary.

Bookham, the Bookham logos and all other Bookham product and service names are registered trademarks or trademarks of Bookham, Inc. in the United States and in other select countries. Avanex, the Avanex logos and all other Avanex product and service names are registered trademarks or trademarks of Avanex Corporation in the United States and in other select countries. ‘‘(R)” and “^tm” indicate U.S. registration and U.S. trademark, respectively. Other third party logos and product/trade names are registered trademarks or trade names of their respective companies.

273

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Bookham, Inc.

We have audited the accompanying consolidated balance sheet of Bookham, Inc. (a Delaware Corporation), and subsidiaries as of June 28, 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bookham, Inc. and subsidiaries as of June 28, 2008, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Bookham, Inc.’s internal control over financial reporting as of June 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 29, 2008, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

As discussed in Note 9 to the consolidated financial statements, effective July 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”

/s/ GRANT THORNTON LLP

San Francisco, California

August 29, 2008

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Bookham, Inc.

We have audited the accompanying consolidated balance sheet of Bookham, Inc. as of June 30, 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended June 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bookham, Inc. at June 30, 2007, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2007, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

San Jose, California

August 27, 2007 except for Note 12 as to which the date is August 29, 2008

F-3

CONSOLIDATED BALANCE SHEETS


	June 28,			June 30,
	2008			2007
	(In thousands, except share and par value amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	32,863		$	36,631
Short term investments		17,845			—
Restricted cash		1,154			6,079
Accounts receivable, net of allowances for doubtful accounts and product returns of $283 and $314 in 2008 and $831 and $370 in 2007		45,665			33,685
Inventories		59,612			52,114
Prepaid expenses and other current assets		6,007			9,121

Total current assets		163,146			137,630

Goodwill		7,881			7,881
Other intangible assets, net		7,829			11,766
Property and equipment, net		32,962			33,707
Non-current deferred tax asset		—			13,248
Other non-current assets		272			294

Total assets	$	212,090		$	204,526


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,501		$	21,101
Bank loan payable		—			3,812
Accrued expenses and other liabilities		20,789			22,704
Current deferred tax liability		—			13,248

Total current liabilities		42,290			60,865

Other long-term liabilities		1,336			1,908
Deferred gain on sale-leaseback		19,402			20,786

Total liabilities		63,028			83,559

Commitments and contingencies (Note 6) Stockholders’ equity:
Preferred stock: 5,000,000 authorized; none issued and outstanding		—			—
Common stock:
$.01 par value per share; 175,000,000 shares authorized; 100,739,778 and 83,275,394 shares issued and outstanding at June 28, 2008 and June 30, 2007, respectively		1,007			832
Additional paid-in capital		1,163,598			1,114,391
Accumulated other comprehensive income		44,036			42,444
Accumulated deficit		(1,059,579	)		(1,036,700	)

Total stockholders’ equity		149,062			120,967

Total liabilities and stockholders’ equity	$	212,090		$	204,526

The accompanying notes form an integral part of these consolidated financial statements.

F-4

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended
	June 28,			June 30,			July 1,
	2008			2007			2006
	(In thousands, except per share amounts)

Revenues	$	235,491		$	162,941			121,138
Revenues from related party		—			39,873			110,511
Net revenues		235,491			202,814			231,649
Cost of revenues		182,518			173,493			190,085

Gross profit		52,973			29,321			41,564
Operating expenses:
Research and development		32,633			43,025			42,587
Selling, general and administrative		47,941			47,820			52,167
Amortization of intangible assets		4,639			8,884			10,004
Restructuring and severance charges		3,471			10,347			11,197
Certain legal actions, settlements and related costs		(2,882	)		490			4,997
Acquired in-process research and development		—			—			118
Impairment of goodwill and other intangible assets		—			—			760
Impairment/(recovery) of other long-lived assets		—			1,621			(832	)
(Gain)/loss on sale of property and equipment and other long-lived assets		(2,562	)		(3,009	)		(2,070	)

Total operating expenses		83,240			109,178			118,928

Operating loss		(30,267	)		(79,857	)		(77,364	)
Other income/(expense):
Loss on conversion and early extinguishment of debt		—			—			(18,842	)
Other income/(expense), net		—			—			298
Interest income		1,465			1,239			1,113
Interest expense		(671	)		(573	)		(5,128	)
Gain/(loss) on foreign exchange		6,038			(2,879	)		677

Total other income/(expense)		6,832			(2,213	)		(21,882	)

Loss before income taxes		(23,435	)		(82,070	)		(99,246	)
Income tax (benefit)/provision		5			105			(11,749	)

Net loss	$	(23,440	)	$	(82,175	)	$	(87,497	)

Net loss per share:
Net loss per share (basic and diluted)	$	(0.25	)	$	(1.17	)	$	(1.87	)

Weighted average shares of common stock outstanding (basic and diluted)		93,099			70,336			46,679

The accompanying notes form an integral part of these consolidated financial statements.

F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended
	June 28,			June 30,			July 1,
	2008			2007			2006
	(In thousands)

Cash flows used in operating activities:
Net loss	$	(23,440	)	$	(82,175	)	$	(87,497	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		16,869			23,167			30,231
Stock-based compensation		8,812			6,666			8,863
Impairment of long-lived assets		—			1,621			(72	)
Gain on sale of property, equipment and other long-lived assets		(2,562	)		(3,009	)		(2,070	)
One time tax gain		—			—			(11,785	)
Legal settlement		—			—			4,997
Acquired in-process research and development		—			—			118
Loss on conversion and early extinguishment of debt		—			—			18,842
Amortization of deferred gain on sale leaseback		(1,384	)		(1,435	)		(278	)
Amortization of interest expense for warrants and beneficial conversion feature		—			—			1,292
Changes in current assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		(11,930	)		2,514			(5,834	)
Inventories		(2,426	)		4,298			383
Prepaid expenses and other current assets		4,078			3,079			8,973
Accounts payable		(1,211	)		(6,275	)		(6,487	)
Accrued expenses and other liabilities		(2,811	)		(19,224	)		(15,863	)

Net cash used in operating activities		(16,005	)		(70,773	)		(56,187	)

Cash flows provided by investing activities:
Purchases of property and equipment		(9,135	)		(6,433	)		(10,113	)
Proceeds from sale of property, equipment and other long-lived assets		2,972			5,387			2,396
Acquisitions, net of cash acquired		—			—			9,575
Proceeds from sale-leaseback of Caswell facility		—			—			23,444
Purchases of available for sale securities and investments		(17,844	)		—			—
Proceeds from sale of land held for resale		—			9,402			14,734
Transfer (to)/from restricted cash		5,026			(427	)		2,656

Cash flows provided/(used) by investing activities		(18,981	)		7,929			42,692

Cash flows provided by financing activities:
Amount paid to repurchase shares from former officer		(2	)		—			—
Cash paid in connection with early extinguishment of notes payable		—			—			(21,000	)
Cash paid in connection with conversion of convertible debentures		—			—			(3,282	)
Proceeds from issuance of common stock, net		40,785			55,444			49,548
Proceeds from/(repayment) of bank loan payable		(3,812	)		3,812			—
Repayment of other loans		(44	)		(108	)		(49	)

Net cash provided by financing activities		36,927			59,148			25,217

Effect of exchange rate on cash and cash equivalents		(5,709	)		2,577			1,094

Net increase in cash and cash equivalents		(3,768	)		(1,119	)		12,816
Cash and cash equivalents at beginning of period		36,631			37,750			24,934

Cash and cash equivalents at end of period	$	32,863		$	36,631		$	37,750

Supplemental disclosures of cash flow information:
Cash paid for interest	$	244		$	5,012		$	7,481

Cash paid for income taxes	$	52		$	105		$	22

Supplemental disclosures of non cash transactions:
Warrants issued in connection with debt and extinguishment of debt	$	—		$	12,417		$	4,385

The accompanying notes form an integral part of these consolidated financial statements.

F-6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


											Accumulated
					Additional						Other									Total
	Common Stock				Paid-In			Deferred			Comprehensive			Accumulated			Comprehensive			Stockholders
	Shares		Amount		Capital			Compensation			Income			Deficit			Income			Equity
	(In thousands, except share amounts)

Balance at July 2, 2005		33,805,437	$	338	$	925,677		$	(808	)	$	32,889		$	(867,028	)	$	—		$	91,068
Issuance of shares upon the exercise of common stock options		58,627		—		303			—			—			—			—			303
Issuance of restricted stock		1,050,000		11		—			—			—			—			—			11
Issuance of shares
to CP Santa Rosa Enterprises Corp.		5,100		—		24			—			—			—			—			24
Common stock issued in connection with the settlement of
Yue lawsuit		537,635		5		4,995			—			—			—			—			5,000
Common stock issued in public offering		11,250,000		113		49,121			—			—			—			—			49,234
Common stock issued upon conversion of convertible debt		5,386,365		54		25,156			—			—			—			—			25,210
Common stock issued in connection with debt equity exchange		5,120,793		51		33,802			—			—			—			—			33,853
Stock-based compensation expense		—		—		8,056			808			—			—			—			8,864
Common stock issued in connection with Avalon acquisition		764,951		8		6,492			—			—			—			—			6,500
Comprehensive loss:
Unrealized gain on hedging transactions		—		—		—			—			573			—			573			573
Currency translation adjustment		—		—		—			—			1,998			—			1,998			1,998
Net loss for the period		—		—		—			—			—			(87,497	)		(87,497	)		(87,497	)

Total comprehensive loss		—		—		—			—			—			—		$	(84,926	)

Balance at July 1, 2006		57,978,908	$	580	$	1,053,626		$	—		$	35,460		$	(954,525	)	$	—		$	135,141
Issuance of shares
upon the exercise of common stock options		3,678		—		—			—			—			—			—			—
Issuance of shares upon vesting of restricted stock units		7,917		—		—			—			—			—			—
Issuance of restricted stock to non-employee directors		50,000		—		—			—			—			—			—			—
Resolution of contingent consideration in connection with Avalon acquisition		—		—		(1,000	)		—			—			—			—			(1,000	)
Common stock issued in private placements		25,234,891		252		55,193			—			—			—			—			55,445
Stock-based compensation expense		—		—		6,277			—			—			—			—			6,277
Restricted stock vesting acceleration related to restructuring and severance charges		—		—		295			—			—			—			—			295
Comprehensive loss:
Unrealized loss on hedging transactions		—		—		—			—			(361	)		—			(361	)		(361	)

F-7

BOOKHAM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME — (Continued)


										Accumulated
					Additional					Other									Total
	Common Stock				Paid-In			Deferred		Comprehensive			Accumulated			Comprehensive			Stockholders
	Shares		Amount		Capital			Compensation		Income			Deficit			Income			Equity
	(In thousands, except share amounts)

Currency translation adjustment		—		—		—			—		7,345			—			7,345			7,345
Net loss for the period		—		—		—			—		—			(82,175	)		(82,175	)		(82,175	)

Total comprehensive loss																$	(75,191	)

Balance at June 30, 2007		83,275,394	$	832	$	1,114,391		$	—	$	42,444		$	(1,036,700	)	$	—		$	120,967
Issuance of shares related to shares awards and restricted stock units		1,464,384		15		(15	)		—		—			—			—			—
Buy-back of accelerated stock options issued to former officer of the company		—		—		(2	)		—		—			—			—			(2	)
Adjustment to prior years taxes payable to reflect effect of adoption of FIN 48		—		—		—			—		—			562			—			562
Common stock issued in public offering		16,000,000		160		40,626			—		—			—			—			40,785
Stock-based compensation expense		—		—		8,598			—		—			—			—			8,598
Comprehensive loss:
Unrealized loss on hedging transactions		—		—		—			—		(34	)		—			(34	)		(34	)
Currency translation adjustment		—		—		—			—		1,615			—			1,615			1,615
Other comprehensive income		—		—		—			—		11			—			11			11
Net loss for the period											—			(23,440	)		(23,440	)		(23,440	)

Total comprehensive loss																$	(21,848	)

Balance at June 28, 2008		100,739,778	$	1,007	$	1,163,598		$	—	$	44,036		$	(1,059,579	)				$	149,062

The accompanying notes form an integral part of these consolidated financial statements.

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Summary of Significant Accounting Policies

Description of Business

Bookham, Inc., a Delaware Corporation (the “Company”) designs, manufacture and market optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals principally for use in high-performance fiber optics communications networks. Due to its advantages of higher capacity and transmission speed, optical transmission has become the predominant technology for large-scale communications networks. The Company’s primary operating segment is its telecom segment, which addresses this optical communications market. The Company’s remaining product lines, which address certain other optics and photonics markets, such as material processing, inspection and instrumentation, and research and development, and which leverage the resources, infrastructure and expertise of its telecom segment, comprise its non-telecom segment.

Basis of Presentation

The Company operates on a 52/53 week year ending on the Saturday closest to June 30. Fiscal 2008, 2007 and 2006 all were comprised of 52 weeks.

Foreign Currency Transactions and Translation Gains and Losses

The assets and liabilities of the Company’s foreign operations are translated from their respective functional currencies into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations. Foreign currency translation adjustments are recorded as accumulated other comprehensive income, except for the translation adjustment of short-term intercompany loans which are recorded as other income or expense. Gains and losses from foreign currency transactions, realized and unrealized in the event of foreign currency transactions not designated as hedges, and those transactions denominated in currencies other than the Company’s functional currency, are recorded as gain/(loss) on foreign exchange in the consolidated statements of operations. See Note 1 — Derivative Financial Instruments.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but are not limited to, the allowances for doubtful accounts; accruals for sales returns; inventory write-downs and write-offs; warranty accruals; the useful lives of fixed assets; impairment charges on long-lived assets, goodwill and other intangible assets; losses on facility leases and other charges; accrued liabilities and other reserves; and stock-based compensation. Actual results could differ from these estimates and such differences may be material to the amounts reported in the Company’s financial statements.

Cash and Cash Equivalents

Cash and cash equivalents are recorded at market value. The Company considers all liquid investment securities with an original maturity date of three months or less to be cash equivalents. Any realized gains and losses on liquid investment securities are included in other income/(expense), net in the consolidated statements of operations.

Short-Term Investments

The Company classifies short-term investments, which consist primarily of securities purchased with original maturities of more than three months, as “available for sale securities”. These short-term investments

F-9

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

are reported at market value, with the aggregate unrealized holding gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Restricted Cash

Restricted cash of $1.2 million as of June 28, 2008 consists of collateral for the performance of the Company’s obligations under certain facility lease agreements along with letters of credit and bank accounts otherwise restricted.

Inventories

Inventories are stated at the lower of cost (determined using the first in, first out method) or market value (determined using the estimated net realizable value). The Company plans production based on orders received and forecasted demand and maintains a stock of certain items. The Company must order components and build inventories in advance of product shipments. These production estimates are dependent on the Company’s assessment of current and expected orders from its customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. We review our inventory on a quarterly basis to determine if it is saleable. Products may be unsaleable because they are technically obsolete due to substitute products, specification changes or excess inventory relative to customer forecasts. We currently reserve for inventory using methods that take those factors into account. In addition, if we find that the cost of inventory is greater than the current market price, we will write the inventory down to the selling price, less the cost to complete and sell the product.

Property and Equipment

The Company records its property and equipment at cost less accumulated depreciation. Depreciation is recorded when assets are placed into service and it is computed using the straight-line method over the estimated useful lives of the assets as follows:


Buildings		Twenty years
Plant and machinery		Three to five years
Fixtures, fittings and equipment		Three to five years
Computer equipment		Three years

Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets

The Company reviews property and equipment and certain identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable on an annual basis. Recoverability of these assets is measured by comparing their carrying amounts to market prices or future undiscounted cash flows the assets are expected to generate. If property and equipment or certain identifiable intangibles are considered to be impaired, the impairment to be recognized would equal the amount by which the carrying value of the asset exceeds its fair market value based on market prices or future discounted cash flows.

The Company has adopted Statement of Financial Accounting Standard (“SFAS”) SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) which requires that goodwill and intangible assets with indefinite useful lives be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired.

SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable in accordance with SFAS 144, “Accounting for Impairment or Disposal of Long-

F-10

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Lived Assets”. The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 6 years and 15 years as to one specific customer contract.

In the year ended July 1, 2006, the Company’s annual review of goodwill and intangible assets led to the recording of an impairment charge of $760,000, all of which related to intangibles in the Company’s telecom segment. A concurrent review of other long-lived assets led to an additional impairment charge of $433,000.

Derivative Financial Instruments

SFAS No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, requires the Company to recognize all derivatives, such as foreign currency forward exchange contracts, on the consolidated balance sheet at fair value regardless of the purpose for holding the instrument. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through operating results or recognized in other comprehensive income/(loss), net until the hedged item is recognized in operating results on the consolidated statements of operations.

For derivative instruments that are designated and qualify as a cash flow hedge, the purpose of which is to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income/(loss), net on the statement of shareholders’ equity and reclassified into operating results in the same period or periods during which the hedged transaction affects operating results. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current operating results on the consolidated statements of operations during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized as other income/(expense) during the period of change.

The Company is exposed to fluctuations in foreign currency exchange rates. As the business has become multinational in scope, the Company has become subject to fluctuations based upon changes in the exchange rates between the currencies in which the Company collects revenue and pays expenses. The Company engages in currency hedging transactions in an effort to minimize the effects of fluctuations in exchange rates and to convert currencies to meet its obligations. In the majority of these contracts the Company agrees under certain circumstances to sell U.S. dollars in exchange for U.K. pounds sterling.

At the end of each accounting period, the Company marks-to-market all foreign currency forward exchange contracts that have been designated as cash flow hedges and changes in fair value are recorded in comprehensive income until the underlying cash flow is settled and the contract is recognized in operating results. As of June 28, 2008, there were eighteen outstanding foreign currency forward exchange contracts to sell U.S. dollars and buy U.K. pound sterling. These contracts have an aggregate nominal value of approximately $15.5 million of put and call options expiring from July 2008 to June 2009. To date, the Company has not entered into any such contracts for longer than 12 months and accordingly, all amounts included in accumulated other comprehensive income as of June 28, 2008 will generally be reclassified into earnings within the next 12 months. As of June 28, 2008, the Company recorded an unrealized loss of $33,000 to other comprehensive income relating to recording the fair value of the eighteen foreign currency forward exchange contracts designated as hedges for accounting purposes.

Advertising Expenses

The cost of advertising is expensed as incurred. The Company’s advertising costs for the years ended June 28, 2008, June 30, 2007, and July 1, 2006 were $212,000, $226,000, and $302,000, respectively.

F-11

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

Revenue represents the amounts (excluding sales taxes) derived from the providing of goods and services to third-party customers during the period. The Company’s revenue recognition policy follows Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements”. Specifically, the Company recognizes product revenue when persuasive evidence of an arrangement exists, the product has been shipped, title has transferred, collectibility is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. For shipments to new customers and evaluation units, including initial shipments of new products, where the customer has the right of return through the end of the evaluation period, the Company recognizes revenue on these shipments at the end of an evaluation period, if not returned, and when collection is reasonably assured. The Company records a provision for estimated sales returns in the same period as the related revenues are recorded, which is netted against revenue. These estimates are based on historical sales returns, other known factors and the Company’s return policy. Shipping and handling costs are included in cost of revenues.

The Company recognizes royalty revenue when it is earned and collectibility is reasonably assured.

The Company applies the same revenue recognition policy to both its telecom and non-telecom operating segments.

Research and Development

Company-sponsored research and development costs are expensed as incurred.

Income Taxes

The Company recognizes income taxes under the liability method under which deferred income taxes are recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change in rates.

Stock-Based Compensation

At June 28, 2008, the Company had active stock-based employee compensation plans, as described in Note 10 — Stockholders’ Equity. Prior to July 3, 2005, the Company accounted for its plans under the recognition and measurement provisions of Accounting Principles Board Opinion (“APB”) No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, and related Interpretations, as permitted by Financial Accounting Standards Board Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”. Effective July 3, 2005, the Company adopted the fair value recognition provisions of FASB Statement No. 123R (“SFAS 123R”), “Share-Based Payment”, using the modified prospective transition method and accordingly, the Company has not restated the consolidated results of operations for fiscal years prior to its adoption of SFAS 123R. Under that transition method, stock-based compensation cost recognized during the years ended June 28, 2008, June 30, 2007 and July 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of July 3, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to July 3, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Stock options have a term of 10 years and generally vest over a four to five year service period, and restricted stock awards generally vest over a one to four year period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by the Company’s Board of Directors.

F-12

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The weighted average fair value of stock options granted at fair market value during the years ended June 28, 2008, June 30, 2007 and July 1, 2006 were $2.13, $2.28 and $4.97, respectively. Total compensation cost related to non-vested awards not yet recognized as of June 28, 2008 was $8.5 million, of which $7.9 million relates to time based vesting awards expected to be recognized over 1.6 year weighted average basis and $0.6 million relates to performance based vesting awards for which the achievement of the related performance targets has not yet been deemed as probable. The fair value of stock options vested during the year was $5.8 million.

The weighted-average fair value for stock options granted was calculated using the Black-Scholes-Merton option-pricing model based on the following assumptions:


	Year Ended
	June 28,	July 30,	July 1,
	2008	2007	2006

Volatility	68% to 79%	81% to 85%	81% to 87%
Weighted-average estimated life	4.5 years	4.5 years	4.0 years
Weighted-average risk free interest rate	2.3% to 4.9%	4.4% to 5.1%	4.2% to 4.5%
Dividend yield	—	—	—

Consistent with our valuation method for the disclosure-only provisions of SFAS 123, we are using the Black-Scholes-Merton option-pricing model to value the compensation expense associated with our stock-based awards under SFAS 123(R). In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are as follows:


	June 28,		June 30,
	2008		2007
	(In thousands)

Unrealized gain on currency instruments designated as hedges	$	86	$	212
Currency translation adjustments		43,939		42,232
Unrealized gain/loss on short-term investments		11		—

Accumulated other comprehensive income — end	$	44,036	$	42,444

Recent Accounting Developments

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities— Including an Amendment of FASB Statement No. 115”, or “SFAS 159”. SFAS 159 gives companies the option of applying at specified election dates fair value accounting to certain financial instruments and other items that are not currently required to be measured at fair value. If a company chooses to record eligible items at fair value, the company must report unrealized gains and losses on those items in earnings at each subsequent reporting date. SFAS 159 also prescribes presentation and disclosure requirements for assets and liabilities that are measured at fair value pursuant to this standard and pursuant to the guidance in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 159 will be effective for the Company on June 29, 2008. The adoption of SFAS No. 159 will not have a material impact on the Company’s financial position, results of operations or cash flows.

F-13

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also requires requests for expanded information about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 will be effective for the Company on June 29, 2008. The adoption of SFAS No. 157 will not have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2007, the FASB also ratified Emerging Issues Task Force 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF 07-3 to have a material effect on its consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company does not believe the adoption of SFAS 141R will have a material impact on its consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). SFAS 160 changes the accounting and reporting for minority interests, which are to be re-characterized as non-controlling interests and classified as a component of equity on the balance sheet and statement of shareholders’ equity. This consolidation method will significantly change the accounting for transactions with minority interest holders. The Company is required to adopt SFAS No. 160 at the beginning of the first quarter of fiscal 2010, which begins on June 28, 2009. The Company is currently evaluating the effect, if any, that the adoption of SFAS No. 160 will have on its consolidated results of operations and financial condition.

In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157. FSP No. 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. The Company is currently evaluating the impact that SFAS No. 157 will have on its consolidated financial statements when it is applied to non-financial assets and non-financial liabilities that are not measured at fair value on a recurring basis beginning in the first quarter of 2009. The major categories of non-financial assets and non-financial liabilities that are measured at fair value, for which the company has not yet applied the provisions of SFAS No. 157 are goodwill and intangible assets.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS 161 requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2010. The Company is currently evaluating the effect, if any, that the adoption of SFAS No. 161 may have on its consolidated results of operations and financial condition.

F-14

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other Generally Accepted Accounting Principles (GAAP). FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after July 1, 2009.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 supersedes the existing hierarchy contained in the U.S. auditing standards. The existing hierarchy was carried over to SFAS No. 162 essentially unchanged. The Statement becomes effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to the auditing literature. The new hierarchy is not expected to change current accounting practice in any area.


2.	Concentration of Revenues and Credit and Other Risks

The Company places its cash and cash equivalents and short term investments with and in the custody of financial institutions with high credit standing and, by policy, limits the amounts invested with any one institution, type of security and issuer.

Nortel Networks Corporation accounted for 15% of our revenue in the year ended June 28, 2008, 20% in the year ended June 30, 2007, and 48% in the year ended July 1, 2006. Huawei Technologies Co., Ltd. accounted for 11% of our revenue in the year ended June 28, 2008. Revenues from both customers were generated in the Company’s telecom segment. For the years ended June 28, 2008, June 30, 2007 and July 1, 2006, no other customer accounted for more than 10% of the Company’s total revenues, except Cisco Systems, Inc. which accounted for 12% in the year ended June 30, 2007.

At June 28, 2008 and June 30, 2007, Nortel Networks Corporation accounted for 15% and 12% of the Company’s gross accounts receivable balance, respectively. At June 28, 2008 and June 30, 2007, Huawei Technologies Co., Ltd. accounted for 12% and 11% of the Company’s gross accounts receivable balance, respectively.

Trade receivables are recorded at the invoiced value. Allowances for uncollectible trade receivables are based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with specific problem accounts. The Company performs ongoing credit evaluations of its customers and does not typically require collateral or guarantees.


3.	Inventories

Inventories consist of the following:


	June 28,		June 30,
	2008		2007
	(In thousands)

Raw materials	$	21,140	$	20,238
Work in process		24,786		18,489
Finished goods		13,686		13,387

Total	$	59,612	$	52,114

F-15

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inventories are valued at the lower of the cost to acquire or manufacture the product or market value. The manufacturing cost includes the cost of the components purchased to produce products, the related labor and overhead. On a quarterly basis, inventory is reviewed to determine if it is believed to be saleable. Products may be unsaleable because they are technically obsolete or excess, due to substitute products or specification changes or because the Company holds an excessive amount of inventory relative to customer forecasts. Inventory is currently valued using methods that take these factors into account. In addition, if it is determined that cost is greater than selling price then inventory is written down to market value defined as the selling price less costs to complete and sell the product.

During the year ended July 1, 2006, the Company had revenues of $9.5 million related to, and recognized profits on, inventory that had been carried on the Company’s books at zero value. The Company had no revenues from zero value inventories in the year ended June 28, 2008 or the year ended June 30, 2007. These inventories were originally acquired in connection with the purchase of the optical components business of Nortel Networks Corporation. While this inventory is carried on the Company’s books at zero value, and its sale generates higher margins than most of the new products, the Company incurs additional costs to complete the manufacturing of these products prior to sale. Revenues from this inventory are expected to be insignificant in the future.

4. Property, Plant and Equipment

Property, plant and equipment consist of the following:


	June 28,			June 30,
	2008			2007
	(In thousands)

Buildings	$	18,411		$	18,303
Plant and machinery		77,606			66,575
Fixtures, fittings and equipment		1,098			420
Computer equipment		14,892			13,598

		112,007			98,896
Less accumulated depreciation		(79,045	)		(65,189	)

	$	32,962		$	33,707

Depreciation expense was $12,230,000, $14,012,000, and $20,227,000 for the years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively.


5.	Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consist of the following:


	June 28,		June 30,
	2008		2007
	(In thousands)

Trade creditor accruals	$	4,090	$	4,324
Compensation and benefits related accruals		6,724		5,212
Warranty accrual		2,598		2,569
Other accruals		5,657		7,886
Current portion of restructuring accrual		1,720		2,713

Total	$	20,789	$	22,704

F-16

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other long-term liabilities consist of the following:


	June 28,		June 30,
	2008		2007
	(In thousands)

Long-term portion of restructuring accrual	$	1,108	$	1,678
Other long-term liabilities		228		230

Total	$	1,336	$	1,908

Warranty accrual

The Company accrues for the estimated costs to provide warranty services at the time revenue is recognized. The Company’s estimate of costs to service its warranty obligations is based on 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 increases to net loss.

Movements in the warranty accrual are as follows:


	June 28,			June 30,			July 1,
	2008			2007			2006
	(In thousands)

Warranty provision at beginning of year	$	2,569		$	3,429		$	3,782
Warranties issued		2,290			2,037			2,447
Warranties utilized		(1,307	)		(2,497	)		(2,243	)
Warranties expired, and other changes in liability		(992	)		(713	)		(610	)
Foreign currency translation		38			313			53

Warranty provision at end of year	$	2,598		$	2,569		$	3,429

Credit Agreement

On August 2, 2006, the Company, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc., each a wholly-owned subsidiary of the Company (collectively, the “Borrowers”), entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc. and other lenders regarding a three-year $25,000,000 senior secured revolving credit facility. Advances are available under the Credit Agreement based on a percentage of accounts receivable at the time the advance is requested. As of June 28, 2008, the Company had no amount borrowed under this line of credit. The Company also had $4.8 million of standby letters of credits with vendors and landlords secured under this credit agreement, of which $4.5 million expires in September 22, 2008.

The obligations of the Borrowers under the Credit Agreement are guaranteed by the Company, Onetta, Inc., Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., each a wholly-owned subsidiary of the Company (together, the “Guarantors” and together with the Borrowers, the “Obligors”), and are secured pursuant to a security agreement (the “Security Agreement”) by the assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in some of their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a guaranty agreement in substantially the same form and join in the Security Agreement.

Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage points or the U.S. prime interest rate as quoted in the Wall Street Journal plus 1.25 percentage points. In the absence of an

F-17

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

event of default, any amounts outstanding under the Credit Agreement may be repaid and borrowed again anytime until maturity, which is August 2, 2009.

The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $1,000,000 or more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA and judgments, and a change of control default. The Credit Agreement contains negative covenants applicable to the Company, the Borrowers and their subsidiaries, including financial covenants requiring the Borrowers to maintain a minimum level of EBITDA (if the Borrowers have not maintained minimum levels of liquidity defined as $30 million of qualified cash and qualified accounts receivables, as defined in the Credit Agreement), as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business, and transactions with affiliates.


6.	Commitments and Contingencies

Operating Leases

The Company leases certain of its facilities under non-cancelable operating lease agreements that expire at various dates from fiscal 2009 through 2026. Rent expense for these leases was $6,674,000, $4,434,000 and $2,372,000, during the years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively.

Caswell Sale-Leaseback

On March 10, 2006, the Company’s Bookham Technology plc subsidiary entered into multiple agreements with a subsidiary of Scarborough Development (“Scarborough”) for the sale and leaseback of the land and buildings located at its Caswell, United Kingdom, manufacturing site. The sale transaction, which closed on March 30, 2006, resulted in immediate proceeds to Bookham Technology plc of £13.75 million (approximately U.S. $24 million on the date of the transaction). Under these agreements, Bookham Technology plc leases back the Caswell site for an initial term of 20 years, with options to renew the lease term for 5 years following the initial term and for rolling 2-year terms thereafter. Annual rent is £1.1 million (approximately $2.2 million based on the exchange rate of $1.989 as of June 28, 2008) during the first 5 years of the lease, £1.2 million (approximately $2.4 million based on the exchange rate of $1.989 as of June 28, 2008) during the next 5 years of the lease, £1.4 million (approximately $2.8 million based on the exchange rate of $1.989 as of June 28, 2008) during the next 5 years of the lease and £1.6 million (approximately $3.2 million based on the exchange rate of $1.989 as of June 28, 2008) during the next 5 years of the lease. Rent during the renewal terms will be determined according to the then market rent for the site. The obligations of Bookham Technology plc under these agreements are guaranteed by the Company. In addition, Scarborough, Bookham Technology plc and the Company entered into a pre-emption agreement with the buyer under which Bookham Technology plc, within the next 20 years, has a right to purchase the Caswell site in whole or in part on terms acceptable to Scarborough if Scarborough agrees to terms with or receives an offer from a third party to purchase the Caswell facility. Under the provisions of SFAS 13, “Accounting for Leases”, the Company has deferred a related gain of $20.4 million, which will be amortized ratably against rent expense over the initial 20 year term of the lease. As of June 28, 2008, the unamortized balance of this deferred gain is $19.4 million. The Company is recognizing the rent expense related to payments over the term of the lease.

At the inception of the Caswell lease, the Company determined the total minimum lease payments which were to be paid over the lease term in accordance with the provisions of SFAS No. 13 “Accounting for Leases”, and it is recognizing the effects of scheduled rent increases, which are included in the total minimum

F-18

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

lease payments, on a straight-line basis over the lease term, as required by FASB Technical Bulletin No. 85-3 “Accounting for Operating Leases with Scheduled Rent Increases.”

The Company’s future minimum lease payments under non-cancelable operating leases, including the sale-leaseback of the Caswell facility and $3.7 million related to unoccupied facilities as a result of the Company’s restructuring activities, are as follows (in thousands):


For fiscal year ending on or about June 30, 2009	$	6,489
2010		6,347
2011		5,872
2012		3,742
2013		2,974
Thereafter		38,512

Total	$	63,936

Guarantees

The Company follows the provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34”. The Company has the following financial guarantees:


	•	In connection with the sale by New Focus, Inc. of its passive component line to Finisar, Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property sold to Finisar. This obligation expires in May 2009 and has no limitation on maximum liability.

	•	The Company indemnifies its directors and certain employees as permitted by law, and has entered into indemnification agreements with its directors and senior officers. The Company has not recorded a liability associated with these indemnification arrangements as the Company historically has not incurred any costs associated with such indemnifications and does not expect to in the future. Costs associated with such indemnifications may be mitigated by insurance coverage that the Company maintains.

	•	The Company also has indemnification clauses in various contracts that it enters into in the normal course of business, such as those issued by its banks in favor of several of its suppliers or indemnification in favor of customers in respect of liabilities they may incur as a result of purchasing the Company’s products should such products infringe the intellectual property rights of a third party. The Company has not historically paid out any amounts related to these indemnifications and does not expect to in the future, therefore no accrual has been made for these indemnifications.

Settlement of Yue Litigation

On April 3, 2006, the Company entered into a definitive settlement agreement, or the Settlement Agreement, with Mr. Howard Yue, or the Plaintiff, relating to the lawsuit the Plaintiff filed against New Focus, Inc., a subsidiary of the Company, and several of its officers and directors in Santa Clara County Superior Court. The lawsuit, which was originally filed on February 13, 2002, is captioned Howard Yue v. New Focus, Inc. et al, Case No. CV808031, or the Yue Litigation, and relates to events that occurred prior to the Company’s acquisition of New Focus, Inc.

The terms of the Settlement Agreement provided that the Company would issue to the Plaintiff a $7.5 million promissory note, or the Note, payable on or before April 10, 2006, of which $5.0 million could be satisfied by the Company, at its option, through the issuance of shares of common stock. Pursuant to the

F-19

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Settlement Agreement, the Company issued the Note on April 3, 2006 and satisfied the terms of the Note in full by issuing to the Plaintiff 537,635 shares of common stock valued at $5.0 million on April 4, 2006 and paying $2.5 million in cash on April 5, 2006. The Plaintiff filed dismissal papers in the Yue litigation on April 6, 2006.

The defense fees for this litigation have been paid by the insurers under the applicable New Focus directors and officers insurance policy. The Company and New Focus, Inc. have demanded that the relevant insurers fully fund this settlement within policy limits. At this time certain of the insurers have not confirmed to the Company their definitive coverage position on this matter. As the terms of this settlement had been reached during the year ended July 1, 2006, the Company recorded $7.2 million ($7.5 million, net of insurance recoveries expected as of that time) as an other operating expense in the Company’s results of operations for the year ended July 1, 2006. The Company recorded an additional $0.5 million as an other operating expense for the year ended June 30, 2007, for additional defense fees related to this settlement. If and when additional insurers confirm their definitive coverage position, the Company will record the amounts of this coverage as recoveries against operating expenses in the corresponding future periods.

Other Litigation

On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. (“New Focus”) and several of its officers and directors, or the Individual Defendants, in the United States District Court for the Southern District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter Defendants, the underwriters in New Focus’s initial public offering. Three subsequent lawsuits were filed containing substantially similar allegations. These complaints have been consolidated.

F-20

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Amended Class Action Complaints. The motions were denied as to Bookham Technology plc and New Focus in February 2003. Special committees of the board of directors authorized the companies to negotiate a settlement of pending claims substantially consistent with a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their insurers.

On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. In light of the overturned class certification on June 25, 2007, the District Court signed an Order terminating the settlement. The actions against Bookham Technology plc and New Focus remain stayed while litigation proceeds in six test cases against other companies which involve claims virtually identical to those that have been asserted against Bookham Technology plc and New Focus. On November 13, 2007, the issuer defendants in certain designated “focus cases” filed a motion to dismiss the second consolidated amended class action complaints there were filed in those cases. On March 26, 2008, the District Court issued an Opinion and Order denying, in large part, the motions to dismiss the amended complaints in the “focus cases.” It is uncertain if the litigations will settle. If settlement of the litigations does not occur and litigation against Bookham Technology plc and New Focus continues, the Company believes that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the amended class action complaints and therefore the Company believes that such claims will not have a material effect on its financial position, results of operations or cash flows.

On November 12, 2007, Xi’an Raysung Photonics Inc. filed a civil suit against Bookham, Inc., and its wholly-owned subsidiary, Bookham Technology (Shenzhen) Co., Ltd., in the Xi’an Intermediate People’s Court in Shanxi Province of the People’s Republic of China. The complaint filed by Xi’an Raysung Photonics Inc. alleges that Bookham, Inc. and Bookham Technology (Shenzhen) Co., Ltd. breached an agreement between the parties pursuant to which Xi’an Raysung Photonics Inc. had supplied certain sample components and was to supply certain components to Bookham, Inc. and Bookham Technology (Shenzhen) Co., Ltd. Xi’an Raysung Photonics Inc. has increased its request that the court award damages of 20,000,000 Chinese Yuan (approximately $2.9 million based on an exchange rate of $1.00 to 6.85495 Chinese Yuan as in effect on June 28, 2008) and require that Bookham, Inc. and Bookham Technology (Shenzhen) Co., Ltd. pay its legal fees in connection with the suit. Bookham, Inc. and Bookham Technology (Shenzhen) Co., Ltd. believes they

F-21

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

have meritorious defenses to the claims made by Xi’an Raysung Photonics Inc. and therefore believes that such claims will not have a material effect on its financial position, results of operations or cash flows.

On March 4, 2008, Bookham filed a declaratory judgment complaint captioned Bookham, Inc. v. JDS Uniphase Corp. and Agility Communications, Inc., Civil Action No. 5:08-CV-01275-RMW, in the United States District Court for the Northern District of California, San Jose Division. Bookham’s complaint seeks declaratory judgments that its tunable laser products do not infringe any valid, enforceable claim of U.S. Patent Nos. 6,658,035, 6,654,400, 6,687,278, and that all claims of the aforementioned patents are invalid and unenforceable. Bookham’s complaint also contains affirmative claims for relief against JDS Uniphase Corp. and Agility Communications, Inc. for statutory unfair competition, and for intentional interference with economic advantage.

On July 21, 2008, JDS Uniphase Corp. and Agility Communications, Inc. answered Bookham’s complaint and asserted counterclaims against Bookham for infringement of U.S. Patent Nos. 6,658,035, 6,654,400, 6,687,278, which JDS Uniphase Corp. acquired from Agility Communications, Inc. The counterclaims are focused on Bookham’s tunable laser product line, but no disclosure of particular alleged infringing products has yet been made. JDS Uniphase Corp. seeks unspecified compensatory damages, treble damages and attorney fees from Bookham, and an order enjoining Bookham from future infringement of the patents-in-suit. No litigation schedule or trial date has yet been set. Any adverse ruling by the court, including an injunction that could prohibit us from using the technology covered by the patents in our products, or prolonged litigation may have an adverse effect on our business and any resolution may not be in our favor.

On April 18, 2008 the Company settled a lawsuit in the United Kingdom under which it had been seeking claims against a land developer in connection with the Company’s sale of a certain parcel of land in 2005. In the year ended June 30, 2008 the Company has recorded a gain of $2.9 million, net of costs, associated with this settlement.


7.	Restructuring and Severance Charges

In May, September and December 2004, the Company announced restructuring plans, including the transfer of its assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in research and development and selling, general and administrative expenses. These cost reduction efforts were expanded in November 2005 to include the transfer of the Company’s chip-on-carrier assembly from Paignton to Shenzhen. The transfer of these operations was completed in the quarter ended March 31, 2007. In May 2006, the Company announced further cost reduction plans, which included transitioning all remaining manufacturing support and supply chain management, along with pilot line production and production planning, from Paignton to Shenzhen, which was substantially completed in the quarter ended June 30, 2007. As of June 28, 2008, the Company had spent $32.8 million on these restructuring programs.

On January 31, 2007, the Company adopted an overhead cost reduction plan which includes workforce reductions, facility and site consolidation of its Caswell, U.K. semiconductor operations within existing U.K. facilities and the transfer of certain research and development activities to its Shenzhen, China facility. The Company began implementing the overhead cost reduction plan in the quarter ended March 31, 2007, and the related actions also included consolidation of certain head office functions in our San Jose, California location. Of the total cost associated with this overhead cost reduction plan, the substantial portions of the costs were personnel severance and retention related expenses. As of December 29, 2007, these plans were substantially complete. The Company has incurred related expenses of $7.7 million. The Company continues to leverage the cost reduction actions first initiated under this plan and has begun transferring certain non-telecom manufacturing activities from its San Jose, California facility to its Shenzhen, China facility. Restructuring and severance charges related to this move, the substantial portion being personnel related, and are expected to total $0.8 million to $1.0 million over the next two fiscal quarters.

F-22

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with earlier plans of restructuring, and the assumption of restructuring accruals upon the acquisition of New Focus in March 2004, in the year ended June 28, 2008, the Company continued to make scheduled payments drawing down the related lease cancellations and commitments. The Company accrued $1.1 million, $0.9 million and $1.9 million in the fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively, in expenses for revised estimates related to these lease cancellations and commitments. Remaining net payments of lease cancellations and commitments in connection with the Company’s earlier restructuring and cost reduction efforts are included in the restructuring accrual as of June 28, 2008. The related operating lease commitments outstanding as of June 28, 2008 are reflected in the disclosures in Note 6 — Commitments and Contingencies.

For all periods presented, separation payments under the restructuring and cost reduction efforts were accrued and charged to restructuring in the period that both the benefit amounts were determined and the amounts had been communicated to the affected employees.

The following table summarizes the activity related to the restructuring liability for the year ended June 28, 2008:


	Accrued			Amounts										Accrued
	Restructuring			Charged to										Restructuring
	Costs at June 30,			Restructuring		Amounts			Amounts Paid					Costs at June 28,
	2007			Costs and Other		Reversed			or Written-Off			Adjustments		2008
	(In thousands)

Lease cancellations and commitments	$	3,845		$	1,141	$	(20	)	$	(2,904	)	$	12	$	2,074
Asset impairment		—			35		—			(35	)		—		—
Termination payments to employees and related costs		546			2,350		(36	)		(2,141	)		35		754

Total accrued restructuring		4,391		$	3,526	$	(56	)	$	(5,080	)	$	47		2,828

Less non-current accrued restructuring charges		(1,678	)												(1,108	)

Accrued restructuring charges included within accrued expenses and other liabilities	$	2,713												$	1,720

The amounts charged to restructuring, net of reversals, in the statement of operations for the year ended June 28, 2008 is $3.5 million. Charges for termination payments are primarily related to the January 2007 overhead cost reduction discussed above and certain headquarters consolidation actions. Charges for lease cancellations and commitments are primarily related to changing assumptions as to sub-lease assumptions regarding previously exited buildings and are related to our non-telecom segment. The substantial portions of other charges are associated with our telecom segment.

F-23

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the activity related to the restructuring liability for the year ended June 30, 2007:


	Accrued			Amounts											Accrued
	Restructuring			Charged to											restructuring
	Costs at July 1,			Restructuring		Amounts			Amounts Paid						costs at June 30,
	2006			Costs and Other		Reversed			or Written-Off			Adjustments			2007
	(In thousands)

Lease cancellations and commitments	$	11,438		$	867	$	—		$	(8,408	)	$	(52	)	$	3,845
Termination payments to employees and related costs		4,691			9,480		(295	)		(13,692	)		362			546

Total accrued restructuring		16,129		$	10,347	$	(295	)	$	(22,100	)	$	310			4,391

Less non-current accrued restructuring charges		(3,196	)													(1,678	)

Accrued restructuring charges included within accrued expenses and other liabilities	$	12,933													$	2,713

The amount charged to restructuring in the statement of operations for the year ended June 30, 2007 is $10.3 million. Charges for termination payments are primarily in connection with the transfer of assembly and test and related operations from Paignton to Shenzhen, and related to the January 2007 cost reduction described above. Restructuring and severance charges for the year ended June 30, 2007 include $0.3 million related to a non-cash charge for acceleration of restricted stock and $0.8 million related to payments made in connection with a separation agreement the Company executed in May 2007 with its former Chief Executive Officer. Charges for lease cancellations and commitments are primarily related to changing sub-lease assumptions regarding previously exited buildings and are related to our non-telecom segment. The substantial portions of other charges are associated with our telecom segment.


8.	Employee Benefit Plans

In the United States, the Company sponsors a 401(k) plan that allows voluntary contributions by eligible employees, who may elect to contribute up to the maximum allowed under the U.S. Internal Revenue Service regulations. The Company generally makes 25% matching contributions (up to a maximum of $2,000 per eligible employee per year) and it recorded related expenses of $0.5 million in each of the years ended June 28, 2008, June 30, 2007, and July 1, 2006, respectively.

The Company also contributes to a United Kingdom based defined contribution pension scheme for directors and employees, and to an additional defined contribution plan for the benefit of one director. Contributions, and the related expenses, under these plans were $1.6 million, $2.4 million, and $2.7 million in the years ended June 28, 2008, June 30, 2007, and July 1, 2006, respectively.

F-24

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Income Taxes

For financial reporting purposes, the Company’s pre-tax loss from continuing operations includes the following:


	Year Ended
	June 28			June 30			July 1
	2008			2007			2006
	(In thousands)

Current
Domestic	$	(7,265	)	$	(9,692	)	$	(43,817	)
Foreign		(16,170	)		(72,378	)		(55,428	)

	$	(23,435	)	$	(82,070	)	$	(99,245	)

The components of the provision for income taxes are as follows:


	Year Ended
	June 28		June 30			July 1
	2008		2007			2006
	(In thousands)

Current
Federal	$	—	$	(4	)	$	—
State		—		—			—
Foreign		5		109			23

	$	5	$	105		$	23

Deferred
Federal		—		—			—
State		—		—			—
Foreign							(11,772	)

		—		—			(11,772	)

Total	$	5	$	105		$	(11,749	)

Reconciliations of the income tax provision at the statutory rate to the Company’s provision for income tax are as follows:


	Year Ended
	June 28			June 30			July 1
	2008			2007			2006
	(In thousands)

Tax benefit at federal statutory rate	$	(7,968	)	$	(28,724	)	$	(34,736	)
Unbenefited domestic losses and credits		2,470			3,392			12,131
Unbenefited foreign losses and credits		5,503			25,437			10,856

Provision for (benefit from) income taxes	$	5		$	105		$	(11,749	)

F-25

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	June 28			June 30
	2008			2007
	(In thousands)

Deferred tax assets:
Net operating loss carryforwards	$	199,391		$	314,760
Depreciation and capital losses		76,202			79,648
Inventory valuation		952			1,069
Accruals and reserves		1,777			4,161
Capitalized research and development		2,310			2,848
Tax credit carryforwards		2,846			10,147
Stock Compensation		1,585			1,592

Total deferred tax assets		285,063			414,225
Valuation allowance		(277,221	)		(391,806	)

Net deferred tax assets		7,842			22,419
Deferred tax liabilities:
Other asset impairments		(7,842	)		(8,073	)
Forthaven deferred tax liability		0			(14,346	)

		(7,842	)		(22,419	)
Net Deferred Tax Assets	$	—		$	—

The Company’s valuation allowance decreased by $114,585,000 in the year ended June 28, 2008 compared to the year ended June 30, 2007, and decreased by $71,781,000 in the year ended July 1, 2007 compared to the year ended July 1, 2006.

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its net deferred tax assets.

As of June 28, 2008, the Company had foreign net operating loss carry forwards of approximately $602,266,000, $56,805,000, $19,776,000, and $3,397,000 in the United Kingdom, Switzerland, China, and Canada, respectively. The United Kingdom and Canada net operating losses do not expire, the Swiss net operating loss will expire at various times from 2008 through 2013 if unused, and the China net operating loss will expire at various times from 2008 through 2009 if unused. The Company also has U.S. federal, California and other state net operating losses of approximately $12,095,000, $29,090,000 and $24,000 respectively, which will expire in various years from 2017 through 2028 if unused.

As of June 28, 2008, the Company has U.S. federal, California, and foreign research and development credits of approximately $100,000, $289,000 and 5,846,000 respectively. The federal credit will expire at various times from 2027 through 2028 if unused. The California credit can be carried forward indefinitely. The foreign credit will expire at various times from 2015 through 2027 if unused.

Utilization of net operating loss carry forwards and credit carry forwards may be subject to annual limitations due to ownership changes as provided in the Internal Revenue Code of 1986, as amended, as well as similar state and foreign tax laws.

Effective July 1, 2007, the Company adopted Financial Accounting Standards Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement

F-26

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recognition and measurement of uncertain tax positions taken, or expected to be taken, in a company’s income tax return; and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes”, or SFAS No. 109. Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN No. 48 on July 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date. As a result of the implementation of FIN No. 48, Bookham, Inc. recognized a decrease in the liability for unrecognized tax benefits related to tax positions taken in prior periods and therefore made a corresponding adjustment to its opening retained earnings as of July 2, 2007 of approximately $562,000.

The Company’s total amount of unrecognized tax benefits as of July 1, 2007, the adoption date, and June 28, 2008 was approximately $3.6 million and $92.3 million, respectively. An adjustment of $88.5 million based on analysis performed during the year was made to the opening July 1, 2007 balance to account for certain deferred tax assets recorded as unrecognized tax benefits. This adjustment was previously in the deferred tax asset which carried a full valuation allowance; therefore, there is no impact on the financial statements. Also, the Company had no unrecognized tax benefits that, if recognized, would affect its effective tax rate for July 1, 2007 or June 28, 2008 due to a full valuation allowance against its deferred tax assets. While it is often difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months.

A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the tax year ended June 28, 2008 is as follows:


	2008
	(In thousands)

Balance at July 1, 2007	$	3,612
Revisions to opening unrecognized tax benefits		88,518
Additions for tax positions related to 2008		150

Balance at June 28, 2008	$	92,280

Upon adoption of FIN No. 48, the Company’s policy to include interest and penalties related to unrecognized tax benefits within the Company’s ’provision for (benefit from) income taxes,’ did not change. As of July 1, 2007, and June 28, 2008, the Company did not have any accrual for payment of interest and penalties related to unrecognized tax benefits.

The Company files U.S. federal, U.S. state, and foreign tax returns and has determined its major tax jurisdictions are the United States, the United Kingdom, and China. Certain jurisdictions remain open to examination by the appropriate governmental agencies; U.S. federal and China tax years 2004 to 2008, various U.S. states tax years 2003 to 2008, and the United Kingdom tax years 2002-2008.


10.	Stockholders’ Equity

On November 13, 2007, the Company completed a public offering of 16,000,000 shares of its common stock at a price to the public of $2.75 per share that generated $40.8 million of cash, net of underwriting commissions and offering expenses.

F-27

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On March 22, 2007, the Company entered into a definitive agreement for a private placement pursuant to which it issued and sold, on March 22, 2007, 13,640,224 shares of common stock and warrants to purchase up to 4,092,066 shares of common stock with certain institutional accredited investors for net proceeds to the Company of approximately $26.9 million. The warrants have a five year term and are exercisable beginning on September 23, 2007 at an exercise price of $2.80 per share, subject to adjustment based on a weighted average anti-dilution formula if the Company effects certain equity issuances in the future for consideration per share that is less than the then current exercise price per share of such warrants. The fair value of these warrants was determined to be $6.3 million as of March 22, 2007.

On August 31, 2006, the Company entered into an agreement for a private placement of common stock and warrants pursuant to which it issued and sold 8,696,000 shares of common stock and warrants to purchase up to 2,174,000 shares of common stock on September 1, 2006, and issued and sold an additional 2,898,667 shares of common stock and warrants to purchase up to an additional 724,667 shares of common stock in a second closing on September 19, 2006. In both cases, such shares of common stock and warrants were issued and sold to certain institutional accredited investors. Net proceeds to the Company from this private placement, including the second closing, were $28.7 million. The warrants are exercisable during the period beginning on March 2, 2007 through September 1, 2011, at an exercise price of $4.00 per share. The fair value of these warrants was determined to be $6.1 million as of August 31, 2006.

On April 3, 2006, the Company entered into the Settlement Agreement with Mr. Howard Yue relating to a lawsuit Mr. Yue filed against New Focus, Inc., a subsidiary of the Company, and several of its officers and directors in Santa Clara County Superior Court. The lawsuit, which was originally filed on February 13, 2002, relates to events that occurred prior to the Company’s acquisition of New Focus, Inc. The terms of the Settlement Agreement provided that the Company would issue to Mr. Yue a $7.5 million promissory note of which $5.0 million could be satisfied by the Company, at its option, through the issuance of its common stock. Pursuant to the Settlement Agreement, on April 4, 2006, the Company issued 537,635 shares of its common stock with a then current market value of $5.0 million to Mr. Yue and, on April 5, 2006, the Company paid the remaining $2.5 million due under the promissory note in cash.

On March 22, 2006, the Company acquired all of the outstanding share capital of Avalon Photonics AG for 764,951 shares of its common stock. Subject to the achievement of certain future integration and revenue milestones, the Avalon shareholders and their designees were potentially entitled to receive up to 347,705 additional shares of common stock, consisting of up to 139,082 shares for achieving the integration milestone and up to 208,623 shares for achieving revenue milestones. The integration milestone was not achieved resulting in adjustment of $1.0 million against additional paid-in-capital. It is unlikely the revenue milestones will be achieved. See Note 13 — Business Combinations, for additional disclosures regarding this acquisition.

On January 13, 2006, the Company entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of the convertible debentures the Company issued approximately 10.5 million shares of common stock, warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash, and recorded a charge of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt. See Note 16 — Debt.

On October 17, 2005, the Company completed a public offering of its common stock, issuing a total of 11,250,000 shares at a price per share of $4.75, raising $53.4 million and receiving $49.3 million net of commissions to the underwriters, offering costs and expenses.

In November 2007, the Company granted 268,749 shares of restricted stock units under existing stock incentive plans. The Company also issued 250,000 shares of restricted stock units to certain executives of the Company under existing stock incentive plans. The restricted stock grants vest when the Company achieves

F-28

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

earnings before interest, taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges for stock-based compensation greater than zero. The Company recorded $1.3 million of expense in its fiscal quarter ended June 28, 2008 under SFAS 123R in connection with these performance based grants.

In June 2007, the Company granted options to purchase 886,500 shares of common stock and issued 886,500 shares of restricted stock (including 217,500 restricted stock units) under existing stock incentive plans. The options have an exercise price of $2.01, have a term of ten years and vest ratably over 48 months with the first 12 months of vesting deferred until the one year anniversary of the grant. The restricted stock grants vest when the Company achieves earnings before interest, taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges for stock-based compensation greater than zero. The Company recorded $1.7 million of expense in its fiscal quarter ended December 29, 2007 under SFAS 123R in connection with these performance based grants.

In February 2007, the Company issued 96,300 restricted stock units under existing stock incentive plans. The restricted stock units vest upon the achievement of certain development targets. Effective February 2007, the Company also accelerated the vesting of 128,906 shares of restricted stock, granted in November 2005, in connection with a separation agreement executed in May 2007 with its former Chief Executive Officer.

In November 2005, the Company granted options to purchase 4,762,500 shares of common stock and issued 1,100,000 shares of restricted stock (including 50,000 restricted stock units) under existing stock incentive plans. The options have an exercise price of $4.91, have a term of ten years and vest ratably over 48 months with the first 12 months of vesting deferred until the one year anniversary of the grant. The restricted stock grants vest as to 50% ratably over 48 months, as to 25% when the Company achieves earnings before interest, taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges for stock-based compensation cumulatively greater than zero for two successive quarters, and as to 25% when the Company achieves earnings before interest, taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges for stock-based compensation cumulatively greater than 8% of revenues for two successive quarters. During the quarter ended June 28, 2008 the Company recorded expenses of $657,000 under SFAS 123R related to 133,750 shares of restricted stock (and restricted stock units) in association with certain of these performance based targets and the remaining 133,750 unvested shares of restricted stock (and restricted stock units) with performance based vesting will expire November 11, 2009 if such targets are not achieved by that date.

On September 22, 2004, options to purchase 1,730,950 shares of common stock of the Company were granted to employees at an exercise price of $6.73 per share. One half of the options vest on a time based schedule (twenty-five percent of such amount vests one year from the grant date, with the remaining seventy-five percent of such amount vesting monthly over the next three years) and the remaining half vest on a performance based schedule. The performance based schedule options vest as follows: (i) fifty percent of the performance based shares vest when the Company achieves cash flow break-even (which is defined as the point when the Company generates earnings before interest, taxes, depreciation and amortization (excluding one-time items) greater than zero in any fiscal quarter) and (ii) the remaining fifty percent of these performance based shares vest upon the Company achieving profitability (which is defined as the point at which the Company generates a profit before interest and taxes (excluding one-time items) that is greater than zero in any fiscal quarter). As of June 28, 2008, 424,345 shares underlying these options have vested. Any unvested performance based options will vest in full on September 22, 2009, regardless of the achievement of the underlying performance targets.

In December 2004, in connection with a 7% convertible note private placement as described in Note 16- Debt, the Company issued warrants to purchase 2,001,963 shares of its common stock. These warrants have an exercise price of $6.00 per share and expire on December 20, 2009.

F-29

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes option information relating to options outstanding under the Company’s stock option plans as of June 28, 2008 as well as options the Company assumed from Bookham Technology plc in connection with the scheme of arrangement pursuant to which Bookham Technology plc became a wholly-owned subsidiary of the Company. Because the Company tracks the options issued under Bookham Technology plc’s plans and assumed by the Company in the scheme of arrangement separately from those issued under plans, the following information in presented in two separate sets of exercise price ranges (in U.S. dollars):


	Options Outstanding
							Weighted		Options Exercisable
					Number		Average				Number
					Outstanding		Remaining		Weighted		Exercisable		Weighted
					As of June 28,		Contractual		Average		As of June 28,		Average
Range of Exercise Prices					2008		Term		Exercise Price		2008		Exercise Price

U.S. Plans
$1.23		—	$	1.54		155,000		9.68	$	1.33		—	$	0.00
$1.75		—	$	1.75		832,906		9.59	$	1.75		—	$	0.00
$1.86		—	$	2.00		23,000		9.92	$	1.94		10,000	$	1.86
$2.01		—	$	2.01		761,500		9.04	$	2.01		190,375	$	2.01
$2.18		—	$	2.89		718,243		9.03	$	2.77		47,169	$	2.60
$2.90		—	$	4.70		273,141		8.49	$	3.27		176,157	$	3.27
$4.91		—	$	4.91		2,740,714		7.43	$	4.91		1,816,941	$	4.91
$4.99		—	$	7.45		658,898		6.54	$	6.63		459,482	$	6.64
$7.74		—	$	206.49		352,982		4.33	$	18.40		351,773	$	18.41
$510.28		—	$	510.28		30		2.34	$	510.28		30	$	510.28

$1.23		—	$	510.28		6,516,414		7.92	$	4.67		3,051,927	$	6.41
Assumed from U.K. Plans
$9.80		—	$	9.80		10,000		6.10	$	9.80		9,583	$	9.80
$11.58		—	$	11.58		50,800		5.93	$	11.58		50,800	$	11.58
$13.86		—	$	14.74		17,000		4.28	$	14.06		17,000	$	14.06
$15.44		—	$	15.44		85,230		4.38	$	15.44		85,230	$	15.44
$15.84		—	$	23.75		17,750		4.77	$	16.84		17,750	$	16.84
$23.85		—	$	23.85		35,755		3.71	$	23.85		35,755	$	23.85
$26.77		—	$	26.77		61,900		5.24	$	26.77		61,900	$	26.77
$26.82		—	$	268.23		17,235		3.17	$	69.61		17,235	$	69.61
$322.47		—	$	322.47		9,900		2.38	$	322.47		9,900	$	322.47
$713.64		—	$	713.64		200		2.13	$	713.64		200	$	713.64

$9.80		—	$	713.64		305,770		4.67	$	31.35		305,353	$	31.38

Total						6,822,184						3,357,280

The weighted average remaining contractual term of options exercisable was 6.91 years as of June 28, 2008.

Under the Company’s Amended and Restated 2004 Stock Incentive Plan, there are 12,105,257 shares available for grant as of June 28, 2008. The Company generally grants stock options that vest over a four to five year service period, and restricted stock awards that vest over a one to four year period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by the Company’s Board of Directors.

F-31

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Common Stock Reserved

Common stock is reserved for future issuance as follows:


	June 28,
	2008

Stock option plan:
Outstanding options		6,822,184
Warrants		10,083,578
Reserved for future grants		12,105,257

Total		29,011,019


11.	Earnings per Share

If the Company had reported net income, as opposed to a net loss, the calculation of diluted earnings per share would have included an additional 18,402,270, 18,111,000 and 11,509,657 common equivalent shares related to outstanding share options and warrants (determined using the treasury stock method) for the years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively.


12.	Segments of an Enterprise and Related Information

Pursuant to SFAS 131, Disclosures about Segments of an Enterprise and Related Information, (“SFAS 131”) the Company’s Chief Executive Officer, who joined the Company during the fiscal year ended June 28, 2008, acts in the capacity of its Chief Operating Decision Maker (“CODM”) in the context defined by SFAS 131. During the Company’s fiscal year ended June 28, 2008, the Company’s CODM implemented changes in the Company’s operating structure as follows:


	•	Current Structure of Business Segments. As of June 28, 2008, and effective for the entire fiscal quarter then ended, the Company is organized and operates as two operating segments: (i) telecom and (ii) non-telecom. The telecom segment is responsible for the design, the development, the chip and filter level manufacturing, the marketing and the selling of optical solutions for telecommunications applications. The non-telecom segment is responsible for the design, development, marketing and selling of non-telecom products which include photonics and microwave solutions, high power lasers, thin film filters and VCSELs. The Company evaluates the performance of these segments and makes resource allocation decisions based on segment revenues and segment operating income/(loss), after allocating manufacturing costs between these operating segments and allocating the Company’s corporate general and administration costs to these operating segments. The Company does not allocate stock compensation, gains or losses on legal settlements, or gain on sale of property and equipment and other long-lived assets to these operating entities, each of which are components of the Company’s consolidated operating income/(loss). The Company also does not allocate other income/(expense), interest income, interest expense or gain/(loss) on foreign exchange to these operating segments.

	•	Previous Structure of Business Segments. Prior to the fiscal quarter ended June 28, 2008, the Company was organized and operated as two operating segments: (i) optics and (ii) research and industrial. The optics segment was responsible for the design, development, manufacturing, marketing and selling of optical solutions for telecommunications and industrial applications. The research and industrial segment was comprised of the Company’s New Focus subsidiary, which operated relatively autonomously as a discrete business, and was responsible for the design, manufacturing, marketing and selling of photonic and microwave solutions. The Company evaluated the performance of these segments and allocated resources based on consolidated revenues and overall profitability as reflected by net income/(loss).

F-32

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Segment Information Based on Current Business Segments

For all periods presented, the Company is presenting business segment financial information on the current business segment basis as follows:


	Year Ended
	June 28,		June 30,		July 1,
	2008		2007		2006
	(In thousands)

Net revenues Telecom	$	176,856	$	153,823	$	195,502
Non-telecom		58,635		48,991		36,147

Consolidated net revenues	$	235,491	$	202,814	$	231,649


	Year Ended
	June 28,			June 30,			July 1,
	2008			2007			2006
	(In thousands)

Operating income/(loss)
Telecom	$	(29,641	)	$	(76,353	)	$	(64,021	)
Non-telecom		2,742			1,971			(1,505	)

Total segment operating income/(loss)		(26,899	)		(74,382	)		(65,526	)
Stock compensation		8,812			6,373			8,863
Legal Settlement		(2,882	)		490			4,997
Acquired in-process research and development		—			—			118
Impairment/(recovery) of goodwill, other intangible and other long lived assets		—			1,621			(71	)
Gain on sale of property and equipment and other long-lived assets		(2,562	)		(3,009	)		(2,069	)

Consolidated operating income/(loss)	$	(30,267	)	$	(79,857	)	$	(77,364	)

Depreciation of tangible assets Telecom	$	10,605		$	11,347		$	17,822
Non-telecom		1,625			2,665			2,405

Consolidated depreciation	$	12,230		$	14,012		$	20,227

Total expenditures for long-lived assets Telecom	$	7,319		$	4,423		$	8,681
Non-telecom		1,815			2,010			1,432

Consolidated total expenditures for long-lived assets	$	9,135		$	6,433		$	10,113

Geographic revenue information for the periods presented below is based on location of the customer:

F-33

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Years Ended
	June 28,		June 30,		July 1,
	2008		2007		2006
	(In millions)

United States	$	59.5	$	46.0	$	47.8
Canada		39.1		56.1		107.4
China		59.1		37.7		27.8
Europe		47.6		34.4		28.8
Asia other than China		22.4		25.2		15.6
Rest of the World		7.8		3.4		4.2

Total revenues	$	235.5	$	202.8	$	231.6

The following table sets forth the Company’s long-lived tangible assets by geographic region as of the dates indicated:


	June 28,		June 30,
	2008		2007
	(In millions)

China	$	20.5	$	18.5
United Kingdom		6.3		9.7
Europe other than United Kingdom		4.1		3.9
United States		1.8		1.3
Canada		0.3		0.3

Total long-lived assets	$	33.0	$	33.7


13.	Business Combinations

Acquisition of Creekside

On August 10, 2005, the Company’s wholly-owned subsidiary, Bookham Technology plc, acquired all of the share capital of City Leasing (Creekside) Limited (“Creekside”) for consideration of approximately £1, plus transaction costs. The following is the purchase price allocation related to this business combination (in thousands):


	Purchase
	Price
	Allocation

Purchase price:
Cash	$	—
Transaction costs		685

	$	685

Allocation of purchase price:
Cash, including restricted cash	$	8,378
Net monetary assets		4,092
Deferred tax liabilities		(11,785	)

	$	685

F-34

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The net monetary assets acquired primarily represent lease receivables and loans payable to and from parties related to the entity from which Bookham Technology plc acquired Creekside. Bookham Technology plc has the right to offset these balances, and in accordance with FIN 39, “Offsetting of Amounts Related to Certain Contracts” is reflecting these amounts net on its balance sheet. The contracts underlying the receivables and loans are denominated in United Kingdom pounds sterling. These loans, in principal amounts at the date of acquisition of $32 million and $75 million based on the October 1, 2005 exchange rate of 1.76 U.S. dollars per UK pound sterling, accrue interest at annual rates of 5.54% and 5.68%, respectively. The first loan was paid in full on October 14, 2005 and the second loan was paid in full in equal installments on July 14, 2006, paid as scheduled on that date, and July 16, 2007, paid as scheduled on that date with the lease receivables received substantially concurrent with this schedule. The Company anticipates applying capital allowances of Bookham Technology plc to reduce tax liabilities assumed from Creekside. Accordingly, as a result of the acquisition of Creekside, in the year ended July 1, 2006 the Company has recognized a one time tax gain of $11.8 million related to the expected realization of these tax assets. No results of Creekside have been included in the Company’s results of operations for periods prior to August 10, 2005, after which point Creekside is included in the Company’s consolidated results of operations.

Acquisition of Avalon Photonics, AG

Avalon Photonics, AG (“Avalon”) is a producer of multimode and single mode short wavelength VCSEL or VCSEL-arrays. On March 22, 2006, the Company acquired all of the outstanding share capital of Avalon, a company organized under the laws of Switzerland, under an agreement pursuant to which it issued 764,951 shares of common stock to the Avalon shareholders and their designees, valued at $5,500,000 as of the date of acquisition. In addition, subject to the achievement of certain future integration and revenue milestones, the Avalon shareholders and their designees were entitled to receive up to 347,705 additional shares of common stock. As 139,082 shares related to integration milestones were fixed as to number and believed to be achievable, the value of these shares, $1,000,000 as of the date of acquisition, was included as part of the consideration in the allocation of the purchase price. In the year ended June 28, 2008 it was determined the integration milestone would not be achieved and the $1,000,000 related to these contingent shares was reversed as a reduction of goodwill and additional paid-in capital. The issuance of the remaining 208,623 shares is contingent upon Avalon achieving certain revenue criteria over a two-year period. As of June 28, 2008, the Company does not believe it is likely the revenue criteria will be achieved. Should any additional contingent consideration result from the achievement of the revenue criteria it will be accounted for as additional goodwill. $118,000 of the proceeds was allocated to in-process research and development (“IPR&D”) projects. The pro forma results of operations of Avalon prior to March 22, 2006 were immaterial to the Company.

To determine the value of the developed technology of Avalon, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and application of the technology, existing and future markets and assessments of the lifecycle stage of the technology.

The value of IPR&D of Avalon was determined based on the expected cash flow attributed to in-process projects, taking into account revenue that is attributable to previously developed technology, the level of effort to date in the IPR&D, the percentage of completion of the project and the level of risk associated with the in-process technology. The projects identified as in-process are those that were underway at Avalon at the time of the acquisition and that required additional efforts in order to establish technological feasibility. The value of IPR&D was included in the Company’s results of operations during the period of the Avalon acquisition.

The value of the acquired patent portfolio was determined based on the income approach, as it most accurately reflected the fair value associated with unique assets such as a patent. Specifically, the relief from royalty method was utilized to arrive at an estimate of fair value. This methodology estimates the amount of hypothetical royalty income that could be generated if the patents were licensed by an independent, third-party

F-35

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

owner to the business currently using the patents in an arm’s-length transaction. This is the royalty savings to the owners of the patent portfolio in that the owner is not required to pay a royalty for the use of the patents.

The value of supply contracts was determined based on discounted cash flows. The discounted cash flow method was considered to be the most appropriate methodology, as it reflects the present value of the operating cash flows generated by the contracts over their returns.

A summary of the purchase price allocation pertaining to the Avalon acquisition is as follows:


	Avalon
	(In thousands)

Purchase price	$	6,500
Transaction and other direct acquisition costs		200

	$	6,700

Allocation of purchase price:
Net tangible assets acquired	$	1,804
Intangible assets acquired:
Supply contracts and customer relationships		539
Core and current technology		1,695
In-process research and development		118
Goodwill		2,544

	$	6,700

Amortization period of intangibles acquired from Avalon are as follow:


Supply contracts and customer relationships			7 years
Core and current technology			4 - 6 years

F-36

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


14.	Goodwill and Other Intangible Assets

The following are summaries of information related to the Company’s goodwill and other intangible assets:


				Intangibles
							Accumulated
	Goodwill			Cost			Amortization			Net Book Value
	(In thousands)

Cost
July 2, 2005	$	6,260		$	57,548		$	29,538		$	28,010
Acquired		2,621			2,234			—			2,234
Charged		—			—			10,004			(10,004	)
Disposals		—			(929	)		(929	)		—
Impairment		—			(760	)		—			(760	)
Exchange rate adjustment		—			739			552			187

July 1, 2006		8,881			58,832			39,165			19,667

Adjustment		(1,000	)		—			—
Charged		—			—			9,155			(9,155	)
Exchange rate adjustment		—			4,868			3,614			1,254

June 30, 2007		7,881			63,700			51,934			11,766

Adjustment		—			(108	)		(108	)		—
Acquired		—			385			—			385
Charged		—			—			4,639			(4,639	)
Disposals		—			(43,665	)		(43,665	)		—
Exchange rate adjustment		—			(113	)		(430	)		317

June 28, 2008	$	7,881		$	20,199		$	12,370		$	7,829

Intangible assets consist of the following:


	Balance at									Translation			Balance at
	June 30, 2007			Disposals			Additions			and adjustments			June 28, 2008
	(In thousands)

Supply agreements	$	4,213		$	—		$	—		$	(187	)	$	4,026
Customer relationships		1,059			—			—			109			1,168
Customer databases		132			—			—			3			135
Core and current technology		35,155			(22,762	)		385			(124	)		12,654
Patent portfolio		19,446			(17,208	)		—			(22	)		2,216
Customer contracts		3,695			(3,695	)		—			—			—
		63,700			(43,665	)		385			(221	)		20,199

Less accumulated amortization		(51,934	)		43,665			(4,639	)		538			(12,370	)

Intangible assets, net	$	11,766		$	—		$	(4,254	)	$	317		$	7,829

F-37

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Balance at										Translation			Balance at
	July 1, 2006			Impairment		Disposals		Additions			Adjustment			June 30, 2007
	(In thousands)

Supply agreements	$	4,213		$	—	$	—	$	—		$	—		$	4,213
Customer relationships		1,051			—		—		—			8			1,059
Customer databases		132			—		—		—			—			132
Core and current technology		35,129			—		—		—			26			35,155
Patent portfolio		14,612			—		—		—			4,834			19,446
Customer contracts		3,695			—		—		—			—			3,695

		58,832			—		—		—			4,868			63,700
Less accumulated amortization		(39,165	)		—		—		(9,155	)		(3,614	)		(51,934	)

Intangible assets, net	$	19,667		$	—	$	—	$	(9,155	)	$	1,254		$	11,766


	Balance at												Translation			Balance at
	July 2, 2005			Impairment			Disposals			Additions			Adjustment			July 1, 2006
	(In thousands)

Supply agreements	$	4,157		$	—		$	—		$	—		$	56		$	4,213
Customer relationships		487			—			—			539			25			1,051
Customer databases		132			—			—			—			—			132
Core and current technology		34,750			(760	)		(929	)		1,695			373			35,129
Patent portfolio		14,377			—			—			—			235			14,612
Customer contracts		3,645			—			—			—			50			3,695

		57,548			(760	)		(929	)		2,234			739			58,832
Less accumulated amortization		(29,538	)		—			929			(10,004	)		(552	)		(39,165	)

Intangible assets, net	$	28,010		$	(760	)	$	—		$	(7,770	)	$	187		$	19,667

Goodwill

On March 22, 2006, Bookham acquired all of the outstanding share capital of Avalon Photonics for total stock consideration valued at $6.7 million, including contingent consideration valued at $1,000,000 (Note 13 — Business Combinations). The goodwill arising from this combination was $2,544,000. This goodwill was adjusted down to $1,544,000 in the year ended June 30, 2007 to reverse the $1,000,000 contingent consideration as a result of certain integration milestones not being achieved.

No other acquisitions by the Company resulted in recognition of goodwill in the years ended June 28, 2008, June 30, 2007 and July 1, 2006.

Intangible Assets

Intangible assets have primarily been acquired through business combinations and are being amortized on a straight line basis over the estimated useful life of the related asset, generally three to six years, except for fifteen years as to a specific customer contract.

F-38

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The expected future annual amortization expense of other intangible assets is as follows (in thousands):


Fiscal Year Ending	Amounts
	(In thousands)

2009	$	1,904
2010		1,672
2011		1,344
2012		665
2013		665
Thereafter		1,579

Total expected future amortization	$	7,829

As of June 28, 2008, the weighted average amortization period for intangible assets is 7 years, including 9 years for supply contracts, 3 years for the Company’s customer database, 7 years for patents and 10 for core and current technologies.

Impairment of Goodwill and Other Intangible Assets

The Company has adopted SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. SFAS 142 generally requires these impairment tests to be based on a business unit’s “fair value,” which is generally determined through market prices, although in certain cases, in the event of an absence of market prices for particular elements of the relevant business, SFAS 142 also permits the use of discounted future expected cash flows as a basis for testing. The Company has applied both approaches, as appropriate.

The Company’s annual impairment review of goodwill and other intangibles led to the recording of no impairment charges for the year ended June 28, 2008 and June 30, 2007, and the recording of an impairment charge of $760,000, for the year ended July 1, 2006 due to the impairment of intangibles related to Ignis Optics, Inc. which had been acquired in October 2003.


15.	Related Party Transactions

As of July 1, 2006 Nortel Networks owned 6.9% of the Company’s outstanding shares of common stock, respectively. To the best of the Company’s knowledge, Nortel Networks owned no outstanding shares of its common stock as of or since June 30, 2007. Since the Company’s acquisition of Nortel Networks Optical Components in 2002, the Company has also been party to a series of supply agreements, and addendums thereto, with Nortel Networks, which expired as to all material terms and obligations during the year ended June 30, 2007, and Nortel Networks has also held notes payable from the Company, which were settled in January 2006.

In the ordinary course of business, the Company has entered into the following transactions with Nortel Networks for the years ended June 30, 2007, and July 1, 2006:


			Purchases
	Sales to		from
	Nortel		Nortel
	(In thousands)

June 30, 2007	$	39,873	$	5,020
July 1, 2006		110,511		—

F-39

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Historical Transactions with Nortel

Prior to January 13, 2006, Nortel Networks, and subsidiaries of Nortel Networks, held promissory notes with an aggregate principal amount of $45.9 million. In connection with a series of transactions entered into on January 13, 2006, the promissory notes were settled in full on January 13, 2006 (See Note 16 — Debt).

On January 13, 2006, the Company entered into a third addendum to the Optical Components Supply Agreement dated November 8, 2002 with Nortel Networks Limited (the “Supply Agreement”). This third addendum obligated Nortel Networks to purchase $72 million of the Company’s product during the 2006 calendar year. The addendum also eliminated provisions requiring the Company to grant a license for the assembly, test, post-processing and test intellectual property (excluding wafer technology) of certain critical products to Nortel Networks Limited and to any designated alternative supplier if the Company’s cash balance was less than $25 million, as well as the provisions giving Nortel Networks Limited the right to buy all Nortel Networks Limited inventory then held by the Company and requiring the Company to grant a license to Nortel Networks Limited or any alternative supplier for the manufacture of all products covered by the first addendum to the Supply Agreement if the Company’s cash balance was less than $10 million.

These January 13, 2006 transactions, as well as the transactions described in Note 16, were the culmination of a series of transactions since the Company’s acquisition of Nortel Networks Optical Components (“NNOC”) in 2002 under which obligations to Nortel Networks Limited were created and amended, and a supply agreement similarly was entered into and amended. The following describes this series of transactions:


	•	At the time of the Company’s acquisition of NNOC in November 2002, a subsidiary of the Company issued a $30 million secured loan note due November 8, 2005 (the “$30m Note”) and a $20 million unsecured loan note due November 8, 2007 (the “Original $20m Note”) to affiliates of Nortel Networks. In connection with the issuance of these notes, the Company and Nortel Networks entered into security agreements with respect to certain assets of the Company. In September 2004, the Original $20m Note was exchanged for a $20 million note convertible into shares of the Company’s common stock (the “New $20m Note”);

	•	On December 2, 2004, (i) the $30m Note was amended and restated to, among other things, extend the final maturity date by one year from November 8, 2005 to November 8, 2006 and (ii) the New $20m Note was amended and restated to, among other things, provide that it would not convert into the Company’s common stock (collectively, the “Amended and Restated Notes”). The Amended and Restated Notes were secured by the assets that secured the $30m Note, as well as certain additional property, plant and equipment of the Company. The Amended and Restated Notes also contained certain limitations, including restrictions on asset sales and a requirement that the Company maintain a cash balance of at least $25 million;

	•	On February 7, 2005, the Company, Bookham Technology plc and certain of the Company’s other subsidiaries entered into a Notes Amendment and Waiver Agreement with Nortel Networks Corporation and Nortel Networks UK Limited, relating to the $25 million cash balance covenant set forth in the Amended and Restated Notes. Under the waiver, the obligation to maintain this cash balance was waived until August 7, 2006; and

	•	On February 7, 2005, the Company also entered into an addendum (the “The First Addendum”) to the Supply Agreement. The First Addendum effected the following changes to the Supply Agreement:


	•	The term of the Supply Agreement was extended by one year to November 2006, provided that Nortel Networks’ obligation to purchase a percentage of certain optical components from the Company was to expire in accordance with the terms of the Supply Agreement in November 2005;

F-40

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	•	Nortel Networks provided the Company with a purchase commitment for last time buys, or certain of the Company’s discontinued products, which Nortel Networks was obligated to purchase as these products were manufactured and delivered. If the Company failed to meet milestones set out in an agreed upon delivery schedule for “last-time buy” products by more than 10% in aggregate revenue for three consecutive weeks, and did not rectify the failure within 30 days, those products would have been deemed critical products, subject to the relevant provisions of the Supply Agreement described below.

The following terms were put in place:


	•	At Nortel Networks’ request, the Company agreed to increase its manufacturing of critical product wafer in-feeds against a Nortel Networks agreed upon manufacturing schedule. Upon manufacture and placement into inventory, Nortel Networks agreed to pay a holding and inventory fee pending Nortel Network’s outright purchase of such wafers. In addition, Nortel Networks could at its election supply any capital equipment required in connection with the requisite inventory buildup or extend the time period for meeting its demand if its demand required the Company to increase its capital equipment to meet the demand in the required time period;

	•	If at any time the Company (a) had a cash balance of less than $25 million; (b) was unable to manufacture critical products in any material respect, and that inability continued uncured for a period of six weeks, or (c) was subject to an insolvency event, such as a petition or assignment in bankruptcy, appointment of a trustee, custodian or receiver, or entrance into an arrangement for the general benefit of creditors, then the Company would have to grant a license for the assembly, post-processing and test intellectual property (but excluding wafer technology) of certain critical products to Nortel Networks and to any designated alternative supplier;

	•	If the Company’s cash balance were less than $10 million or there were an insolvency event, Nortel Networks Limited would have had the right to buy all Nortel Networks inventory held by the Company, and the Company would have had to grant a license to Nortel Networks Limited or any alternative supplier for the manufacture of all products covered by the First Addendum;

	•	The Company’s licensing and related obligations would terminate on February 7, 2007, unless the license had been exercised, in which case they would terminate 24 months from the date the license was exercised, provided that at that time, among other things, the Company had a cash balance of $25 million and had been able to meet Nortel Network’s demand for the subject products; and

	•	Pursuant to the First Addendum, the Company was obligated to make prepayments under the $30 million note and the $20 million note issued to Nortel Networks UK Limited on a pro rata basis in the following amounts upon the occasion of any one of the events described below:


	•	$1.0 million if the Company failed to deposit intellectual property relating to all covered products in escrow and its cash balance was below $10 million;

	•	$1.0 million in each case if (a) the Company failed to deliver 90% of scheduled last time buys through April 2005, subject to cure provisions (b) the Company failed to meet 90% of scheduled critical component wafer manufacturing through August 2005, subject to cure provisions, or (c) the Company failed to use commercially reasonable efforts to provide for an alternative supplier of two identified product lines when obligated to do so under the agreement; and

	•	$2.0 million in each case if (a) the Company failed to deliver 75% of scheduled last time buys through August 2005, subject to cure provisions, or (b) the Company failed to meet 75% of scheduled critical product deliveries through November 2005, subject to cure provisions.

F-41

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	•	On March 28, 2005, the Company entered into a letter agreement (the “Letter Agreement”) with Nortel Networks pursuant to which the Company and Nortel Networks agreed to enter into definitive documentation further amending certain terms of the supply agreement, the Amended and Restated Notes and documentation related to the Amended and Restated Notes, including the security agreements entered into in connection with the Amended and Restated Notes;

	•	On May 2, 2005, the Company and Nortel Networks entered into definitive agreements formally documenting the arrangements contemplated by the Letter Agreement. The terms of the definitive agreements were effective April 1, 2005 and include, among other agreements including a security agreement, a further Addendum (the “Second Addendum”) to the supply agreement and a Second Notes Amendment and Waiver Agreement between the Company and Nortel Networks relating to the Amended and Restated Notes (the “Notes Agreement”);

	•	The Second Addendum, which amended the terms and provisions of the Supply Agreement as amended by the First Addendum, increased the prices and adjusted the payment terms of certain products shipped to Nortel Networks under the Supply Agreement. The increased prices and adjusted payment terms continued for one year beginning April 1, 2005. Such prices and payment terms were subject to termination if an event of default occurred and continued under the Amended and Restated Notes or if a change in control or bankruptcy event occurred;

	•	Pursuant to the Second Addendum, Nortel Networks confirmed the arrangements in the Letter Agreement to issue non-cancelable purchase orders for “last-time buys” for certain products and other “non last-time buy” products. The products were to be delivered to Nortel Networks Limited over the next 12 months beginning on April 1, 2005. This resulted in the issuance of a non-cancelable purchase order for such products valued at approximately $100 million with approximately $50 million of “last-time buy” products and $50 million for other non “last-time buy” products. A specific delivery schedule was agreed for the “last-time buy” products, however, the delivery schedule and composition of the “non last-time buy” products was subject to change as agreed between the parties. The Second Addendum also formally confirmed increases in the prices and adjustments in the payment terms of certain products shipped to Nortel Networks under the Supply Agreement. Pursuant to the Notes Agreement, Nortel Networks UK Limited waived through May 2, 2006 the terms of the Amended and Restated Notes requiring prepayment in the event the Company raised additional capital. This waiver applied to net proceeds of up to $75 million in the aggregate, provided that the Company used such proceeds for working capital purposes in the ordinary course of business. The waiver would have terminated prior to May 2, 2006 if an event of default had occurred and were continuing under the Amended and Restated Notes or if a change in control or bankruptcy event occurred; and

	•	The Notes Agreement further amended the Amended and Restated Notes to provide that an event of default under the Supply Agreement would constitute an event of default under the Amended and Restated Notes. An event of default would occur under the Supply Agreement (and therefore the Amended and Restated Notes) upon:


	•	the Company’s intentional cessation of shipment of products to Nortel Networks against an agreed delivery schedule;

	•	the Company’s failure to deliver products pursuant to the Supply Agreement to the extent that Nortel Networks would be entitled to cancel all or part of an order, provided that Nortel Networks provided written notice of such default;

	•	the Company’s failure to meet a milestone for a last time buy product, provided that Nortel Networks provided written notice of such default;

F-42

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	•	the Company’s breach of or default under any one of its material obligations under the Supply Agreement which continued for more than 10 calendar days;

	•	any other default by the Company which would entitle Nortel Networks to terminate the Supply Agreement; or

	•	any event of default under the Amended and Restated Notes.


	•	Pursuant to the Notes Agreement, the Company and certain of its subsidiaries entered into security agreements securing the obligations of the Company and its subsidiaries under the Amended and Restated Notes and the Supply Agreement. These obligations were secured by the assets already securing the obligations of the Company and its subsidiaries under the Amended and Restated Notes as of December 2, 2004, as well as by Nortel Networks’ specific inventory and accounts receivable under the Supply Agreement and the Company’s real property located in Swindon, United Kingdom. However, the Company was permitted to sell the Swindon property provided that no event of default had occurred and was continuing under the Amended and Restated Notes, and provided that the Company used the proceeds of such sale for working capital purposes in the ordinary course of business.


16.	Debt

On January 13, 2006, the Company entered into a series of transactions to (i) retire $45.9 million aggregate principal amount of outstanding notes payable to Nortel Networks UK Limited and (ii) convert $25.5 million in outstanding convertible debentures which were issued in December 2004. In connection with the satisfaction of these debt obligations and conversion of these convertible debentures, the Company issued approximately 10.5 million shares of common stock, issued warrants to purchase approximately 1.1 million shares of common stock, paid approximately $22.2 million in cash and recorded an expense of $18.8 million in the fiscal year ended July 1, 2006 for loss on conversion and early extinguishment of debt.

The transactions were accounted for under the provisions of APB 26, “Early Extinguishments of Debt”, except for the conversion of the convertible debentures, which have been accounted for in accordance with SFAS 84, “Induced Conversions of Convertible Debt — an amendment to APB Opinion No. 26”. In accordance with these transactions, the Company recorded in other expense a loss of $18.8 million in the year ended July 1, 2006.


	•	On January 13, 2006, the Company paid Nortel Networks (UK) Limited (“NNUKL”) all $20 million outstanding principal of, plus all accrued interest on, the Amended and Restated Series A-2 Senior Secured Note Due 2007 issued by the Company to NNUKL (the “Series A Note”), and the Series A Note was retired and cancelled. The Company also paid NNUKL all of the accrued interest on the Amended and Restated

Series B-1 Senior Secured Note Due 2006 issued by Bookham Technology plc to NNUKL, the payment of which and performance of all obligations under which had been fully and unconditionally guaranteed by the Company.


	•	On January 13, 2006, the Company, Bookham Technology plc and certain subsidiaries of Bookham Technology plc entered into a Release Agreement (the “Release Agreement”) with Nortel Networks, NNUKL, and certain of their affiliates (collectively, “Nortel”). Pursuant to the Release Agreement, Nortel released its security interests in the collateral securing the obligations of the Company and Bookham Technology plc under the Series A Note, the Series B Note and the Optical Components Supply Agreement dated November 8, 2002 (the “Supply Agreement”) between Bookham Technology plc and Nortel Networks Limited (“NNL”).

F-43

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	•	On January 13, 2006, certain accredited institutional investors entered into separate purchase agreements to purchase portions of the Series B Note (the “Note Purchasers”) from NNUKL. Pursuant to the terms of an Exchange Agreement, dated as of January 13, 2006 (the “Exchange Agreement”), by and among the Company, Bookham Technology plc and the Note Purchasers, the Company issued an aggregate of 5,120,793 shares of common stock and warrants to purchase an aggregate of up to 686,000 shares of common stock (the “Note Exchange Warrants”) to the Note Purchasers in exchange for the Series B Note, which was retired and cancelled. The Note Exchange Warrants are exercisable from July 13, 2006 to January 13, 2011 at an exercise price per share of $7.00.

	•	Pursuant to the terms of a Securities Exchange Agreement, dated as of January 13, 2006 (the “Securities Exchange Agreement”), by and among the Company and the investors named therein (the “Debenture Holders”), each of the Debenture Holders exercised its rights to convert a portion of the Company’s 7.0% Senior Unsecured Convertible Debentures issued in December 2004 and held by such Debenture Holder (the “Debentures”) into shares of common stock, resulting in the issuance of an aggregate of 3,529,887 shares of common stock. Also pursuant to the Securities Exchange Agreement, the Company paid the Debenture Holders an aggregate of $1,717,663.16 in cash and issued to the Debenture Holders an aggregate of 571,011 additional shares of common stock and warrants (the “Initial Warrants”) to purchase up to 304,359 shares of common stock. The Initial Warrants are exercisable from July 13, 2006 to January 13, 2011 at an exercise price per share of $7.00. Subject to the approval of the Company’s stockholders pursuant to the rules of the NASDAQ Stock Market and the terms of the Securities Exchange Agreement, each of the Debenture Holders agreed to exercise its rights to convert the remaining portion of the Debentures, which would result in the issuance of an aggregate of 178,989 additional shares of common stock. Also pursuant to the Securities Exchange Agreement, at the time of such subsequent conversion, the Company agreed to pay the Debenture Holders an aggregate of $538,408.51 in cash and issue to the Debenture Holders an aggregate of 1,106,477 shares of common stock to the Debenture Holders and warrants to purchase an aggregate of up to 95,461 shares of common stock, which would be exercisable on the same terms as the Initial Warrants. The requisite stockholder approval was received on March 22, 2006 and the transactions described in the preceding two sentences were consummated on March 23, 2006.

	•	In connection with these transactions, the Company paid $1.8 million in fees to a third party broker.

In determining the accounting loss from these transactions, the Company applied the fair value of the consideration paid, which in the case of the warrants to purchase shares of the Company’s common stock, was based on applying the Black-Scholes-Merton model assuming variables of 84% volatility, zero dividend yield, an expected life of 5 years, and a risk free interest rate of 4.34%.

The original terms of the Nortel Networks promissory notes are described in Note 15 — Related Party Transactions.

The terms and accounting for the Debentures, prior to the January 13, 2006 were as follows:


	•	On December 20, 2004, the Company closed a private placement of $25.5 million of 7.0% senior unsecured convertible debentures and warrants to purchase common stock which resulted in net proceeds of $21.5 million. The Company forwarded $4.2 million of the proceeds to Nortel Networks, paying a portion of the Series B Note owed as part of the acquisition of NNOC. The Debentures were convertible into shares of common stock at the option of the holder prior to the maturity of the Debentures on December 20, 2007. The initial conversion price of the debentures was $5.50 per share, which represented a premium of approximately 16% over the closing price of the Company’s common stock on December 20, 2004. The holder also had a right of mandatory redemption of unpaid principle and accrued and unpaid interest in the event of a change in control or default, including penalties in the event of a change in control ranging from ten percent to twenty percent of the unpaid principle, as

F-44

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


		determined based on the timing of the triggering event. The Company had a right to convert the Debentures into shares of common stock under certain circumstances. The warrants issued in connection with the sale of the debentures provided holders thereof the right to purchase up to an aggregate of 2,001,963 shares of common stock and were exercisable during the five years from the date of grant at an initial exercise price of $6.00 per share, which represents a premium of approximately 26% over the closing price of common stock on December 20, 2004.


	•	The valuation of the financial instruments issued in connection with this private placement involved judgment affecting the carrying value of each instrument on the balance sheet and the periodic interest expense recorded. In order to determine the valuation of these instruments the Company applied the guidance in Emerging Issues Task Force, “EITF” Issue 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” to value the Debentures, the accompanying warrants and the value of the convertibility element of the Debentures. The Company first determined the fair value of the warrant and its value relative to the Debenture. The Company chose to use the Black-Scholes-Merton model to determine the value of the warrant which requires the determination of the Company’s stock’s volatility and the life of the instrument, among other factors. The Company determined that its stock’s historic volatility of 97% was representative of its stock’s future volatility and used the contractual term of five years for the life of the instrument and a risk free interest rate of 2.89%. The valuation independently derived from the Black-Scholes-Merton model for the warrant was then compared to the face value of the Debenture and a relative value of $5.4 million was assigned to the warrants. The value of the conversion element of the Debenture was determined based on the difference between the relative value of the Debenture per share of $4.35 of the 4.6 million shares into which the Debenture could have converted, compared to the fair market value per share of $4.77 per share of the Company’s common stock on the date on which the Debentures were issued. The value of the conversion feature of the Debenture was thereby determined to be $2.0 million. The value of the warrants and the conversion feature were recorded as a discount to the debt liability on the balance sheet and were amortized to interest expense based on the life of the Debenture of three years. In addition, the Company capitalized $1.9 million related to issuance costs associated with the Debentures and warrants, which was being amortized as part of interest expense for the term of the Debentures, prior to the January 13, 2006 settlement of the Debentures, as described above.

The warrants issued to the holders of the Debentures on December 20, 2004 are still outstanding.

Other Debt

As of June 28, 2008, the Company’s Switzerland subsidiary has an unsecured loan payable to a third party for $229,000 which is repayable in equal monthly installments until December 2013. This loan bears interest at 5% per annum, which is payable monthly in arrears.

F-45

BOOKHAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


17.	Quarter Summaries (unaudited)


	Three Months Ended
	June 28,			March 29,			December 29,			September 29,			June 30,			March 31,			December 30,			September 30,
	2008			2008			2007			2007			2007			2007			2006			2006
	(In thousands, except per share data)

Revenues	$	62,550		$	59,703		$	58,956		$	54,282		$	45,106		$	44,989		$	56,328		$	56,391
Cost of revenues		48,731			46,320			45,522			41,945			37,733			40,707			48,103			46,950

Gross profit		13,819			13,383			13,434			12,337			7,373			4,282			8,225			9,441
Operating expenses:
Research and development		8,203			7,570			8,168			8,692			9,154			10,853			11,525			11,493
Selling, general and administrative		12,742			11,711			12,162			11,326			10,837			12,043			12,081			12,859
Amortization of intangible assets		622			667			1,353			1,997			1,956			2,170			2,484			2,274
Restructuring and severance charges		1,020			672			562			1,217			1,872			4,273			1,301			2,901
Certain legal actions/(recovery), settlements and related costs		(3,813	)		54			877			—			—			—			—			490
Impairment/ (recovery) of goodwill, other intangible and other long-lived assets		—			—			—			—			(280	)		—			—			1,901
(Gain)/loss on sale of fixed assets		(250	)		(596	)		(1,481	)		(235	)		(2,185	)		6			270			(1,100	)

Total operating expenses		18,524			20,078			21,641			22,997			21,354			29,345			27,661			30,818

Operating loss		(4,705	)		(6,695	)		(8,207	)		(10,660	)		(13,981	)		(25,063	)		(19,436	)		(21,377	)
Other income/(expense), net:
Interest and other income/(expense) , net		2,841			1,312			2,973			(294	)		389			777			(1,862	)		(1,517	)

Loss before income tax		(1,864	)		(5,383	)		(5,234	)		(10,954	)		(13,592	)		(24,286	)		(21,298	)		(22,894	)
Income tax provision/(benefit)		35			17			(47	)		—			22			37			50			(4	)

Net loss	$	(1,899	)	$	(5,400	)	$	(5,187	)	$	(10,954	)	$	(13,614	)	$	(24,323	)	$	(21,348	)	$	(22,890	)

Basic and diluted net loss per share	$	(0.02	)	$	(0.05	)	$	(0.06	)	$	(0.13	)	$	(0.17	)	$	(0.35	)	$	(0.31	)	$	(0.38	)

Shares used to compute net loss per share		99,604			99,316			90,963			82,586			82,454			70,077			68,635			60,178

F-46

CONDENSED CONSOLIDATED BALANCE SHEETS


	December 27,			June 28,
	2008			2008
	(unaudited, in thousands,
	except par value amount)

ASSETS
Current assets:
Cash and cash equivalents	$	35,296		$	32,863
Short-term investments		8,894			17,845
Restricted cash		513			1,154
Accounts receivable, net		33,119			45,665
Inventories		58,448			59,612
Prepaid expenses and other current assets		4,842			6,007

Total current assets		141,112			163,146

Goodwill		—			7,881
Other intangible assets, net		6,191			7,829
Property and equipment, net		32,509			32,962
Other non-current assets		274			272

Total assets	$	180,086		$	212,090


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,402		$	21,501
Accrued expenses and other liabilities		21,245			20,789

Total current liabilities		36,647			42,290

Other long-term liabilities		1,821			1,336
Deferred gain on sale-leaseback		14,019			19,402

Total liabilities		52,487			63,028

Commitments and contingencies (Note 9) Stockholders’ equity:
Preferred stock: 5,000 shares authorized; none issued and outstanding		—			—
Common stock:
$0.01 par value per share; 175,000 shares authorized; 100,868 shares issued and outstanding at December 27, 2008 100,740 shares issued and outstanding at June 28, 2008		1,009			1,007
Additional paid-in capital		1,165,695			1,163,598
Accumulated other comprehensive income		24,742			44,036
Accumulated deficit		(1,063,847	)		(1,059,579	)

Total stockholders’ equity		127,599			149,062

Total liabilities and stockholders’ equity	$	180,086		$	212,090

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

F-47

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Six Months Ended
	December 27,			December 29,			December 27,			December 29,
	2008			2007			2008			2007
	(unaudited, in thousands, except per share amounts)

Revenues	$	50,204		$	58,956		$	116,735		$	113,238
Cost of revenues		41,499			45,522			91,401			87,467

Gross margin		8,705			13,434			25,334			25,771
Operating expenses:
Research and development		6,897			8,168			14,832			16,860
Selling, general and administrative		9,282			12,162			19,966			23,488
Amortization of intangible assets		444			1,353			907			3,350
Restructuring and severance charges		482			562			1,968			1,779
Legal settlement		—			877			(184	)		877
Impairment of goodwill		7,881			—			7,881			—
(Gain) loss on sale of property and equipment		(8	)		(1,481	)		8			(1,716	)

Total operating expenses		24,978			21,641			45,378			44,638

Operating loss		(16,273	)		(8,207	)		(20,044	)		(18,867	)
Other income (expense):
Other expense		(95	)		—			(695	)		—
Interest income		209			494			457			746
Interest expense		(132	)		(253	)		(324	)		(387	)
Gain on foreign exchange		9,866			2,732			16,362			2,320

Total other income (expense)		9,848			2,973			15,800			2,679

Loss before income taxes		(6,425	)		(5,234	)		(4,244	)		(16,188	)
Income tax provision (benefit)		36			(47	)		24			(47	)

Net loss	$	(6,461	)	$	(5,187	)	$	(4,268	)	$	(16,141	)

Net loss per share:
Basic	$	(0.06	)	$	(0.06	)	$	(0.04	)	$	(0.19	)
Diluted	$	(0.06	)	$	(0.06	)	$	(0.04	)	$	(0.19	)
Shares used in computing net loss per share:
Basic		100,339			90,963			100,209			86,775
Diluted		100,339			90,963			100,209			86,775

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

F-48

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	December 27,			December 29,
	2008			2007
	(unaudited, in thousands)

Cash flows from operating activities:
Net loss	$	(4,268	)	$	(16,141	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,720			9,604
Stock-based compensation		2,241			4,409
Amortization of deferred gain on sale-leaseback		(486	)		(714	)
Impairment of short-term investments		706			—
Impairment of goodwill		7,881			—
Accretion on short-term investments		(102	)		—
(Gain) loss on sale of property and equipment		8			(1,716	)
Changes in assets and liabilities:
Accounts receivable, net		1,721			(6,614	)
Inventories		(825	)		(4,524	)
Prepaid expenses and other current assets		684			4,925
Other assets		(88	)		—
Accounts payable		(5,264	)		3,714
Accrued expenses and other liabilities		762			(1,884	)

Net cash provided by (used in) operating activities		9,690			(8,941	)

Cash flows from investing activities:
Purchases of property and equipment		(6,934	)		(5,688	)
Proceeds from sale of property and equipment		14			1,775
Purchases of available-for-sale investments		(6,945	)		—
Sales and maturities of available-for-sale investments		15,350			—
Transfer from restricted cash		575			4,480

Net cash provided by investing activities		2,060			567

Cash flows from financing activities:
Proceeds from issuance of common stock, net		—			40,902
Proceeds from bank loan payable		—			501
Repayment of bank loan payable		—			(4,313	)
Repayment of other loans		(31	)		(12	)
Amount paid to repurchase shares from former officer		—			(2	)

Net cash provided by (used in) financing activities		(31	)		37,076

Effect of exchange rate on cash and cash equivalents		(9,286	)		(2,331	)
Net increase in cash and cash equivalents		2,433			26,371
Cash and cash equivalents at beginning of period		32,863			36,631

Cash and cash equivalents at end of period	$	35,296		$	63,002

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

F-49

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 1.	Nature of Business

Bookham, Inc., a Delaware corporation (“Bookham, Inc.”), designs, manufactures and markets optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals principally for use in high-performance fiber optics communications networks. Due to its advantages of higher capacity and transmission speed, optical transmission has become the predominant technology for large-scale communications networks. The Company’s primary operating segment is its telecom segment, which addresses this optical communications market. The Company’s remaining product lines, which address certain other optics and photonics markets, such as material processing, inspection and instrumentation, and research and development, and which leverage the resources, infrastructure and expertise of its telecom segment, comprise its non-telecom segment. References herein to the “Company” mean Bookham, Inc. and its subsidiaries.


Note 2.	Basis of Preparation

The accompanying unaudited condensed consolidated financial statements as of December 27, 2008 and for the three and six months ended December 27, 2008 and December 29, 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 10 of Regulation S-X, and include the accounts of Bookham, Inc. and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s consolidated financial position and operations have been included. The consolidated results of operations for the three and six months ended December 27, 2008 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 27, 2009.

The condensed consolidated balance sheet as of June 28, 2008 has been derived from the audited consolidated financial statements as of such date. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2008 (the “2008 Form 10-K”).

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2008 Form 10-K.

Revenue Recognition for Financially Distressed Customers

The Company’s revenue recognition policy, which is more fully described in its 2008 Form 10-K, follows Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements. Specifically, the Company recognizes product revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped and title has transferred, (iii) collectability is reasonably assured, (iv) fees are fixed or determinable and (v) there are no uncertainties with respect to customer acceptance.

F-50

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the accompanying consolidated financial statements at the time of such billings, as the Company determined that such amounts were not reasonably assured of collectability in accordance with its revenue recognition policy. The Company recognizes revenues from financially distressed customers when collectability becomes reasonably assured, assuming all other criteria for revenue recognition have been met.


Note 3.	Fair Value

In the Company’s first quarter of fiscal 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets, primarily marketable securities, and liabilities at fair value.

The Company’s cash equivalents and short-term investment instruments are classified within Level 1, Level 2 or Level 3 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include investment-grade corporate bonds, mortgage-backed and asset-backed securities and foreign currency forward exchange contracts. Such instruments are generally classified within Level 2 of the fair value hierarchy.

In September 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code. At December 27, 2008, the Company held a Lehman security with par value of $0.8 million. As of January 30, 2009, the Company does not have an estimate of the recovery value of this security, but has reduced the carrying value of this security to $0.1 million based on Level 3 inputs. For the three and six months ended December 27, 2008, the Company has recorded impairment charges for the Lehman security of $0.1 million and $0.7 million, respectively, which are included in other expense in the condensed consolidated statement of operations.

F-51

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments at December 27, 2008:


	Fair Value Measurement at Reporting Date Using
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(Thousands)

Assets:
Cash and cash equivalents(1):
Money market funds	$	14,092	$	—	$	—	$	14,092
Short-term investments:
United States agency securities		6,177		—		—		6,177
United States corporate bonds		—		2,637		80		2,717

Total assets measured at fair value	$	20,269	$	2,637	$	80	$	22,986


Liabilities:
Accrued expenses and other liabilities
Unrealized loss on hedges	$	—	$	3,332	$	—	$	3,332

Total liabilities measured at fair value	$	—	$	3,332	$	—	$	3,332


(1)		Excludes $21.2 million in cash held in Company bank accounts.

Derivative Financial Instruments

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires the Company to recognize all derivatives, such as foreign currency forward exchange contracts, on the condensed consolidated balance sheet at fair value regardless of the purpose for holding the instrument. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through operating results or recognized in accumulated other comprehensive income until the hedged item is recognized in operating results in the condensed consolidated statements of operations.

At the end of each accounting period, the Company marks-to-market all foreign currency forward exchange contracts that have been designated as cash flow hedges and changes in fair value are recorded in accumulated other comprehensive income until the underlying cash flow is settled and the contract is recognized in operating results. As of December 27, 2008, the Company held nineteen outstanding foreign currency forward exchange contracts to sell U.S. dollars and buy U.K. pounds sterling. These contracts had an aggregate notional value of approximately $22.0 million of put and call options expiring at various times between January 2009 and December 2009. To date, the Company has not entered into any such contracts for longer than 12 months and accordingly, all amounts included in accumulated other comprehensive income as of December 27, 2008 will generally be reclassified into earnings within the next 12 months. As of December 27, 2008, the Company has recorded an unrealized loss of $3.3 million to accumulated other comprehensive income related to recording the fair value of the nineteen foreign currency forward exchange contracts designated as hedges for accounting purposes.

F-52

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 4.	Balance Sheet Details

The following table provides details regarding the Company’s cash, cash equivalents and short-term investments at the dates indicated:


	December 27,		June 28,
	2008		2008
	(Thousands)

Cash and cash equivalents:
Cash-in-bank	$	21,204	$	16,361
Money market funds		14,092		10,022
Commercial paper		—		6,480

	$	35,296	$	32,863

Short-term investments:
United States agency securities	$	6,177	$	2,977
United States corporate bonds		2,717		14,868

	$	8,894	$	17,845

As of December 27, 2008 and June 28, 2008, all of the Company’s short-term investments had a maturity of less than one year.

The following table provides details regarding the Company’s inventories at the dates indicated:


	December 27,		June 28,
	2008		2008
	(Thousands)

Inventories:
Raw materials	$	19,558	$	21,140
Work-in-process		28,806		24,786
Finished goods		10,084		13,686

	$	58,448	$	59,612

The following table provides details regarding the Company’s property and equipment, net at the dates indicated:


	December 27,			June 28,
	2008			2008
	(Thousands)

Property and equipment, net:
Buildings	$	15,842		$	18,411
Plant and machinery		78,388			78,652
Fixtures, fittings and equipment		956			1,098
Computer equipment		11,475			13,846

		106,661			112,007
Less: accumulated depreciation		(74,152	)		(79,045	)

	$	32,509		$	32,962

F-53

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table provides details regarding the Company’s accrued expenses and other liabilities at the dates indicated:


	December 27,		June 28,
	2008		2008
	(thousands)

Accrued expenses and other liabilities:
Trade creditor accruals	$	2,599	$	4,090
Compensation and benefits related accruals		7,090		6,724
Warranty accrual		2,174		2,598
Unrealized loss on hedges		3,332		—
Other accruals		4,464		5,657
Current portion of restructuring accrual		1,586		1,720

	$	21,245	$	20,789

Note 5. Goodwill and Other Intangible Assets

The Company reviews its goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also reviews goodwill annually in accordance with SFAS No. 142, Goodwill and Other Intangibles. The values assigned to goodwill and other intangible assets are based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.

During the three month period ended December 27, 2008, the Company observed indicators of potential impairment of its goodwill, including the impact of the current general economic downturn on the Company’s future prospects and the continued decline of its current market capitalization, which caused the Company to conduct a preliminary interim goodwill impairment analysis. Specifically, indicators emerged within the New Focus reporting unit for SFAS No. 142 purposes, which includes the technology acquired in the March 2004 acquisition of New Focus, Inc. and is in the Company’s non-telecom segment, and one other reporting unit in the non-telecom segment that includes the technology acquired in the March 2006 acquisition of Avalon Photonics AG, (the “Avalon” reporting unit) that led the Company to conclude that a SFAS No. 142 impairment test was required to be performed during the second quarter for goodwill in these reporting units.

Goodwill is tested for impairment using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill.

The Company determined, in its preliminary first step goodwill impairment analysis, that its goodwill in the New Focus and Avalon reporting units was in fact impaired. In the second step, the measurement of the impairment, the Company hypothetically applies purchase accounting to the reporting units using the fair values from the first step. Due to the timing and complexity of step two, the Company has yet to complete this step. However, based upon preliminary calculations, the Company recorded a preliminary estimate of $7.9 million for the impairment loss in its statements of operations for the three and six months ended December 27, 2008 as management concluded that the loss was probable and that the amount of loss was reasonably determinable. The $7.9 million estimate is only preliminary. The Company is continuing to evaluate the impairment of its goodwill, and the amount of the actual impairment charge may vary from this initial estimate. The Company expects that it will complete the full evaluation of the impairment analysis

F-54

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

during the quarter ending March 28, 2009. The impairment will not result in any current or future cash expenditures.

The Company also tested the intangible assets of these two reporting units during the second quarter in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Based on this testing, the Company has determined that no impairment charge was necessary. At December 27, 2008, intangible assets subject to the amortization provisions of SFAS No. 142, net of accumulated amortization and impairment charges, were $6.2 million.

Note 6. Restructuring Liabilities

The following table summarizes the activity related to the Company’s restructuring liability for the six months ended December 27, 2008:


												Accrued
	Accrued			Amounts								Restructuring
	Restructuring			Charged to								Costs at
	Costs at June 28,			Restructuring		Amounts Paid			Adjustments			December 27,
	2008			Costs		or Written-off			and Reversals			2008
	(Thousands)

Lease cancellations and commitments	$	2,074		$	1,638	$	(686	)	$	—		$	3,026
Termination payments to employees and related costs		754			378		(887	)		(53	)		192

Total accrued restructuring		2,828		$	2,016	$	(1,573	)	$	(53	)		3,218

Less non-current accrued restructuring charges		(1,108	)										(1,632	)

Accrued restructuring charges included within accrued expenses and other liabilities	$	1,720										$	1,586

In connection with earlier plans of restructuring and cost reduction efforts, the Company continued to make scheduled payments drawing down the related lease cancellations and commitments and made further payments to terminated employees and for related costs. In the first quarter of fiscal 2009, the Company accrued an additional $1.5 million in expense related to existing restructuring plans for revised estimates of the cash flows for lease cancellations and commitments. Remaining net payments of lease cancellations and other commitments in connection with the Company’s earlier restructuring and cost reduction efforts are included in the restructuring accrual as of December 27, 2008 and will be paid out through April 2011.

For the three and six months ended December 27, 2008, the Company made payments of $0.4 million and $0.7 million, respectively, related to lease commitments and made payments of $0.6 million and $0.9 million, respectively, in personnel related costs in connection with transferring certain non-telecom manufacturing activities from its San Jose, California facility to its Shenzhen, China facility. Separation payments under the restructuring and cost reduction efforts were accrued and charged to restructuring in the period that both the benefit amounts were determined and the amounts had been communicated to the affected employees.


Note 7.	Accounting for Uncertainty in Income Taxes

FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, prescribes a recognition threshold and measurement attribute for the financial

F-55

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

statement recognition and measurement of uncertain tax positions taken, or expected to be taken, in a company’s income tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Step one, referred to as recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of benefit which is more likely than not to be realized on ultimate settlement.

The Company’s total amount of unrecognized tax benefits as of June 28, 2008 was approximately $92.3 million. For the six months ended December 27, 2008, there have been no material changes to the amount of unrecognized tax benefits. Also, the Company had no unrecognized tax benefits that, if recognized, would affect its effective tax rate for the six months ended December 27, 2008. Included in the balance of unrecognized tax benefits at December 27, 2008 is $1.3 million related to tax positions and estimated interest and penalties for which it is reasonably possible that the statute of limitations will expire in various jurisdictions within the next twelve months.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes. As of December 27, 2008, the Company did not have any accrual for payment of interest and penalties related to unrecognized tax benefits.

The Company files U.S. federal, U.S. state and foreign tax returns and has determined its major tax jurisdictions are the United States, the United Kingdom and China. Tax returns in the following jurisdictions remain open to examination by the appropriate governmental agencies: U.S. federal and China for tax years 2004 to 2008, Switzerland and various U.S. states for tax years 2003 to 2008 and the United Kingdom for tax years 2002 to 2008. The Company is not currently under audit in any major tax jurisdiction.


Note 8.	Credit Agreement

On August 2, 2006, the Company and its wholly-owned subsidiaries Bookham Technology plc, New Focus, Inc. (“New Focus”) and Bookham (U.S.) Inc. (collectively the “Borrowers”) entered into a credit agreement with Wells Fargo Foothill, Inc. and other lenders for a three year $25.0 million senior secured revolving credit facility (the “Credit Agreement”). Advances are available under the Credit Agreement based on 80 percent of “qualified accounts receivable”, as defined in the Credit Agreement, at the time an advance is requested.

The obligations of the Borrowers under the Credit Agreement are guaranteed by the Company, Ignis Optics, Inc., Bookham (Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., each a wholly-owned subsidiary of the Company (together, the “Guarantors” and together with the Borrowers, the “Obligors”), and are secured pursuant to a security agreement (the “Security Agreement”) by the assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in certain of their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a guaranty agreement and join in the Security Agreement. Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage points or the bank’s prime rate plus 1.25 percentage points. In the absence of an event of default, any amounts outstanding under the Credit Agreement may be repaid and re-borrowed at any time until maturity, which is August 2, 2009.

F-56

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$1.0 million or more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA and judgments and a change of control default. The Credit Agreement contains negative covenants applicable to the Company, the Borrowers and their subsidiaries, including financial covenants requiring the Borrowers to maintain a minimum level of earnings before interest, taxes, depreciation and amortization (“EBITDA”) if the Borrowers have not maintained “minimum liquidity” (defined as $30 million of qualified cash and excess availability, each as also defined in the Credit Agreement), as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business, and transactions with affiliates. As of December 27, 2008 and June 28, 2008, there were no borrowings under the Credit Agreement. As of December 27, 2008, the Company was in compliance with all covenants under the Credit Agreement and there was $0.3 million in an outstanding letter of credit with a vendor secured by this credit facility which expires in February 2009. As of June 28, 2008, there were $4.8 million in outstanding letters of credit with vendors secured by this credit facility.

In connection with the Credit Agreement, the Company agreed to pay a monthly servicing fee of $3,000 and an unused line fee equal to 0.375 percentage points per annum, payable monthly on the unused amount of revolving credit commitments. To the extent there are letters of credit outstanding under the Credit Agreement, the Borrowers are obligated to pay the administrative agent a letter of credit fee at a rate equal to 2.75 percentage points per annum.


Note 9.	Commitments and Contingencies

Guarantees

The Company follows the provisions of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. The Company has the following financial guarantees:


	•	In connection with the sale by New Focus of its passive component line to Finisar, Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property sold to Finisar. This obligation expires in May 2009 and has no limitation on maximum liability. The Company has not historically paid out any amounts related to this indemnification obligation and does not expect to in the future, therefore no accrual has been made for this indemnification obligation.

	•	The Company indemnifies its directors and certain employees as permitted by law, and has entered into indemnification agreements with its directors and senior officers. The Company has not recorded a liability associated with these indemnification arrangements as the Company historically has not incurred any costs associated with such indemnification arrangements and does not expect to in the future. Costs associated with such indemnification arrangements may be mitigated by insurance coverage that the Company maintains.

	•	The Company also has indemnification clauses in various contracts that it enters into in the normal course of business, such as those issued by its banks in favor of several of its suppliers or indemnification in favor of customers in respect of liabilities they may incur as a result of purchasing the Company’s products should such products infringe the intellectual property rights of a third party. The Company has not historically paid out any amounts related to these indemnification obligations and does not expect to in the future, therefore no accrual has been made for these indemnification obligations.

F-57

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Provision for warranties


	Three Months Ended						Six Months Ended
	December 27,			December 29,			December 27,			December 29,
	2008			2007			2008			2007
	(Thousands)

Warranty provision — beginning of period	$	2,594		$	2,370		$	2,598		$	2,569
Warranties issued		694			681			1,622			1,303
Warranties utilized or expired		(727	)		(693	)		(1,488	)		(1,550	)
Currency translation adjustment		(387	)		(27	)		(558	)		9

Warranty provision — end of period	$	2,174		$	2,331		$	2,174		$	2,331

Litigation

F-58

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and other expenses. In October 2002, the Individual Defendants were dismissed, without prejudice, from the action subject to their execution of tolling agreements. In July 2002, all defendants filed Motions to Dismiss the Amended Class Action Complaints. The motions were denied as to Bookham Technology plc and New Focus in February 2003. Special committees of the board of directors authorized the companies to negotiate a settlement of pending claims substantially consistent with a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their insurers.

It is uncertain if the litigations will settle. If settlement of the litigations does not occur and litigation against Bookham Technology plc and New Focus continues, the Company believes that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the Amended Class Action Complaints and therefore believes that such claims will not have a material effect on its financial position, results of operations or cash flows.

On March 4, 2008, Bookham filed a declaratory judgment complaint captioned Bookham, Inc. v. JDS Uniphase Corp. and Agility Communications, Inc., Civil Action No. 5:08-CV-01275-RMW, in the United States District Court for the Northern District of California, San Jose Division. Bookham’s complaint seeks declaratory judgments that its tunable laser products do not infringe any valid, enforceable claim of U.S. Patent Nos. 6,658,035, 6,654,400 and 6,687,278, and that all claims of the aforementioned patents are invalid and unenforceable. Bookham’s complaint also contains affirmative claims for relief against JDS Uniphase Corp. and Agility Communications, Inc. for statutory unfair competition, and for intentional interference with economic advantage.

F-59

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On July 21, 2008, JDS Uniphase Corp. and Agility Communications, Inc. answered Bookham’s complaint and asserted counterclaims against Bookham for infringement of U.S. Patent Nos. 6,658,035, 6,654,400 and 6,687,278, which JDS Uniphase Corp. acquired from Agility Communications, Inc. On October 6, 2008, JDS Uniphase Corp. indicated that its infringement claims are directed at Bookham’s LamdaFlex^TM TL500 VCJ; TL5000VLJ; TL3000; TL7000; TL8000 and TL9000 products. JDS Uniphase Corp. seeks unspecified compensatory damages, treble damages and attorneys’ fees from Bookham, and an order enjoining Bookham from future infringement of the patents-in-suit. This litigation has been stayed due to JDS Uniphase Corp.’s commencement of a U.S. International Trade Commission Investigation, which is described below.

On November 7, 2008, JDS Uniphase Corp. petitioned the U.S. International Trade Commission to commence an investigation into alleged violations by Bookham of Section 337 of the Tariff Act of 1930. On December 8, 2008, the U.S. International Trade Commission commenced investigation No. 337-TA-662 into Bookham’s alleged importation into the United States, sale for importation, and sale within the United States after importation of tunable laser chips, assemblies, and products containing the same that infringe U.S. Patent Nos. 6,658,035 and 6,687,278. JDS Uniphase Corp. seeks a general exclusion order prohibiting the importation of any Bookham tunable laser chip, assembly, or product containing the same that infringes any claim of the aforementioned patents, as well as an order prohibiting sales after importation into the United States of any allegedly infringing products. The U.S. International Trade Commission has adopted a target completion date of March 19, 2010 for the investigation, and indicated that a final initial determination should be filed by November 19, 2009. Any adverse ruling by the U.S. International Trade Commission, including an exclusion order that could prohibit us from importing into the United States tunable laser chips, assemblies, or products containing the same, or prolonged litigation will have an adverse effect on the Company’s business and any resolution may not be in the Company’s favor.

On April 18, 2008, the Company settled a lawsuit in the United Kingdom under which it had been seeking claims against a land developer in connection with the Company’s sale of a certain parcel of land in 2005. In the fiscal year ended June 28, 2008, the Company has recorded a gain of $2.9 million, net of costs, associated with this settlement.

Note 10. Stock-based Compensation Expense

The Company accounts for stock-based compensation under SFAS No. 123R, Share-Based Payment, which requires companies to recognize in their statement of operations all share-based payments, including grants of stock options, based on the grant date fair value of such share-based awards. The application of SFAS No. 123R requires the Company’s management to make judgments in the determination of inputs into the Black-Scholes stock option pricing model which the Company uses to determine the grant date fair value of stock options it grants. This model requires assumptions to be made related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. While the risk-free interest rate is a less subjective assumption, 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 makes them critical accounting estimates. The Company has not issued and does not anticipate issuing dividends to stockholders and accordingly uses a zero percent dividend yield assumption for all Black-Scholes stock option pricing calculations. The Company uses an expected stock-price volatility assumption that is based on historical realized volatility of the underlying common stock during a period of time. With regard to the weighted-average option life assumption, the Company evaluates the exercise behavior of past grants as a basis to predict future activity.

F-60

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assumptions used to value stock option grants for the three and six months ended December 27, 2008 and December 29, 2007 are as follows:


	Three Months Ended						Six Months Ended
	December 27,			December 29,			December 27,			December 29,
	2008			2007			2008			2007

Expected life		4.5 years			4.5 years			4.5 years			4.5 years
Risk-free interest rate		2.3	%		4.1	%		3.1	%		4.6	%
Volatility		82.9	%		77.0	%		70.4	%		81.7	%
Dividend yield		—			—			—			—

The amounts included in cost of revenues and operating expenses for stock-based compensation expenses for the three and six months ended December 27, 2008 and December 29, 2007 were as follows:


	Three Months Ended					Six Months Ended
	December 27,		December 29,			December 27,		December 29,
	2008		2007			2008		2007
	(Thousands)

Stock-based compensation by category of expense:
Costs of revenues	$	284	$	708		$	679	$	1,323
Research and development		222		643			472		1,094
Selling, general and administrative		518		1,332			1,090		1,992

	$	1,024	$	2,683		$	2,241	$	4,409

Stock-based compensation by type of award Stock options	$	842	$	1,061		$	1,669	$	2,177
Restricted stock awards		150		1,835			430		2,179
Inventory adjustment to cost of revenues		32		(213	)		142		53

	$	1,024	$	2,683		$	2,241	$	4,409

As of December 27, 2008 and June 28, 2008, the Company had capitalized $0.2 million and $0.3 million, respectively, of stock-based compensation as inventory.

The following table summarizes the combined activity under all of the Company’s equity incentive plans for the six months ended December 27, 2008:


	Awards			Stock			Weighted-		Restricted Stock			Weighted-
	Available			Options			Average		Awards / Units			Average Grant
	For Grant			Outstanding			Exercise Price		Outstanding			Date Fair Value
	(Thousands)			(Thousands)					(Thousands)

Balances at June 28, 2008		9,603			6,822		$	5.87		1,503		$	2.91
Granted		(2,707	)		2,707		$	1.74		—		$	—
Exercised or released		—			—		$	—		(741	)	$	3.06
Cancelled or forfeited		1,029			(870	)	$	5.20		(211	)	$	4.38

Balances at December 27, 2008		7,925			8,659		$	4.36		551		$	2.39

The Company generally grants stock options that vest over a four to five year service period and restricted stock awards that vest over a one to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives or pursuant to action by the Company’s Board of Directors or a committee of the Board.

F-61

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Supplemental disclosure information about the Company’s stock options outstanding as of December 27, 2008 was as follows:


					Weighted-
			Weighted-		Average		Aggregate
			Average		Remaining		Intrinsic
	Shares		Exercise Price		Contractual Life		Value
	(Thousands)				(Years)		(Thousands)

Options exercisable at December 27, 2008		3,515	$	7.36		6.6	$	—
Options expected to vest at December 27, 2008		8,298	$	4.47		6.7	$	—
Options outstanding at December 27, 2008		8,659	$	4.36		8.0	$	—

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.45 as of December 27, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. There were no shares of common stock subject to in-the-money options which were exercisable as of December 27, 2008. The Company settles employee stock option exercises with newly issued shares of common stock.


Note 11.	Earnings (Loss) Per Share

SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per share on the face of the statement of operations. Basic earnings per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted earnings per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock awards and units and warrants during such period.

For the three and six months ended December 27, 2008 and for the three and six months ended December 29, 2007, there were no stock options, warrants or restricted stock awards factored into the computation of diluted shares outstanding since the Company incurred a net loss in these periods and their inclusion would be anti-dilutive.

For the three and six months ended December 27, 2008, the effects of potentially dilutive securities (which include warrants, stock options and restricted stock awards) totaling 19.0 million and 18.5 million common shares, respectively, have been excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive. For the three and six months ended December 29, 2007, the effects of potentially dilutive securities totaling 16.9 million in each period have been excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive.


Note 12.	Comprehensive Loss

For the three and six months ended December 27, 2008 and December 29, 2007, the Company’s comprehensive loss was primarily comprised of its net loss, the change in the unrealized loss on currency instruments designated as hedges, and unrealized gain on short-term investments and foreign currency translation adjustments.

F-62

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of comprehensive loss were as follows:


	Three Months Ended						Six Months Ended
	December 27,			December 29,			December 27,			December 29,
	2008			2007			2008			2007
	(Thousands)

Net loss	$	(6,461	)	$	(5,187	)	$	(4,268	)	$	(16,141	)
Other comprehensive loss:
Unrealized loss on currency instruments designated as hedges		(2,982	)		(384	)		(4,023	)		(222	)
Unrealized gain on short-term investments		61			—			44			—
Currency translation adjustments		(8,903	)		(1,175	)		(15,315	)		562

Comprehensive loss	$	(18,285	)	$	(6,746	)	$	(23,562	)	$	(15,801	)


Note 13.	Segments of an Enterprise and Related Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments, geographic areas and major customers in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Chief Executive Officer of the Company is the Company’s chief operating decision maker. As of December 27, 2008, the Company is organized and operates as two operating segments: (i) telecom and (ii) non-telecom. The telecom segment is responsible for the design, development, chip and filter level manufacturing, marketing and selling of optical solutions for telecommunications applications. The non-telecom segment is responsible for the design, development, marketing and selling of non-telecom products, which include photonics and microwave solutions, high power lasers, thin film filters and VCSELs (vertical cavity surface emitting lasers). The Company evaluates the performance of its segments and allocates resources based on consolidated revenues and overall performance.

Segment information for the three and six months ended December 27, 2008 and December 29, 2007 is as follows:


	Three Months Ended				Six Months Ended
	December 27,		December 29,		December 27,		December 29,
	2008		2007		2008		2007
	(Thousands)

Revenues Telecom	$	37,418	$	44,799	$	89,673	$	85,532
Non-telecom		12,786		14,157		27,062		27,706

Consolidated revenues	$	50,204	$	58,956	$	116,735	$	113,238

F-63

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Three Months Ended						Six Months Ended
	December 27,			December 29,			December 27,			December 29,
	2008			2007			2008			2007
	(Thousands)

Operating loss Telecom	$	(6,922	)	$	(6,916	)	$	(8,262	)	$	(15,802	)
Non-telecom		(454	)		788			(1,836	)		505

Total segment operating loss		(7,376	)		(6,128	)		(10,098	)		(15,297	)
Stock compensation		1,024			2,683			2,241			4,409
Legal settlement		—			877			(184	)		877
(Gain) loss on sale of property and equipment		(8	)		(1,481	)		8			(1,716	)
Impairment of goodwill		7,881			—			7,881			—

Consolidated operating loss	$	(16,273	)	$	(8,207	)	$	(20,044	)	$	(18,867	)

The following table shows revenues by geographic area based on the delivery locations of the Company’s products:


	Three Months Ended				Six Months Ended
	December 27,		December 29,		December 27,		December 29,
	2008		2007		2008		2007
	(Thousands)

United States	$	11,780	$	13,604	$	30,981	$	28,357
Canada		3,243		10,832		7,898		21,456
Europe:
United Kingdom		2,324		2,581		5,860		4,264
Other		10,313		9,656		21,091		18,350
Asia:
China		12,567		14,659		27,432		25,263
Other		6,851		5,702		13,263		11,483
Rest of world		3,126		1,922		10,210		4,065

	$	50,204	$	58,956	$	116,735	$	113,238

The following table sets forth the Company’s long-lived tangible assets by geographic region as of the dates indicated:


	December 27,		June 28,
	2008		2008
	(Thousands)

United States	$	1,842	$	1,824
China		22,802		20,443
United Kingdom		3,312		6,296
Other		4,553		4,399

	$	32,509	$	32,962

Significant Customers and Concentration of Credit Risk

For the three months ended December 27, 2008, Nortel Networks accounted for 11 percent and Huawei Technologies accounted for 15 percent of the Company’s revenues. For the three months ended December 29,

F-64

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2007, Nortel Networks accounted for 15 percent and Cisco Systems accounted for 11 percent of the Company’s revenues. For the six months ended December 27, 2008, Nortel Networks accounted for 15 percent and Huawei Technologies accounted for 14 percent of the Company’s revenues. For the six months ended December 29, 2007, Nortel Networks accounted for 15 percent and Cisco Systems accounted for 11 percent of the Company’s revenues.

As of December 27, 2008, Huawei Technologies accounted for 17 percent and Cisco Systems accounted for 14 percent of accounts receivable. As of June 28, 2008, Nortel Networks accounted for 15 percent and Huawei Technologies accounted for 12 percent of accounts receivable.

In the second quarter of fiscal 2009 the Company issued billings of (i) $4.1 million for products that were shipped to Nortel Networks, but for which payment was not received prior to its bankruptcy filing on January 14, 2009, and (ii) $1.3 million for products that were shipped to a contract manufacturer for which payment may not be received due to the Nortel Networks bankruptcy filing. As a result, an aggregate of $5.4 million in revenue was deferred, and therefore was not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings, as the Company determined that such amounts were not reasonably assured of collectability in accordance with its revenue recognition policy. As of December 27, 2008, the Company had contractual receivables from these two customers totaling $5.4 million, which are not reflected in the accompanying condensed consolidated balance sheet as of such date.


Note 14.	Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended December 27, 2008, as compared to the recent accounting pronouncements described in the 2008 Form 10-K, that are of significance, or potential significance, to the Company.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired in a business combination. This standard also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of a business combination. SFAS No. 141R is effective for the Company for acquisitions made after June 27, 2009. The Company does not anticipate that the adoption of this pronouncement will have a significant impact on its financial statements; however, the implementation of SFAS No. 141R may have a material impact on the Company’s accounting for businesses acquired by the Company post-adoption.

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157. FSP No. 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2010. The Company is currently evaluating the impact that SFAS No. 157 will have on its consolidated financial statements when it is applied to non-financial assets and non-financial liabilities that are not measured at fair value on a recurring basis beginning in the first quarter of fiscal 2010. The major categories of non-financial assets and non-financial liabilities that are measured at fair value, for which the Company has not yet applied the provisions of SFAS No. 157, are goodwill and intangible assets.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the third quarter of

F-65

BOOKHAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fiscal 2009. The Company is currently evaluating the effect, if any, that the adoption of SFAS No. 161 may have on its consolidated results of operations and financial condition.

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 for financial assets in a market that is not active. FSP No. 157-3 was effective upon issuance. SFAS No. 157 was adopted by the Company, as it applies to its financial instruments, in the first quarter of fiscal 2009. The impact of adoption of SFAS No. 157 is discussed in Note 3.


Note 15.	Subsequent Events

Merger of Bookham Inc. and Avanex Corporation

On January 27, 2009, Bookham announced that it had entered into a definitive agreement providing for the merger of Bookham and Avanex Corporation (“Avanex”). In connection with the merger, which is subject to customary closing conditions, including shareholder approval by both companies, Avanex shareholders will receive, at a fixed exchange ratio, 5.426 shares of Bookham common stock for every share of Avanex common stock. Bookham expects to issue approximately 88.6 million shares of Bookham common stock in the proposed transaction. Upon the close of the transaction, Bookham shareholders will own approximately 53.25 percent and Avanex shareholders will own approximately 46.75 percent of the combined company. Based on the closing price of Bookham common stock of $0.397 per share on January 27, 2009, the total consideration to be paid to Avanex shareholders would be equivalent to $35.2 million or $2.15 per share of Avanex common stock. The merger is expected to be completed within the next three to six months.

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. On March 3, 2009, these individuals filed an amended complaint. The amended 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, and that the joint proxy statement/prospectus fails to provide stockholders with material information or contains materially misleading information thereby rendering the stockholders unable to cast an informed vote on the proposed merger. 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, Bookham and the individual defendants intend to defend against the complaint vigorously.

F-66

REPORT OF DELOITTE & TOUCHE LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Avanex Corporation

We have audited the accompanying consolidated balance sheets of Avanex Corporation and subsidiaries (the “Company”) as of June 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Avanex Corporation and subsidiaries as of June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for uncertainties in income taxes upon adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 effective July 1, 2007, and its method of accounting for defined benefit pension and other postretirement plans upon the adoption of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) as of June 30, 2007.

We have not audited any financial statements of the Company for any period subsequent to June 30, 2008. However, as discussed in Note 17 to the consolidated financial statements, during the six months ended December 31, 2008, the Company incurred operating losses and negative cash flows from operations, resulting in declines in total unrestricted cash, cash equivalents and short-term investments, and limited operating capital to fund future operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 17. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report (not included herein) dated September 4, 2008, expressed an adverse opinion on the Company’s internal control over financial reporting because of a material weakness.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

September 4, 2008 (February 23, 2009 as to Note 17)

F-67

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30,
	2008			2007
	(In thousands, except share and per share data)

ASSETS
Current assets:
Cash and cash equivalents	$	14,839		$	14,837
Restricted cash		3,776			3,620
Short-term investments		40,590			28,942
Accounts receivable		39,032			33,764
Inventories		15,979			15,188
Due from related party		85			14,381
Other current assets		6,486			5,716

Total current assets		120,787			116,448
Property and equipment, net		7,688			5,900
Intangibles, net		314			559
Goodwill		9,408			9,408
Deposits and other assets		2,870			2,685

Total assets	$	141,067		$	135,000


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,255		$	32,549
Accrued compensation		6,272			6,091
Accrued warranty		626			873
Due to related party		110			2,144
Other accrued expenses and deferred revenue		5,893			8,796
Current portion of long-term obligations		13			9
Current portion of accrued restructuring		2,940			2,837

Total current liabilities		49,109			53,299
Long-term liabilities:
Accrued restructuring		5,043			8,269
Other long-term obligations		1,520			1,350

Total liabilities		55,672			62,918

Stockholders’ equity:
Common stock, $0.001 par value, 30,000,000 shares authorized; 15,318,982 and 15,078,955 shares outstanding, net of 10,555 treasury shares, at June 30, 2008 and June 30, 2007, respectively		15			15
Additional paid-in capital		784,492			776,112
Accumulated other comprehensive income		1,277			1,064
Accumulated deficit		(700,389	)		(705,109	)

Total stockholders’ equity		85,395			72,082

Total liabilities and stockholders’ equity	$	141,067		$	135,000

See accompanying notes.

F-68

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended June 30,
	2008			2007			2006
	(In thousands, except per share data)

Net revenue:
Third parties	$	189,821		$	151,380		$	119,054
Related parties		18,273			61,375			43,890

Total net revenue		208,094			212,755			162,944
Cost of revenue:
Cost of revenue except for purchases from related parties		143,518			174,059			151,758
Purchases from related parties		991			491			2,726

Total cost of revenue		144,509			174,550			154,484

Gross profit		63,585			38,205			8,460
Operating expenses:
Research and development		28,325			25,231			23,471
Sales and marketing		16,735			15,261			13,236
General and administrative:
Third parties		18,238			22,663			15,701
Related parties		—			615			951
Amortization of intangibles		771			2,703			5,448
Restructuring		(164	)		1,511			1,912
Gain on disposal of property and equipment		(23	)		(527	)		(5,064	)
(Gain) loss on sale of subsidiary		(1,996	)		3,216			—

Total operating expenses		61,886			70,673			55,655

Income (loss) from operations		1,699			(32,468	)		(47,195	)
Interest and other income		4,100			2,292			2,787
Interest and other expense		(152	)		35			(10,284	)

Income (loss) before income taxes		5,647			(30,141	)		(54,692	)
Income tax provision		(927	)		(464	)		—

Net income (loss)	$	4,720		$	(30,605	)	$	(54,692	)

Basic net income (loss) per common share	$	0.31		$	(2.16	)	$	(5.03	)

Diluted net income (loss) per common share	$	0.31		$	(2.16	)	$	(5.03	)

Weighted-average number of shares used in computing:
Basic net income (loss) per common share		15,242			14,196			10,882

Diluted net income (loss) per common share		15,370			14,196			10,882

See accompanying notes.

F-69

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS)


												Accumulated
			Additional			Deferred						Other			Total
	Common		Paid-in			Stock			Accumulated			Comprehensive			Stockholders’
	Stock		Capital			Compensation			Deficit			Income (Loss)			Equity
	(In thousands, except share data)

Balance at June 30, 2005	$	10	$	668,058		$	(353	)	$	(619,445	)	$	5,478		$	53,748
Reclassification of deferred stock compensation to additional paid-in capital upon the adoption of SFAS 123(R)		—		(353	)		353			—			—			—
Issuance of 103,408 shares of common stock upon exercise of stock options		—		2,107			—			—			—			2,107
Issuance of 77,105 shares of common stock in connection with restricted stock units		—		—			—			—			—			—
Issuance of 39,149 shares of common stock in connection with employee stock purchase plan		—		409			—			—			—			409
Modification of warrants, net of issuance costs of $258		—		686			—			—			—			686
Issuance of common stock, net of issuance costs of $3,509		2		44,663			—			—			—			44,665
Issuance of common stock in connection with conversion of senior secured debentures		1		23,120			—			—			—			23,121
Stock-based compensation				4,452			—			—			—			4,452
Common stock withheld on exercise of restricted stock units for tax withholding		—		—			—			(367	)		—			(367	)
Comprehensive loss:
Unrealized gain on investments		—		—			—			—			461			461
Cumulative translation adjustment		—		—			—			—			(1,252	)		(1,252	)
Net loss		—		—			—			(54,692	)		—			(54,692	)

Comprehensive loss																(55,483	)

Balance at June 30, 2006		13		743,142			—			(674,504	)		4,687			73,338
Issuance of 23,667 shares of common stock upon exercise of stock options		—		363			—			—			—			363
Issuance of 151,619 shares of common stock in connection with restricted stock units		1		2			—			—			—			3
Issuance of 82,645 shares of common stock upon exercise of warrants		—		1,400			—			—			—			1,400
Issuance of 28,456 shares of common stock in connection with employee stock purchase plan		—		367			—			—			—			367
Issuance of 410,767 shares of common stock in connection with conversion of 8% senior convertible notes		—		4,986			—			—			—			4,986
Issuance of 719,670 shares of common stock, net of issuance costs of $1,267		1		18,743			—			—			—			18,744
Stock-based compensation		—		7,109			—			—			—			7,109
Comprehensive loss:
Unrealized gain on investments		—		—			—			—			10			10
Cumulative translation adjustment		—		—			—			—			(3,968	)		(3,968	)
Net actuarial gain		—		—			—			—			335			335
Net loss		—		—			—			(30,605	)		—			(30,605	)

Comprehensive loss																(34,228	)

Balance at June 30, 2007		15		776,112			—			(705,109	)		1,064			72,082
Issuance of 25,321 shares of common stock upon exercise of stock options		—		398			—			—			—			398
Issuance of 193,562 shares of common stock in connection with restricted stock units		—		—			—			—			—			—
Issuance of 31,383 shares of common stock in connection with employee stock purchase plan		—		382			—			—			—			382
Issuance of 482 shares in connection with Officer and Director Purchase Plan		—		8			—			—			—			8
Issuance of restricted stock units in connection with accrued compensation distribution		—		1,553			—			—			—			1,553
Stock-based compensation		—		6,039			—			—			—			6,039
Comprehensive loss:
Unrealized loss on investments		—		—			—			—			(31	)		(31	)
Cumulative translation adjustment		—		—			—			—			207			207
Net actuarial gain		—		—			—			—			37			37
Net income		—		—			—			4,720			—			4,720

Comprehensive income																4,933

Balance at June 30, 2008	$	15	$	784,492		$	—		$	(700,389	)	$	1,277		$	85,395

See accompanying notes.

F-70

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Year Ended June 30,
	2008			2007			2006
	(In thousands)

Operating Activities:
Net income (loss)	$	4,720		$	(30,605	)	$	(54,692	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on disposal of property and equipment		(23	)		(767	)		(5,064	)
Depreciation and amortization		3,476			2,360			5,565
Amortization of intangibles		769			2,698			5,448
Gain on investment in subsidiary		—			(223	)		—
Stock-based compensation		6,039			7,109			4,452
(Reversal of) provision for doubtful accounts and sales returns		(1,199	)		1,194			(2,538	)
Net cash used in sale of subsidiary		—			(19,557	)		—
Loss in connection with convertible notes modification		—			—			4,525
Non-cash interest expense		—			424			2,160
Write-down of excess and obsolete inventory		4,725			13,034			12,790
Changes in operating assets and liabilities:
Accounts receivable		7,115			(7,646	)		(10,727	)
Inventories		(4,806	)		(11,739	)		5,488
Other current assets		(327	)		8,813			16,828
Other assets		(173	)		331			(53	)
Due to/from related parties		(2,662	)		(10,595	)		10,364
Accounts payable		4,604			(1,685	)		8,127
Accrued compensation		908			3,312			(2,912	)
Accrued restructuring		(3,123	)		(3,462	)		(26,787	)
Accrued warranty		(247	)		(1,006	)		(3,521	)
Other accrued expenses and deferred revenues		(3,287	)		1,892			(12,053	)

Net cash provided by (used in) operating activities		16,509			(46,118	)		(42,600	)

Investing Activities:
Purchases of investments		(174,108	)		(418,704	)		(123,005	)
Maturities of investments		162,429			428,468			123,699
Decrease (increase) in restricted cash		(156	)		3,085			1,489
Investment in third parties		—			(1,250	)		—
Purchases of property and equipment		(3,542	)		(2,403	)		(2,508	)
Proceeds from sale of property and equipment		28			106			4,824
Net cash used in asset purchase		(2,139	)		—			—

Net cash provided by (used in) investing activities		(17,488	)		9,302			4,499

Financing Activities:
Payments on capital lease obligations		(8	)		—			(2,268	)
Payments in connection with convertible notes modification		—			—			(4,075	)
Proceeds from issuance of capital lease obligations with related party		—			637			—
Proceeds from issuance of common stock		787			20,869			47,181

Net cash provided by financing activities		779			21,506			40,838

Effect of exchange rate changes on cash		202			1,184			(585	)

Net increase (decrease) in cash and cash equivalents		2			(14,126	)		2,152
Cash and cash equivalents at beginning of period		14,837			28,963			26,811

Cash and cash equivalents at end of period	$	14,839		$	14,837		$	28,963

Supplemental Information:
Cash paid during the period for:
Interest expense	$	4		$	36		$	164
Income taxes	$	348		$	—		$	—
Non-cash investing and financing activities:
Issuance and modifications of warrants	$	—		$	—		$	686
Conversion of senior convertible notes into common stock	$	—		$	4,994		$	23,121
Investment in equity securities in exchange for equipment	$	—		$	—		$	658
Reduction in pension liability in connection with sale of subsidiary	$	—		$	2,122		$	—
Fixed asset purchases included in accounts payable	$	269		$	28		$	110
Pension liability recognized in accumulated other comprehensive income	$	37		$	335		$	—
Net issuance of restricted stock awards (restricted stock and restricted stock units)	$	4,311		$	4,124		$	2,812

See accompanying notes.

F-71

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	Description of Business and Summary of Significant Accounting Policies

The Company

Avanex Corporation (“the Company”, “we”, “us” and “our”) designs, manufactures and markets fiber optic-based products, known as photonic processors, which are designed to increase the performance of optical networks. The Company sells products to telecommunications system integrators and their network carrier customers. The Company was incorporated in October 1997 in California and reincorporated in Delaware in January 2000.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company balances have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Significant estimates made by management include revenue recognition, sales returns provision, bad debt provision, inventory write-downs, warranty provision, impairment of goodwill and other acquired intangible assets, restructuring expenses, tax valuation allowance, and litigation and contingency assessments.

Cash and Cash Equivalents and Short-Term Investments

Cash and cash equivalents consist of cash deposited in checking and money market accounts. They are recorded at market value.

Restricted cash is security for certain leasing arrangements.

The Company considers all other highly liquid investment securities to be short-term investments. All of our short-term investments are classified as available-for-sale securities and are carried at fair value, with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income in stockholders’ equity.

Interest, dividends, realized gains and losses and any other borrowing-related costs are included in interest and other income (expense). Realized gains and losses are recognized based on the specific identification method.

Fair Value of Financial Instruments

The Company evaluates the estimated fair value of financial instruments using available market information. The use of different market assumptions could have a negative effect on the estimated fair value amounts. The fair value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt approximates the carrying amount due to the relatively short maturity of these items.

Concentration of Credit and Other Risks

Financial instruments, which subject the Company to potential credit risk, consist of demand deposit accounts, money market accounts, short-term investments and accounts receivable. The Company maintains its demand deposit accounts, money market accounts and short-term investments primarily with three financial institutions. The Company invests its excess cash principally in debt securities.

F-72

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company sells its products primarily to large communications equipment vendors. The Company extends collection terms standard within the industry but does not require collateral from its customers. When the Company becomes aware, subsequent to delivery, of a customer’s potential inability to meet its payment obligations, the Company records a specific allowance for doubtful accounts. In the last four years, our uncollectible accounts experience has been insignificant. At June 30, 2008, we determined that an allowance was not required. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. This may be magnified due to the concentration of its sales to a limited number of customers. The Company has not experienced significant credit losses to date. Concentrations of credit risk exist to the extent of amounts presented in the financial statements.

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 currently adjusted standard basis (which approximates actual costs on a first-in, first-out basis).

The Company writes off the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines 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 the Company.

In estimating excess inventory, the Company used a range of six-month to twelve-month demand forecasts in fiscal 2008 and 2007. In addition, we assess inventory on a quarterly basis and write-down those inventories which are obsolete or in excess of our forecasted usage to their estimated realizable value. Our estimates of realizable value are based upon our analysis including, but not limited to, forecasted sales by product, expected product life cycle, product development plans and future demand requirements. Our marketing department plays a key role in our excess review process by providing updated sales forecasts, managing product rollovers and working with sub-contract manufacturing to maximize recovery of excess inventory.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, or two to four years for computer hardware and software except for enterprise resource planning software, three to five years for production and engineering equipment, and five years for office equipment, furniture and fixtures, and enterprise resource planning software. The Company amortizes capital leases and leasehold improvements using the straight-line method over the lesser of the assets’ estimated useful lives or remaining lease terms (typically two to five years).

Goodwill and Intangibles, Net

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. The first step screens for impairment, while the second step, measures the impairment, if any. SFAS 142 requires impairment testing based on reporting units. Management believes that we operate in one segment, which we consider our sole reporting unit. Therefore, goodwill is tested for impairment at the enterprise level. The fair value of the enterprise, which was determined based on our market capitalization at June 30, 2008 and 2007, exceeded its carrying value, and goodwill was determined not to be impaired at June 30, 2008 and 2007. Goodwill at June 30, 2008 and 2007 was $9.4 million.

F-73

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We periodically review our intangible assets for impairment and assess whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. This could occur when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated as the excess of the asset’s carrying value over its estimated fair value. Changes to estimated useful lives would impact the amount of amortization expense recorded in earnings.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” When events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the Company recognizes such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. We also periodically reassess the estimated remaining useful lives of our long lived assets. As of June 30, 2008, we determined there was no impairment of long-lived assets.

Restructuring Costs

During the past few years, the Company has 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 these estimates accurately reflect the costs of the restructuring programs, actual results may differ, thereby requiring the Company to record additional provisions or reverse a portion of such provisions.

Pension Benefits

For defined benefit pension plans, liabilities and prepaid expenses are determined using the Projected Unit Credit Method (with projected final salary), and recognizing actuarial gains and losses in excess of more than 10% of the present value of the defined benefit obligation or 10% of the fair value of any plan assets over the expected average remaining working lives of the employees participating in the plan.

The Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of Financial Accounting Standard Board (“FASB”) Statements No. 87, 88, 106, and 132(R)” in fiscal 2007. Upon adoption, the Company recorded an adjustment of $0.3 million to the ending balance of accumulated other comprehensive income for pension benefit plan.

Contingency Accruals

The Company evaluates 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, the Company accrues 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, the Company reassesses the potential liability related to its pending claims and litigation and may revise its estimates.

F-74

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, the Company has not incurred any costs related to claims under these provisions, and no amounts have been accrued in the accompanying financial statements.

Foreign Currency

The functional currencies of the Company’s foreign subsidiaries are their respective local currencies. Accordingly, all assets and liabilities of the foreign operations are translated to U.S. dollars at current period end exchange rates, and revenues and expenses are translated to U.S. dollars using weighted average exchange rates in effect during the period. The gains and losses from the translation of these subsidiaries’ financial statements into the U.S. dollar are recorded directly into a separate component of stockholders’ equity under the caption “Accumulated Other Comprehensive Income.” Currency transaction gains and losses are included in the Company’s results of operations.

Accumulated Other Comprehensive Income

SFAS No. 130 “Reporting Comprehensive Income” (“FAS 130”) requires that all items required to be recognized under accounting standards as components of comprehensive income, including unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments be reported in the consolidated financial statements. As a result, the Company has reported comprehensive income (loss) within the accompanying Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss).

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, the product has been shipped, risk of loss has been transferred, collectibility is reasonably assured, fees are fixed or determinable, and there are no uncertainties with respect to customer acceptance. In addition, when the Company approves sales returns or becomes aware of disputed sales invoices, the Company records an allowance for estimated sales returns and price adjustments. The Company generally does not accept product returns from customers; however, the Company does sell its products under warranty. Specific warranty terms and conditions vary by customer and region in which the Company does business; however, the warranty period is generally one year.

Stock-Based Compensation

The Company grants stock options and stock purchase rights for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. We adopted SFAS No. 123 (revised 2004), “Share-Based Payment (SFAS 123(R)), effective July 1, 2005. SFAS 123(R) requires the recognition of the fair value of stock compensation in net income. We recognize the stock compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. For more information, please see Note 12 to Consolidated Financial Statements.

Equity instruments granted to consultants are accounted for under the fair value method using the Black-Scholes option-pricing model and are subject to periodic revaluations over their vesting terms. The expense is recognized as the instruments vest.

Research and Development Costs

Research and development costs are expensed as incurred.

F-75

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided to reduce net deferred tax assets to an amount that is more likely than not to be realized.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We adopted FIN 48 effective for our fiscal year beginning July 1, 2007 and the adoption did not have a material impact on our consolidated balance sheet and statement of operations for fiscal 2008.

Earnings per Share

Basic net income (loss) per share is calculated using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common equivalent shares outstanding during the period using the treasury stock method. Common equivalent shares consist of stock options issued to employees under employee stock option plans and warrants.

Following the close of market 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 these consolidated financial statements for all periods presented reflect the reverse stock split.

Recent Accounting Pronouncements

In September 2006, the 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 is effective for our fiscal year beginning July 1, 2008. We are currently evaluating the impact of the adoption of Statement 157 on our consolidated balance sheet and statement of operations.

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 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. Statement 159 is effective for our fiscal year beginning July 1, 2008. The adoption of Statement 159 will not have a material impact on our consolidated balance sheet and statement of operations.


Note 2.	Disposition

On February 28, 2007, the Company entered into a share purchase agreement with Global Research Company, a société à responsibilité limitée incorporated under the laws of France (“GRC”), and Mr. Didier Sauvage, an individual and former employee of the Company (together with GRC, the “Purchasers”), pursuant

F-76

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to which the Company sold ninety percent (90%) of the share capital and voting rights of its wholly owned subsidiary, Avanex France, a société anonyme incorporated under the laws of France, which owned the Company’s semiconductor fabs and associated product lines located in Nozay, France, to the Purchasers for the nominal amount of €1.00. The sale closed on April 16, 2007. The Purchasers changed the name of Avanex France to “3S Photonics” following the closing.

The sale involved the divestiture of the Company’s laser, terrestrial and submarine pumps and Fiber Bragg Grating product lines. The Company has continued to operate its optical interfaces (OIF) business and optical fiber amplifiers and raman amplifiers business, which were transferred to a new wholly owned subsidiary of the Company in France prior to the closing.

The sale resulted in a loss to the Company of approximately $3.2 million primarily as a result of the approximately $24.9 million cash paid, transaction expenses incurred of approximately $1.0 million, and transfer of approximately $4.3 million of assets, partially offset by approximately $15.9 million of liabilities written-off, the assumption of approximately $6.7 million of liabilities by 3S Photonics, the write-off of cumulative translation gain related to Nozay of approximately $3.3 million, and a reduction of the pension obligation of approximately $1.1 million related to the sale.

In 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 the 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, except for one customer, Alcatel-Lucent, for which 3S Photonics had the right to extend the term of the Global Distributor Agreement for an additional year. 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 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.

F-77

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Restructuring

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


	June 30,
	2008			2007

Accrued facility closure costs	$	7,983		$	11,106
Less current portion		(2,940	)		(2,837	)

Non-current portion	$	5,043		$	8,269

Accrued Restructuring Liability Related to Acquisitions

In fiscal 2004, the Company acquired the optical components businesses of Alcatel and Corning. As part of the acquisitions, the Company recorded restructuring liabilities at July 31, 2003 with a fair value of $64.1 million relating to future workforce reductions, which were included in the purchase price of the optical components businesses of Alcatel and Corning. During fiscal 2007, the Company made cash payments to participants and to third parties who assumed liabilities of the remaining $3.4 million relating to the 2003 workforce reduction.

Other Restructuring

Over the past several years, the Company has implemented various restructuring programs to realign resources in response to the changes in the industry and customer demand, and the Company continues to assess its current and future operating requirements accordingly. The Company’s restructuring programs include centralizing global manufacturing at its operations center in Thailand.

During fiscal 2006, the Company approved a work force reduction of 41 employees due to the re-alignment of our work force as a result of the transfer of most of our manufacturing operations to third-party contract manufacturers. The reduction in force was completed in October 2006. The costs associated with this restructuring consisted primarily of severance costs of $1.7 million.

The restructurings have resulted and will result in, among other things, a significant reduction in the size of the Company’s workforce, consolidation of its facilities and increased reliance on outsourced, third-party manufacturing.

The following table summarizes changes in accrued restructuring for fiscal 2008 and 2007, excluding accruals related to the acquisitions noted above (in thousands):


	Accrued		Additional		Cash						Accrued
	Liability at		Accruals		Payments			Recovery			Liability at
	June 30,		During		During			During			June 30,
	2007		Fiscal 2008		Fiscal 2008			Fiscal 2008			2008

Workforce reduction, fiscal 2004	$	—	$	—	$	—		$	—		$	—
Workforce reduction, fiscal 2005		11		—		(11	)		—			—
Workforce reduction, fiscal 2006		—		—		—			—			—
Abandonment of excess leased facilities		11,095		615		(2,948	)		(779	)		7,983

Total	$	11,106	$	615	$	(2,959	)	$	(779	)	$	7,983

F-78

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Accrued		Additional		Cash						Accrued
	Liability at		Accruals		Payments			Recovery			Liability at
	June 30,		During		During			During			June 30,
	2006		Fiscal 2007		Fiscal 2007			Fiscal 2007			2007

Workforce reduction, fiscal 2004	$	542	$	—	$	(542	)	$	—		$	—
Workforce reduction, fiscal 2005		2,828		320		(3,135	)		(2	)		11
Workforce reduction, fiscal 2006		62		—		(60	)		(2	)		—
Abandonment of excess leased facilities		12,708		1,278		(2,803	)		(88	)		11,095

Total	$	16,140	$	1,598	$	(6,540	)	$	(92	)	$	11,106


Note 4.	Net Income (Loss) per Share

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


	Year Ended June 30,
	2008		2007			2006

Net income (loss)	$	4,720	$	(30,605	)	$	(54,692	)

Shares used to compute basic net income (loss) per share		15,242		14,196			10,882
Potentially dilutive shares used to compute net income per share on a diluted basis		128		—			—

Shares used to compute diluted net income (loss) per share		15,370		14,196			10,882

Net income (loss) per share:
Basic	$	0.31	$	(2.16	)	$	(5.03	)

Diluted	$	0.31	$	(2.16	)	$	(5.03	)

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:


	Balance at June 30
	2008		2007		2006

Employee stock options		811,080		887,175		842,804
8% convertible notes		—		—		410,767
Warrants attached to 8% convertible notes		—		529,201		578,512
Warrants granted to landlord		4,000		4,000		4,000
Warrants attached to March 2006 equity securities offering		489,315		489,315		481,500
Warrants attached to March 2007 equity securities offering		179,917		179,917		—

		1,484,312		2,089,608		2,317,583


Note 5.	Consolidated Balance Sheet Detail

Cash, 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

F-79

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to maintain safety and liquidity. To date, the Company has not experienced any significant losses on its debt investments.

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

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


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

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

June 30, 2007
Cash	$	14,661	$	—	$	—		$	14,661
Cash Equivalents — Money Market Funds		176		—		—			176
Restricted cash — Certificates of Deposit and United States Government Agencies		3,620		—		—			3,620
Short-term Investments:
Certificates of Deposit		11		—		—			11
Commercial Paper		17,060		—		(1	)		17,059
United States Government Agencies		4,019		—		(5	)		4,014
Corporate Notes		3,272		1		—			3,273
Corporate Bonds		2,580		—		(9	)		2,571
Foreign Debt Securities		2,013		1		—			2,014

Subtotal, short-term investments		28,955		2		(15	)		28,942

Total cash, cash equivalents and short-term investments	$	47,412	$	2	$	(15	)	$	47,399

F-80

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inventory

Inventories, net, consist of the following (in thousands):


	June 30,
	2008		2007

Raw materials	$	7,981	$	4,781
Work-in-process		360		591
Finished goods		7,638		9,816

	$	15,979	$	15,188

The Company recorded charges to cost of revenue of $4.7 million for excess and obsolete inventory in fiscal 2008, $12.9 million in fiscal 2007, and $12.8 million in fiscal 2006. The write-off was primarily due to lower demand for certain products and lower expected usage of previously purchased inventory. Management did not believe it could fully recover the purchase price of this inventory in the future.

The Company sold inventory previously written-off with original cost totaling $2.9 million in fiscal 2008, $1.2 million in fiscal 2007 and $0.2 million in fiscal 2006. The majority of this inventory sold in each year had been written-off in a prior year. As a result, cost of revenue associated with the sale of this inventory was zero.

Other Current Assets

Other current assets consist of the following (in thousands):


	June 30,
	2008		2007

VAT receivable and research tax credit receivable	$	2,424	$	1,213
Prepaid insurance		305		493
Prepaid rent		—		10
Billings to contract manufacturers		2,714		3,302
Prepaid expenses and other assets		1,043		698

	$	6,486	$	5,716

Property and Equipment

Property and equipment consist of the following (in thousands):


	June 30,
	2008			2007

Computer hardware and software	$	9,893		$	9,217
Production and engineering equipment		39,813			34,537
Office equipment, furniture and fixtures		1,360			971
Leasehold improvements		1,852			1,791

Total acquisition cost		52,918			46,516
Accumulated depreciation and amortization		(45,229	)		(40,616	)

Net book value	$	7,688		$	5,900

F-81

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s product warranty accrual for fiscal 2008, fiscal 2007 and fiscal 2006 are as follows (in thousands):


	Years Ended June 30,
	2008			2007			2006

Balance at beginning of year	$	873		$	1,799		$	5,268
Accrual for sales during the year		197			1,334			1,826
Cost of warranty repair		(444	)		(906	)		(877	)
Change in estimate and expiration for prior provisions		—			(1,354	)		(4,418	)

Balance at end of year	$	626		$	873		$	1,799

During fiscal 2007, the Company determined that the pattern for replacement as opposed to repair had shifted resulting in decreases to previous estimates for product warranty costs.

Other Accrued Expenses and Deferred Revenue

Other accrued expenses and deferred revenue consist of the following (in thousands):


	June 30,
	2008		2007

Accrued escrow agreement	$	—	$	2,700
Professional services		1,243		1,899
Other accruals		2,138		1,196
Taxes — foreign income, sales & use, and other taxes		1,511		843
Contract manufacturer contingent liability		320		981
Deferred revenue		442		508
Building deposits owed to third parties		97		439
Accrued severance		142		230

Total	$	5,893	$	8,796

Accumulated Other Comprehensive Income

Accumulated other comprehensive income is comprised of the following (in thousands):


	June 30,
	2008			2007

Unrealized loss on investments	$	(44	)	$	(13	)
Cumulative translation adjustment		949			742
Net actuarial gain		372			335

Total	$	1,277		$	1,064

F-82

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 6.	Other Intangibles

The following table reflects the carrying amount of intangible assets at June 30, 2008 and June 30, 2007 (in thousands):


			Net					Net							Net
	Weighted-		Carrying					Carrying							Carrying
	Average		Amount,		Less Fiscal			Amount,				Less Fiscal			Amount,
	Life, in		June 30,		2007			June 30,				2008			June 30,
	Quarters		2006		Amortization			2007		Acquisition		Amortization			2008

Purchased technology		12	$	3,034	$	(2,475	)	$	559	$	300	$	(659	)	$	200
Supply agreement		—		136		(136	)		—		—		—			—
Other		8		76		(76	)		—		226		(112	)		114

			$	3,246	$	(2,687	)	$	559	$	526	$	(771	)	$	314

The amortization of other intangible assets is expected to be $314,000 in fiscal 2009.


Note 7.	Related Party Transactions

On July 31, 2003, Alcatel (now known as Alcatel-Lucent) was issued 28% of the Company’s common stock and Corning was issued 17% of the Company’s common stock on a post-transaction basis. On October 29, 2007, the Pirelli Group acquired all the shares of the Company’s common stock then held by Alcatel-Lucent. As of June 30, 2008, Pirelli and Corning owned shares representing 12% and zero percent, respectively, of the outstanding shares of Avanex common stock. The Company sells products to and purchases raw materials and components from the Pirelli Group and Alcatel-Lucent in the regular course of business. Additionally, Alcatel-Lucent and Corning provided certain administrative and other transitional services to the Company.

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


	Year Ended June 30,
	2008*		2007**		2006***

Related party transactions
Sales to related parties	$	18,273	$	61,375	$	43,890
Purchases from/services provided to related parties in cost of revenue		991		491		2,726
Administrative and transitional services purchased from/provided to related parties; fiscal 2007 and 2006 amounts include facilities rent credits		—		615		951
Royalty income		—		—		190


*		On October 29, 2007, the Pirelli Group acquired all the shares of the Company’s common stock held by Alcatel-Lucent. Thus, related party transactions for the year ended June 20, 2008 include Alcatel-Lucent through October 29, 2007, and the Pirelli Group from October 20, 2007 to June 30, 2008.

**		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 both Alcatel and Lucent transactions in the related party disclosure beginning December 1, 2006.

***		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 fiscal 2006.

F-83

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	June 30,
	2008*		2007**

Due from related parties	$	85	$	14,381
Due to related parties	$	110	$	2,144


*		On October 29, 2007, the Pirelli Group acquired all the shares of the Company’s common stock held by Alcatel-Lucent. Thus, as of June 30, 2008, the Pirelli Group is a related party, and as of June 30, 2007, Alcatel-Lucent is a related party.

**		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 both Alcatel and Lucent transactions in the related party disclosure beginning December 1, 2006.

Receivables due from related parties at June 30, 2008 are amounts owed by the Pirelli Group contractually payable to the Company.


Note 8.	Commitments and Contingencies

Operating Leases

In September 1999 and April 2000, the Company entered into operating leases for its corporate headquarters and manufacturing facility. Upon the expiration of each lease in October 2009 and April 2010, the Company has an option to extend the respective lease term for an additional five-year period. In July 2004, the Company assumed certain operating leases in Europe in connection with its acquisitions. The Company also has an operating lease for certain facilities in Newark, California which the Company no longer occupies. The remaining lease obligation is included in accrued restructuring costs.

Future minimum lease payments under non-cancelable operating leases having initial terms in excess of one year as of June 30, 2008 are as follows (in thousands):


			Amount Included in
	Total Cash		Accrued Restructuring			Sublease			Future
	Obligation		Liability			Payments			Expense

Years ending June 30,
2009	$	5,779	$	(2,940	)	$	(1,012	)	$	1,827
2010		4,631		(2,690	)		(695	)		1,246
2011		3,114		(2,353	)		(80	)		681
2012		182		—			—			182
2013		—		—			—			—
Remaining years		—		—			—			—

Total minimum lease payments	$	13,706	$	(7,983	)	$	(1,787	)	$	3,936

Amounts shown in the above table are net of sublease income. The Company’s rental expense under operating leases was $2.8 million, $2.5 million and $7.3 million for the years ended June 30, 2008, 2007 and 2006, respectively.

Contingencies

From time to time, in the normal course of business, Avanex indemnifies certain customers with whom it enters into contractual relationships. Avanex has agreed to hold the other party harmless against third party claims that Avanex’s products, when used for their intended purpose, infringe the intellectual property rights of

F-84

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, the Company has not incurred any costs related to claims under these provisions, and no amounts have been accrued in the accompanying financial statements.

In addition, from time to time, Avanex is 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 Avanex in the form of letters and other forms of communication. Avanex does not believe that any of these legal proceedings or claims is likely to have a material adverse effect on its 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 Avanex’s future results of operations, cash flows, or financial position 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 have filed amended master allegations and amended complaints and moved for class certification in the six focus cases, which the defendants in those cases have opposed. 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.

F-85

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Section 16(b) Demand

On October 3, 2007, a purported Avanex stockholder 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.


Note 9.	Pension and Post-Retirement Benefits Other Than Pension Plans

With the acquisition of the optical components business of Alcatel, Avanex assumed a defined benefit pension plan covering the employees in France. The benefit obligation recorded on acquisition (project benefit obligation) was actuarially determined. The Company has not funded any of the benefit obligation as of June 30, 2008 and 2007.

Adoption of SFAS No. 158

SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position using prospective application. SFAS No. 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through comprehensive income.

The Company adopted SFAS No. 158 in fiscal 2007. Upon adoption, the Company recorded an adjustment of $0.3 million to the ending balance of accumulated other comprehensive income for pension benefit plan.

The following table provides the incremental effect of applying SFAS No. 158 on the Consolidated Balance Sheets as of June 30, 2007 for the pension plan:


	Before		Adjustments			After
	Application		Due to			Application
	of SFAS		SFAS			of SFAS
	No. 158		No. 158			No. 158
	(In thousands)

Pension liability	$	560	$	(335	)	$	225
Total liabilities	$	63,253	$	(335	)	$	62,918
Accumulated other comprehensive income (loss)	$	729	$	335		$	1,064
Total stockholders’ equity	$	71,747	$	335		$	72,082

F-86

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pension Benefit Plan

The following table provides information about changes in the benefit obligation and amounts recognized on the Consolidated Balance Sheets and in accumulated other comprehensive income:


	Pension			Pension
	Benefits			Benefits
	2008			2007
	(In thousands)

Change in benefit obligation:
Beginning balance	$	225		$	1,062
Service cost		13			69
Interest cost		12			51
Actuarial loss (gain)		(68	)		(9	)
Curtailment/settlement		—			(998	)
Exchange rate changes		41			50

Ending balance	$	223		$	225

Amounts recognized on the consolidated balance sheets consist of:
Other long term obligations	$	223		$	225
Accumulated other comprehensive income		427			335

Net amount recognized	$	650		$	560

The change in accumulated other comprehensive income includes the actuarial gain/loss, as well as foreign exchange gain/loss on accumulated other comprehensive income for $55,000 as of June 30, 2008.

Components of net periodic benefit (gain)/cost for pension benefits were as follows:


	Year Ended June 30,
	2008			2007
	(In thousands)

Pension benefit:
Service cost	$	13		$	69
Interest cost		12			51
Amortization of actuarial gain		(31	)		—
Settlement associated with sale of subsidiary		—			(998	)
Effect of settlement on actuarial gain		—			(1,371	)

Net periodic benefit (gain) cost	$	(6	)	$	(2,249	)

Contributions and Estimated Future Benefit Payments

To date, the Company has made no contribution to its pension plan. The Company does not have significant statutory or contractual funding requirements for the qualified defined benefit plan.

F-87

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid:


	Pension
	Benefit
	(In thousands)

Year
2009 — 2013	$	—
2014 — 2018		209
2019		97

Total	$	306

Weighted Average Assumptions Used

Weighted average assumptions used to determine benefit obligations at June 30, 2008 and June 30, 2007 were as follows:


	Pension Benefits
	2008			2007

Discount rate		5.20	%		4.65	%
Rate of compensation increase		3.5	%		2.5	%
Expected residual active life (in years)		11.0			9.3

Assumed discount rates are used in measurements of the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension cost. Management makes estimates of discount rates to reflect the rates at which the pension benefits could be effectively settled. In making those estimates, management evaluates rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits.


Note 10.	Financing Arrangements

Senior Convertible Notes and Capital Lease Obligations

Senior Convertible Notes

On May 19, 2005, the Company closed a private placement of $35 million of the Company’s 8.0% senior secured convertible notes and warrants to purchase common stock. On November 8, 2005, certain terms of the May 2005 convertible note financing were amended pursuant to Amendment Agreements entered into between Avanex and each holder of such notes, and the Company issued amended and restated notes and amended and restated warrants.

During fiscal 2006, the amortization of prepaid interest, accretion of notes discount and the increase in the valuation of the Company’s warrants prior to their registration totaled $3.8 million. Unaccreted discount was $1.0 million at June 30, 2006.

During fiscal 2006, holders of $29.5 million of the outstanding Amended and Restated Notes converted to common stock. At June 30, 2006, the notes balance was $5.5 million at face value, and $4.6 million net of unaccreted discount.

During fiscal 2007, holders of the remaining $5.5 million of the Amended and Restated Notes converted to common stock. Accordingly, as of June 30, 2008, the Company does not have any outstanding Notes.

F-88

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Capital Lease Obligations

Payments due under capital lease agreements for equipment as of June 30, 2008 are as follows (in thousands):


	Total Cash
	Obligation

Year ending June 30, 2009	$	15
Less: Amounts representing interest		(2	)

Present value of net minimum lease payments	$	13

The Company leases certain equipment and other fixed assets under capital lease agreements. The assets and liabilities under the capital leases are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under capital leases are amortized over the shorter of the lease term or useful life of the assets. At June 30, 2007 and 2008, the Company had minimal capital lease obligations.


Note 11.	Stockholders’ Equity

Following the close of market 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 the consolidated financial statements reflect the reverse stock split.

Securities Purchase Agreements

On March 6, 2006, the Company entered into a Securities Purchase Agreement with certain buyers who were parties to the agreement for the sale of 1.6 million registered shares of common stock at a price per share of $30.00 for an aggregate purchase price of approximately $48.1 million. The investors also received warrants to purchase up to an aggregate of 0.5 million shares of common stock at an exercise price of $40.95 per share, subject to adjustment for antidilution, exercisable on or before March 9, 2010.

The number of shares deliverable upon exercise of the warrants and the exercise price of the warrants are each subject to adjustment whenever we issue or sell certain of our equity securities for a consideration per share less than a price equal to the applicable exercise price of the warrants. In connection with the Company’s March 1, 2007 financing, the holders of such warrants 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.

The net proceeds from the sale of the shares of common stock were $44.7 million, after deducting a placement fee and the Company’s offering expenses. In addition, if the warrants issued to the investors are exercised in full for cash, the Company will receive an additional $18.5 million in net proceeds.

On March 1, 2007, the Company sold 719,670 shares of common stock of Avanex at a price per share of $27.79 for an aggregate purchase price of $20 million. In connection with the sale, the investor received a warrant to purchase up to an additional 179,918 shares of common stock. The warrant is exercisable at an exercise price of $32.18 per share through March 1, 2011.

F-89

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shares Reserved

Common stock reserved for future issuance is as follows:


	June 30,
	2008

Stock Option:
Options outstanding		909,126
Restricted stock units outstanding		235,260
Reserved for future grants		1,525,609
Employee stock purchase plan		176,456
Officer and director share purchase plan		132,851
Warrants		673,232

Total shares reserved for future issuance		3,652,534


Note 12.	Stock-based Compensation

Stock Option and Stock Rights Plans

The Company adopted the 1998 Stock Plan, which has been amended (the “Option Plan”), under which officers, employees, directors, and consultants may be granted options to purchase shares of the Company’s common stock. The Option Plan permits options to be granted at an exercise price of not less than the fair value on the date of grant as determined by the Board of Directors. Options are generally granted with ten-year terms and four-year vesting periods.

The authorized shares under the Option Plan automatically increase each July 1 by an amount equal to the lesser of (i) 400,000 shares, (ii) 4.9% of the Company’s outstanding shares, or (iii) a smaller amount determined by the Company’s Board of Directors. A total of 1,460,056 shares of the Company’s common stock have been reserved for future issuance under the Option Plan as of June 30, 2008.

The Option Plan also permits the Company to grant restricted stock units to employees. During fiscal 2008, the Company granted restricted stock units to employees that vest over periods of two to four years.

In January 2000, the Company adopted the 1999 Director Option Plan, which has been amended (the “Director Plan”). Non-employee directors are entitled to participate in the Director Plan. The Director Plan provides for an automatic initial grant of an option to purchase 5,333 shares of Avanex common stock to each non-employee director on the date when a person first becomes a non-employee director. Each initial option grant will vest as to 25% of the shares subject to the option on each anniversary of its date of grant. After each initial option grant, each non-employee director will automatically be granted an option to purchase 1,333 shares of Avanex common stock each year on the date of the Company’s annual stockholder’s meeting. These options will vest and become fully exercisable on the anniversary of the date of grant. Option grants generally have a term of 10 years. The exercise price of all options will be the fair market value per share of Avanex common stock on the date of grant. After the initial grant, each non-employee director will automatically be granted 667 Restricted Stock Units each year on the date of the Company’s annual stockholders’ meeting. The Restricted Stock Unit grants will fully vest and become 100% payable on the anniversary of the date of grant.

The Director Plan also provides for automatic annual increases each July 1, by an amount equal to the lesser of (i) 10,000 shares, (ii) 0.25% of the outstanding shares on that date, or (iii) a smaller amount determined by the Company’s Board of Directors. A total of 40,220 shares of the Company’s common stock have been reserved for future issuance under the Director Plan as of June 30, 2008.

F-90

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 — Through December 31, 2007, the Company’s expected term was based on the SEC Staff Accounting Bulletin 107 simplified method. Beginning January 1, 2008, the Company has estimated the time-to-exercise based on historical exercise patterns of employee and director populations.

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

Expected Dividend — The Black-Scholes valuation model calls for a single expected dividend yield as an input. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends 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 terms for which interest rates are 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 years ended June 30, 2008 and 2007 was estimated using the following weighted-average assumptions:


	Year Ended June 30,
	2008			2007			2006

Option Plan Shares:
Expected term (in years)		6.06			6.25			6.25
Volatility		76.2	%		77.0	%		80.0	%
Expected dividend		0	%		0	%		0	%
Risk-free interest rate		3.62	%		4.70	%		4.63	%
Weighted-average fair value	$	15.50		$	18.66		$	21.67
ESPP Shares:
Expected term (in years)		1.00			1.00			1.00
Volatility		64.8	%		79.0	%		79.5	%
Expected dividend		0	%		0	%		0	%
Risk-free interest rate		3.07	%		4.93	%		4.31	%
Weighted-average fair value	$	12.08		$	12.86		$	11.99

F-91

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Compensation Expense

The following table summarizes the Company’s stock-based compensation expense:


	Year Ended June 30,
	2008		2007		2006

Cost of sales	$	1,051	$	1,110	$	422
Research and development		2,097		2,292		1,321
Sales and marketing		884		854		451
General and administrative		2,007		2,853		2,258

Total stock-based compensation expense	$	6,039	$	7,109	$	4,452

At June 30, 2008, 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 $9.6 million, net of estimated forfeitures of $4.2 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 2.7 years and will be adjusted for subsequent changes in estimated forfeitures.

Stock Option Activity

The Company issues new shares of common stock upon exercise of stock options. The following is a summary of option activity for Avanex’s stock option plans:


						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise		Contractual		Value, in
	Shares			Price		Term in Years		Thousands

Outstanding at July 1, 2005		1,309,332		$	76.24		4.3	$	2,010
Granted		177,286		$	26.42
Exercised		(103,408	)	$	20.36
Forfeitures and cancellations		(540,406	)	$	75.82

Outstanding at June 30, 2006		842,804		$	72.88		7.6	$	1,986
Granted		228,170		$	25.80
Exercised		(23,667	)	$	15.38
Forfeitures and cancellations		(160,132	)	$	68.32

Outstanding at June 30, 2007		887,175		$	63.13		6.6	$	1,889
Granted		216,436		$	22.47
Exercised		(25,321	)	$	15.71
Canceled		(169,164	)	$	51.01

Outstanding at June 30, 2008		909,126		$	57.02		5.1	$	269

Vested and expected to vest at June 30, 2008		849,273		$	59.39		5.0	$	240

Exercisable at June 30, 2008		569,840		$	76.62		4.1	$	136

F-92

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Number						Number
	Outstanding		Average		Weighted		Exercisable,		Weighted
	As of		Remaining		Average		As of		Average
	June 30,		Contractual		Exercise		June 30,		Exercise
Range of Exercise Prices	2008		Term, in Years		Price		2008		Price

$5.85 — $16.50		98,046		6.72	$	13.76		53,550	$	13.96
$16.51 — $23.85		90,359		8.37	$	20.62		23,995	$	20.36
$24.15 — $24.15		2,366		9.22	$	24.15		0	$	0.00
$24.60 — $24.60		169,641		3.93	$	24.60		33,609	$	24.60
$25.20 — $29.70		95,793		7.99	$	27.81		34,958	$	27.93
$30.90 — $34.80		98,234		1.73	$	34.15		86,023	$	34.48
$34.95 — $43.20		91,869		6.20	$	39.89		77,651	$	39.55
$44.25 — $59.25		122,443		5.05	$	54.48		119,679	$	54.65
$60.00 — $87.75		91,746		3.63	$	71.37		91,746	$	71.37
$96.90 — $2,088.75		48,629		2.04	$	442.09		48,629	$	442.09

		909,126		5.13	$	57.02		569,840	$	76.62

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. During the years ended June 30, 2008, 2007 and 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $274,000, $338,000 and $915,000, respectively. Intrinsic value was determined as of the date of option exercise.

Under the Option Plan, the Company may also grant share purchase rights either alone, in addition to, or in tandem with other awards granted under the Option Plan and/or cash awards granted outside the Option Plan. Exercise of these share purchase rights are made pursuant to restricted stock purchase agreements containing provisions established by the Board of Directors. These provisions may give the Company the right to repurchase the shares at the original sales price. This right expires at a rate determined by the Board of Directors, generally at a rate of 25% after one year and 1/48 per month thereafter. There were 1,800 share purchase rights issued in the year ended June 30, 2006, and there were no share purchase rights issued in the years ended June 30, 2008 and 2007. As of June 30, 2008, 2007 and 2006, no shares were subject to repurchase.

The weighted-average fair value of stock options granted during fiscal 2008, 2007 and 2006 were $15.50, $18.66 and $21.67 per share, respectively.

F-93

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Stock Unit Activity

The Company issues new shares of common stock upon the vesting of restricted stock units. The following is a summary of activity for Avanex’s restricted stock unit awards granted under its option plans:


						Weighted-
				Weighted-		Average		Aggregate		Weighted
				Average		Remaining		Intrinsic		Average
	Number			Exercise		Contractual		Value, in		Grant Date
	of Shares			Price		Term in Years		Thousands		Fair Value

Outstanding at July 1, 2005		—
Awarded		395,217		$	0.015
Released		(77,105	)	$	0.015
Forfeited		(46,886	)	$	0.015

Outstanding at June 30, 2006		271,226		$	0.015		2.5	$	7,154	$	26.83
Awarded		213,560		$	0.015
Released		(151,619		$	0.015
Forfeited		(52,568	)	$	0.015

Outstanding at June 30, 2007		280,599		$	0.015		1.3	$	7,575	$	24.60
Awarded		217,994		$	0.015					$	26.03
Released		(193,562		$	0.015					$	22.27
Forfeited		(69,771	)	$	0.015					$	24.62

Outstanding at June 30, 2008		235,260		$	0.015		1.5	$	3,877	$	25.37

Vested and expected to vest at June 30, 2008		200,032		$	0.015		1.4	$	3,296

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. During the years ended June 30, 2008, 2007 and 2006, the aggregate intrinsic value of restricted stock units vested under the Company’s stock option plans was $4.3 million, $4.1 million and $2.8 million, respectively. Intrinsic value was determined as of the date of restricted stock unit release.

1999 Employee Stock Purchase Plan

In January 2000, the Company adopted the 1999 Employee Stock Purchase Plan (the “Stock Purchase Plan”) for its employees. The Stock Purchase Plan permits participants to purchase the Company’s common stock through payroll deductions of up to 10% of the participant’s compensation. The maximum number of shares a participant may purchase during each offering period is 200 shares. The price of common stock purchases will be 85% of the lower of the fair market value at the beginning of the offering period and the ending of the offering period.

The Stock Purchase Plan provides for automatic annual increases each July 1, to shares reserved for issuance by an amount equal to the lesser of (i) 50,000 shares, (ii) 1% of the outstanding shares on that date, or (iii) a smaller amount determined by the Company’s Board of Directors. A total of 176,456 shares of the Company’s common stock have been reserved for future issuance under the Stock Purchase Plan as of June 30, 2008.

F-94

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Employee Stock Purchase Plan (“ESPP”) Information

In connection with our ESPP, the following shares were issued during the years ended June 30, 2008, 2007 and 2006:


	Year Ended June 30,
	2008		2007		2006

Number of shares issued		31,383		28,456		39,149
Weighted-average purchase price	$	12.08	$	12.86	$	11.99

During the years ended June 30, 2008, 2007 and 2006, the aggregate intrinsic value of shares purchased under the Company’s ESPP was $182,000, $326,000 and $143,000, respectively.

Officer and Director Share Purchase Plan

In April 2008, the Company adopted the Officer and Director Share Purchase Plan (“ODPP”) for its executive officers and directors. The ODPP permits participants to purchase shares of the Company’s common stock at fair market value in lieu of salary or, in the case of directors, retainer fees. Eligible individuals will voluntarily participate in the ODPP by authorizing payroll deductions or, in the case of directors, deductions from retainer fees for the purpose of purchasing Avanex shares. Elections to participate in the ODPP may only be made during open trading windows under the Company’s insider trading policy when the participant does not otherwise possess material non-public information concerning the Company. The Board of Directors has authorized 133,333 shares to be made available for purchase by officers and directors under this ODPP which commenced in May 2008.

A total of 132,851 shares of the Company’s common stock have been reserved for future issuance under the Officer and Director Share Purchase Plan as of June 30, 2008.

In connection with our ODPP, the following shares were issued during the year ended June 30, 2008:


	Year Ended
	June 30, 2008

Number of shares issued		482
Weighted-average purchase price	$	16.56


Note 13.	Income Taxes

The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted laws and rates applicable to periods in which the taxes become payable.

The domestic and foreign components of income (loss) before income taxes were as follows (in thousands):


	Year Ended June 30,
	2008			2007			2006

Domestic	$	(5,138	)	$	(22,206	)	$	(46,680	)
Foreign		10,785			(7,935	)		(8,012	)

Total	$	5,647		$	(30,141	)	$	(54,692	)

F-95

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The reconciliation of income tax expense (benefit) at the statutory federal income tax rate of 34% to net income tax provision included in the statement of operations for the years ended June 30, 2008, 2007 and 2006 are as follows (in thousands):


	Year Ended June 30,
	2008			2007			2006

U.S. Fed taxes (benefit) at statutory rate	$	1,919		$	(10,272	)	$	(18,595	)
State income taxes, net of federal benefit		20			—			—
Foreign loss not benefited		729			2,544			2,712
FAS 123 (R) adoption		—			—			12,450
Expiring NOLs		—			215			—
Change in valuation allowance		(1,472	)		7,947			2,868
Credits		(591	)		—			—
Other		322			30			565

Total	$	927		$	464		$	—

Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):


	June 30,
	2008			2007			2006

Deferred Tax Assets:
NOL’s	$	121,503		$	94,252		$	153,194
Tax credit carryforwards		6,939			5,646			5,076
Inventory reserves		5,556			10,515			9,993
Restructuring charges		2,912			4,029			4,845
Other		10,561			9,490			5,965
Intangibles		1,056			2,332			822

Total deferred tax assets		148,527			126,264			179,895
Valuation allowance		(148,527	)		(126,264	)		(179,895	)

Net Deferred Tax Assets	$	—		$	—		$	—

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased (decreased) by $22.3 million and ($53.6) million during June 30, 2008 and June 30, 2007, respectively.

As of June 30, 2008, the Company had net operating loss carry forwards for federal income tax purposes of approximately $305 million which expire in the years 2012 through 2028 and federal research and development tax credits of approximately $5.9 million which expire in years 2013 through 2028. The Company also had state net operating loss carry forwards of approximately $111.3 million which expire in the years 2009 through 2028 and state research and development tax credits of approximately $7.4 million which have no expiration. The Company had net operating loss carry forwards for foreign income tax purposes of approximately $78.7 million.

F-96

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of June 30, 2007, insufficient evidence was available to recognize certain foreign net operating losses or loss carry forwards, therefore a portion of the foreign net operating losses was derecognized with a corresponding offset to the valuation allowance. During fiscal 2008, the Company obtained sufficient evidence to support the inclusion of the foreign net operating losses. Thus, as of June 30, 2008, the Company included a portion of the formerly derecognized NOL’s in its deferred tax asset schedule with a corresponding offset to the valuation allowance.

Utilization of the net operating losses may be subject to substantial annual limitation due to federal and state ownership limitations. The utilization of net operating losses is subject to Section 382 limitation resulting from changes in ownership of the Company.

Effective July 1, 2007, we adopted Financial Accounting Standards Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” or SFAS No. 109. The first step, “Recognition” requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step, “Measurement” is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. As the Company had recorded a full valuation allowance against its deferred tax assets, there was no cumulative effect of adopting FIN No. 48. Upon adoption, the total amount of gross unrecognized tax benefits was $6.3 million.

At June 30, 2008, we had approximately $6.4 million in total unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance at July 1, 2007	$	6,325
Additions based on tax positions related to the current year		28
Reductions based on tax positions related to prior years		—
Settlements		—

Balance at June 30, 2008	$	6,353

At June 30, 2008, the total unrecognized tax benefits of $6.4 million consist of approximately $6.4 million of unrecognized tax benefits that have been netted against the related deferred tax assets. None of the unrecognized tax benefit will impact the rate in future years until the Company releases its valuation allowance.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. There were no interest and penalties accrued upon the adoption of FIN No. 48 on July 1, 2007 nor at June 30, 2008.

We file income tax returns in the United States on a federal basis, in California and various foreign jurisdictions. The tax years 2001 to 2006 remain open to examination in the United States and California which are the major taxing jurisdictions in which we are subject to tax.

F-97

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 14.	Market Sales, Export Sales, Significant Customers, and Concentration of Supply

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way public business enterprises report information about operating segments in 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.

Customers who represented 10% or more of our net revenue or accounts receivable were as follows:


	Percentage of Net
	Revenue for the Year									Percent of Accounts
	Ended June 30,									Receivable at June 30,
	2008			2007			2006			2008			2007

Company A		25	%		29	%		27	%		21	%		24	%
Company B		21	%		17	%			*		17	%		10	%
Company C			*			*		11	%			*			*

		46	%		46	%		38	%		38	%		34	%


*		less than 10%

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


	Year Ended June 30,
	2008		2007		2006

Americas	$	93,304	$	95,189	$	75,889
Europe		68,946		84,126		67,151
Asia-Pac		45,844		33,440		19,904

Total	$	208,094	$	212,755	$	162,944

Long-lived assets by geographical area were as follows (in thousands):


	Year Ended
	June 30,
	2008		2007

U.S.	$	5,159	$	3,949
Non-U.S.		2,529		1,951

	$	7,688	$	5,900


Note 15.	Acquisition

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

F-98

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

relating to the MSA 300-pin transponder and XFP transceiver businesses of the Commercial Communication Products Division of Essex.

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.


Note 16.	Quarterly Financial Data (Unaudited)


	Jun. 30,			Mar. 31,			Dec. 31,			Sep. 30,			Jun. 30,			Mar. 31,			Dec. 31,			Sep. 30,
	2008*			2008			2007			2007			2007			2007			2006			2006
	(In thousands except per share data)
	(Unaudited)

Consolidated Statement of Operations Data:
Net revenue	$	51,822		$	49,556		$	52,007		$	54,709		$	51,098		$	55,143		$	55,623		$	50,891
Cost of revenue		35,643			33,461			35,888			39,517			38,999			44,845			45,127			45,579

Gross profit		16,179			16,095			16,119			15,192			12,099			10,298			10,496			5,312
Operating expenses:
Research and development		6,935			7,012			7,604			6,774			7,511			6,263			5,832			5,625
Sales and marketing		4,211			4,407			4,202			3,915			3,779			4,043			3,891			3,548
General and administrative		4,162			4,621			4,980			4,475			3,469			5,083			9,075			5,651
Amortization of intangibles		56			55			101			559			664			531			656			852
Restructuring costs (recovery)		137			32			2			(335	)		(17	)		1,155			436			(63	)
(Gain) loss on disposal of property and equipment		(24	)		1			—			—			(484	)		5			(28	)		(20	)
(Gain) loss on sale of subsidiary		—			(1,996	)		—			—			3,216			—			—			—

Total operating expenses		15,477			14,132			16,889			15,388			18,138			17,080			19,862			15,593

Income (loss) from operations		702			1,963			(770	)		(196	)		(6,039	)		(6,782	)		(9,366	)		(10,281	)
Interest and other income, net		979			1,371			1,083			515			818			129			813			567

Income (loss) before income taxes		1,681			3,334			313			319			(5,221	)		(6,653	)		(8,553	)		(9,714	)
Provision for income taxes		(428	)		2			(227	)		(274	)		(464	)		—			—			—

Net income (loss)	$	1,253		$	3,336		$	86		$	45		$	(5,685	)	$	(6,653	)	$	(8,553	)	$	(9,714	)

Basic net income (loss) per common share	$	0.08		$	0.22		$	0.01		$	0.00		$	(0.38	)	$	(0.47	)	$	(0.62	)	$	(0.71	)

Diluted net income (loss) per common share	$	0.08		$	0.22		$	0.01		$	0.00		$	(0.38	)	$	(0.47	)	$	(0.62	)	$	(0.71	)

Basic shares outstanding		15,321			15,294			15,235			15,116			15,044			14,268			13,791			13,692
Diluted shares outstanding		15,330			15,301			15,460			15,389			15,044			14,268			13,791			13,692


*		For the three months ended June 30, 2008 the Company posted certain adjustments after its earnings release on August 21, 2008, which resulted in net income decreasing by $39,000. Gross margin, however, decreased to 31%, as compared to 32% previously reported.

F-99

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 17.	Subsequent Events

During the six months ended December 31, 2008, the Company incurred operating losses and negative cash flows from operations, resulting in declines in total unrestricted cash, cash equivalents and short-term investments, and limited operating capital to fund future operations. The Company expects the balances of its 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 (in which Avanex stockholders will receive shares of Bookham, Inc. common stock in exchange for their shares of Avanex common stock). 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.

* * * *

F-100

Condensed Consolidated Balance Sheets (Unaudited)


	December 31,			June 30,
	2008			2008
	(In thousands, except share and par value data)

ASSETS
Current assets:
Cash and cash equivalents	$	13,897		$	14,839
Restricted cash		3,803			3,776
Short-term investments		19,550			40,590
Accounts receivable		30,197			39,032
Inventories		19,528			15,979
Due from related party		123			85
Other current assets		7,021			6,486

Total current assets		94,119			120,787
Property and equipment, net		8,906			7,688
Intangibles, net		—			314
Goodwill		—			9,408
Deposits and other assets		3,094			2,870

Total assets	$	106,119		$	141,067


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,371		$	33,255
Accrued compensation		3,811			6,272
Accrued warranty		350			626
Due to related party		75			110
Other accrued expenses and deferred revenue		6,810			5,893
Current portion of long-term obligations		12			13
Current portion of accrued restructuring		3,068			2,940

Total current liabilities		38,497			49,109
Long-term liabilities:
Accrued restructuring		3,613			5,043
Other long-term obligations		1,364			1,520

Total liabilities		43,474			55,672

Contingencies (Note 11)
Stockholders’ equity:
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		788,204			784,492
Accumulated other comprehensive income		1,269			1,277
Accumulated deficit		(726,844	)		(700,389	)

Total stockholders’ equity		62,645			85,395

Total liabilities and stockholders’ equity	$	106,119		$	141,067

See accompanying notes.

F-101

Condensed Consolidated Statements of Operations (Unaudited)


	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	(In thousands, except per share data)

Net revenue:
Third parties	$	37,924		$	47,155		$	83,137		$	88,550
Related parties		77			4,852			138			18,166

Total net revenue		38,001			52,007			83,275			106,716
Cost of revenue:
Cost of revenue except for purchases from related parties		31,864			35,567			68,904			75,083
Purchases from related parties		295			321			756			322

Total cost of revenue		32,159			35,888			69,660			75,405

Gross profit		5,842			16,119			13,615			31,311
Operating expenses:
Research and development		6,037			7,604			12,722			14,378
Sales and marketing		2,827			4,202			6,879			8,117
General and administrative		3,777			4,980			8,665			9,455
Amortization of intangibles		53			101			107			660
Restructuring		157			2			2,476			(333	)
Impairment of goodwill and intangibles		9,615			—			9,615			—

Total operating expenses		22,466			16,889			40,464			32,277

Loss from operations		(16,624	)		(770	)		(26,849	)		(966	)
Interest and other income (expense), net		(179	)		1,083			(351	)		1,598

Income (loss) before income taxes		(16,803	)		313			(27,200	)		632
Income tax benefit (provision)		(11	)		(227	)		745			(501	)

Net income (loss)	$	(16,814	)	$	86		$	(26,455	)	$	131

Basic net income (loss) per common share	$	(1.08	)	$	0.01		$	(1.71	)	$	0.01

Diluted net income (loss) per common share	$	(1.08	)	$	0.01		$	(1.71	)	$	0.01

Weighted-average number of shares used in computing:
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.

F-102

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended
	December 31,
	2008			2007
	(In thousands)

Operating Activities:
Net income (loss)	$	(26,455	)	$	131
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss on disposal of property and equipment		10			—
Depreciation and amortization		1,973			1,484
Amortization of intangibles		107			659
Stock-based compensation		2,867			3,637
Provision for doubtful accounts and sales returns		651			377
Non-cash pension expense		43			—
Write-off of excess and obsolete inventory		2,444			3,770
Impairment of goodwill and intangibles		9,615			—
Changes in operating assets and liabilities:
Accounts receivable		8,131			8,512
Inventories		(7,748	)		(4,971	)
Other current assets		(905	)		(394	)
Other assets		(212	)		(161	)
Due to/from related party		(72	)		(2,552	)
Accounts payable		(8,689	)		(258	)
Accrued compensation		(1,544	)		490
Accrued restructuring		(1,302	)		(1,728	)
Accrued warranty		(276	)		(102	)
Other accrued expenses and deferred revenue		2,407			(914	)

Net cash provided by (used in) operating activities		(18,955	)		7,980

Investing Activities:
Purchases of investments		(11,476	)		(87,694	)
Maturities of investments		32,643			79,802
Increase in restricted cash		(27	)		(2,864	)
Purchases of property and equipment		(3,269	)		(1,426	)
Net cash used in asset purchase		—			(2,139	)

Net cash provided by (used in) investing activities		17,871			(14,321	)

Financing Activities:
Payments on capital lease obligations		(6	)		(4	)
Proceeds from issuance of common stock		127			549

Net cash provided by financing activities		121			545

Effect of exchange rate changes on cash		21			243

Net decrease in cash and cash equivalents		(942	)		(5,553	)
Cash and cash equivalents at beginning of period		14,839			14,837

Cash and cash equivalents at end of period	$	13,897		$	9,284

Supplemental Information:
Non-cash investing and financing activities:
Fixed asset purchases included in accounts payable	$	529		$	—
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.

F-103