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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A

Amendment No. 1

(Mark One)



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

For the fiscal year ended June 30, 2006

Or



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

Commission file number: 000-29175



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AVANEX CORPORATION

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3285348                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|40919 Encyclopedia Circle Fremont, California                  |  | 94538                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code: (510) 897-4188



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Securities registered pursuant to
Section 12(b) of the Act:

Common Stock, $0.001 par value

Preferred Share Rights (currently attached to and trading only with Common Stock)

(Title of Class)

The NASDAQ Stock Market LLC

(Name of Each Exchange on Which Registered)

Securities registered pursuant to
Section 12(g) of the Act:

None



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

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer x    Non-accelerated filer ̈

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

As of December 31, 2005, the last business day of the Registrants most recently completed second fiscal quarter, the aggregate market value of voting stock held by non-affiliates of the Registrant was
approximately $193.4 million based upon the closing price on the Nasdaq National Market (now known as the Nasdaq Global Market) reported for such date. As of September 22, 2006, the Registrant had 206,196,469 outstanding shares of common stock.



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DOCUMENTS
INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement that will be filed with the Commission pursuant to
Section 14(a) in connection with the 2006 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of
Registrants fiscal year ended June 30, 2006.



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Explanatory Note

This Annual Report on Form 10-K/A (Form 10-K/A)
is being filed as Amendment No. 1 to the Registrants Annual Report on Form 10-K for the year ended June 30, 2006. This Form 10-K/A is filed with the Securities and Exchange Commission (the Commission) for the sole purpose of
correcting the Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, in Item 8 (page 46) to include an opinion on the supplemental schedule listed in Item 15(a) as follows: Also, in our opinion, such financial
statement schedule as of June 30, 2006 and 2005 and for the years then ended, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein. In accordance with the rules of the Commission, Item 8 has been included in this Form 10-K/A in its entirety; however, except for the correction in the Report of Deloitte & Touche, no other changes have been made to Item 8 or to
the remainder of the Form 10-K. This Form 10-K/A speaks as of the original filing date and has not been updated to reflect events occurring subsequent to the original filing date.



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##### Table of Contents

AVANEX CORPORATION

ANNUAL REPORT ON FORM 10-K/A

FOR THE FISCAL YEAR ENDED JUNE 30, 2006

TABLE OF CONTENTS



|           |  |                                             |  |     
|---------- |  | ------------------------------------------- |  | ----
|           |  |                                             |  | Page
|Item 8.    |  | Financial Statements and Supplementary Data |  | 45  
|SIGNATURES |  |                                            



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                               |  |   
|------------------------------------------------------------------------------ |  | --
|Consolidated Financial Statements:                                             |  |   
|                                                                               | 
|Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |  | 46
|                                                                               | 
|Report of Ernst & Young LLP, Independent Registered Public Accounting Firm     |  | 47
|                                                                               | 
|Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |  | 48
|                                                                               | 
|Consolidated Balance Sheets                                                    |  | 50
|                                                                               | 
|Consolidated Statements of Operations                                          |  | 51
|                                                                               | 
|Consolidated Statements of Stockholders Equity and Comprehensive Loss         |  | 52
|                                                                               | 
|Consolidated Statements of Cash Flows                                          |  | 53
|                                                                               | 
|Notes to Consolidated Financial Statements                                     |  | 54
|                                                                               | 
|Financial Statement Schedule:                                                  |  |   
|                                                                               | 
|Schedule IIValuation and Qualifying Accounts                                  |  | 91



45



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##### Table of Contents

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, 2006
and 2005, and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a) as of June 30, 2006
and 2005 and for the years then ended. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule 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, such 2006 and 2005 consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2006 and 2005, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in
our opinion, such financial statement schedule as of June 30, 2006 and 2005 and for the years then ended, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As described in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share Based Payment, effective July 1, 2005, based on the modified prospective application transition method.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of
June 30, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 26, 2006 expressed an unqualified
opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an adverse opinion on the effectiveness of the Companys internal control over financial reporting.

/s/    DELOITTE & TOUCHE LLP

San Jose,
California

September 26, 2006



46



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##### Table of Contents

REPORT OF ERNST & YOUNG LLP

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Avanex Corporation

We have audited the accompanying consolidated statements of operations, stockholders equity and cash flows of Avanex Corporation for the year ended
June 30, 2004. Our audit also included the financial statement schedule for the year ended June 30, 2004 listed in the Index 15(a). These financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conduct our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require 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 results of operations and cash flows of Avanex Corporation for the year ended June 30, 2004, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule for the year ended June 30, 2004, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information
set forth therein.

/s/    Ernst & Young LLP

Palo Alto, California

July 30, 2004



47



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REPORT OF DELOITTE & TOUCHE LLP

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Avanex Corporation

We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that
Avanex Corporation and subsidiaries (the Company) did not maintain effective internal control over financial reporting as of June 30, 2006, because of the effect of the material weaknesses identified in managements assessment
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting 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 effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar
functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in managements assessment as of June 30, 2006:



| | 1. | Company-level controls. The Companys finance group continued to experience turnover such that there was insufficient familiarity with historical
accounting entries and the supervision of the accounting processes was not effective. In addition, during fiscal 2006 the majority of the Companys
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48



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| | manufacturing operations transitioned to contract manufacturers and these transitions contributed to a number of accounting errors which required post-close
journal entries during the year-end close process. Also, controls were not in place to adequately restrict access to the accounting systems. In addition managements assessments related to the risk of financial fraud were not completed until
after year end and certain controls in the assessment process were found to be ineffective;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Preparation and review procedures over account reconciliations and related journal entries. The controls over the preparation and review of account reconciliations and
related journal entries both in the Fremont and Nozay facilities were initially inadequate and led to a lack of control over the Companys closing and reporting processes, which were corrected in the audit process.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Controls over accounts receivable and warranty reserves. Initially, accounts receivable reserves did not adequately consider the Companys recent collection performance
and warranty reserves did not adequately consider the Companys recent performance in the contract manufacturing environment and were corrected in the audit process;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Controls over inventory. Inadequate controls around the Companys inventory values including transactions with the Companys contract manufacturer and inter-company
shipments resulted in errors in ending inventory in both the Fremont and Nozay facilities, which required adjustment in the audit process. Accounting records were not adjusted to physical counts in a timely manner; and initially, inventory reserves
did not adequately consider recent historical performance, which were corrected in the audit process;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Controls over pension accounting. Lack of personnel with the requisite level of knowledge of the French subsidiarys pension plan initially resulted in errors in
accounting for the Companys pension obligation, which were corrected in the audit process; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | Controls over stock-based compensation. Lack of personnel with the requisite level of knowledge of stock-based compensation accounting initially resulted in errors in the
recorded expense, which were corrected in the audit process.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30, 2006 of the Company and this report does not affect our report on such consolidated financial
statements and financial statement schedule.

In our opinion, managements assessment that the Company did not maintain effective
internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over
financial reporting as of June 30, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended June 30, 2006 of the Company and our report dated September 26, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule
and included an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

/s/    DELOITTE & TOUCHE LLP

San Jose, California

September 26, 2006



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##### Table of Contents

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                  |  | June 30, |         
|                                                                                                                                                                                                  |  | 2006     |          |   | 2005 |  
|Assets                                                                                                                                                                                            |  |          |          |   |      |   |          |  
|Current assets:                                                                                                                                                                                   |  |          |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                                         |  | $        | 28,963   |   |      | $ | 26,811   |  
|Restricted cash and investments                                                                                                                                                                   |  |          | 6,676    |   |      |   | 8,165    |  
|Short-term investments                                                                                                                                                                            |  |          | 38,696   |   |      |   | 38,929   |  
|Accounts receivable (net of allowance for doubtful accounts of $0 and $1,992 at June 30, 2006 and 2005, respectively)                                                                             |  |          | 26,768   |   |      |   | 22,788   |  
|Inventories, net                                                                                                                                                                                  |  |          | 18,417   |   |      |   | 36,014   |  
|Due from related parties                                                                                                                                                                          |  |          | 10,404   |   |      |   | 15,357   |  
|Other current assets                                                                                                                                                                              |  |          | 15,473   |   |      |   | 20,645   |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Total current assets                                                                                                                                                                              |  |          | 145,397  |   |      |   | 168,709  |  
|Property and equipment, net                                                                                                                                                                       |  |          | 5,668    |   |      |   | 8,612    |  
|Intangibles, net                                                                                                                                                                                  |  |          | 3,246    |   |      |   | 8,686    |  
|Goodwill                                                                                                                                                                                          |  |          | 9,408    |   |      |   | 9,408    |  
|Other assets                                                                                                                                                                                      |  |          | 1,839    |   |      |   | 4,241    |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Total assets                                                                                                                                                                                      |  | $        | 165,558  |   |      | $ | 199,656  |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Liabilities and stockholders' equity                                                                                                                                                              |  |          |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                                              |  |          |          |   |      |   |          |  
|Accounts payable                                                                                                                                                                                  |  | $        | 38,276   |   |      | $ | 28,251   |  
|Accrued compensation                                                                                                                                                                              |  |          | 6,872    |   |      |   | 10,741   |  
|Accrued warranty                                                                                                                                                                                  |  |          | 1,799    |   |      |   | 5,268    |  
|Due to related parties                                                                                                                                                                            |  |          | 4,475    |   |      |   | 1,549    |  
|Other accrued expenses and deferred revenue                                                                                                                                                       |  |          | 4,467    |   |      |   | 12,230   |  
|Current portion of long-term obligations and convertible note                                                                                                                                     |  |          | 823      |   |      |   | 2,910    |  
|Current portion of accrued restructuring                                                                                                                                                          |  |          | 6,321    |   |      |   | 32,040   |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                         |  |          | 63,033   |   |      |   | 92,989   |  
|Long-term liabilities:                                                                                                                                                                            |  |          |          |   |      |   |          |  
|Accrued restructuring                                                                                                                                                                             |  |          | 13,252   |   |      |   | 14,137   |  
|Convertible notes                                                                                                                                                                                 |  |          | 4,569    |   |      |   | 29,408   |  
|Other long-term obligations                                                                                                                                                                       |  |          | 11,366   |   |      |   | 9,374    |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Total liabilities                                                                                                                                                                                 |  |          | 92,220   |   |      |   | 145,908  |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Stockholders equity:                                                                                                                                                                             |  |          |          |   |      |   |          |  
|Common stock, $0.001 par value, 300,000,000 shares authorized; 204,361,846 and 144,939,807 shares outstanding (net of 160,749 and 41,062
treasury shares) at June 30, 2006 and 2005, respectively |  |          | 204      |   |      |   | 145      |  
|Additional paid-in capital                                                                                                                                                                        |  |          | 742,951  |   |      |   | 667,923  |  
|Deferred compensation                                                                                                                                                                             |  |          |         |   |      |   | (353     | )
|Accumulated other comprehensive income                                                                                                                                                            |  |          | 4,687    |   |      |   | 5,478    |  
|Accumulated deficit                                                                                                                                                                               |  |          | (674,504 | ) |      |   | (619,445 | )
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                                                        |  |          | 73,338   |   |      |   | 53,748   |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                        |  | $        | 165,558  |   |      | $ | 199,656  |  
|                                                                                                                                                                                                  |  |          |          |   |      |   |          |  

See accompanying notes.



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##### Table of Contents

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                |  | Year Ended June 30, |        
|                                                                                                |  | 2006                |         |   | 2005 |   |          | 2004 | 
|Net revenue:                                                                                    |  |                     |         |   |      |   |          |      |  |   |          |  
|Third parties                                                                                   |  | $                   | 119,054 |   |      | $ | 105,568  |      |  | $ | 74,751   |  
|Related parties                                                                                 |  |                     | 43,890  |   |      |   | 55,127   |      |  |   | 32,181   |  
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Total net revenue                                                                               |  |                     | 162,944 |   |      |   | 160,695  |      |  |   | 106,932  |  
|Cost of revenue:                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Cost of revenue except for direct material purchases from related parties                       |  |                     | 151,758 |   |      |   | 155,056  |      |  |   | 105,553  |  
|Direct material purchases from related parties                                                  |  |                     | 2,726   |   |      |   | 10,202   |      |  |   | 27,706   |  
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Total cost of revenue                                                                           |  |                     | 154,484 |   |      |   | 165,258  |      |  |   | 133,259  |  
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Gross profit (loss)                                                                             |  |                     | 8,460   |   |      |   | (4,563   | )    |  |   | (26,327  | )
|Operating expenses:                                                                             |  |                     |         |   |      |   |          |      |  |   |          |  
|Research and development                                                                        |  |                     | 23,471  |   |      |   | 33,124   |      |  |   | 42,107   |  
|Sales and marketing                                                                             |  |                     | 13,236  |   |      |   | 16,803   |      |  |   | 19,808   |  
|General and administrative:                                                                     |  |                     |         |   |      |   |          |      |  |   |          |  
|Third parties                                                                                   |  |                     | 15,701  |   |      |   | 11,867   |      |  |   | 17,867   |  
|Related parties                                                                                 |  |                     | 951     |   |      |   | 5,891    |      |  |   | 6,851    |  
|Amortization of intangibles                                                                     |  |                     | 5,448   |   |      |   | 5,723    |      |  |   | 4,573    |  
|Restructuring                                                                                   |  |                     | 1,912   |   |      |   | 29,272   |      |  |   | 3,779    |  
|Gain on disposal of property and equipment                                                      |  |                     | (5,064  | ) |      |   | (1,850   | )    |  |   |         |  
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Total operating expenses                                                                        |  |                     | 55,655  |   |      |   | 100,830  |      |  |   | 94,985   |  
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Loss from operations                                                                            |  |                     | (47,195 | ) |      |   | (105,393 | )    |  |   | (121,312 | )
|Interest and other income                                                                       |  |                     | 2,787   |   |      |   | 3,607    |      |  |   | 5,155    |  
|Interest and other expense                                                                      |  |                     | (10,284 | ) |      |   | (6,585   | )    |  |   | (1,856   | )
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Loss from continuing operations before discontinued operations                                  |  |                     | (54,692 | ) |      |   | (108,371 | )    |  |   | (118,013 | )
|Loss from discontinued operations                                                               |  |                     |        |   |      |   |         |      |  |   | (6,054   | )
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Net loss                                                                                        |  | $                   | (54,692 | ) |      | $ | (108,371 | )    |  | $ | (124,067 | )
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Loss per share from continuing operations before discontinued operations, basic and diluted     |  | $                   | (0.34   | ) |      | $ | (0.75    | )    |  | $ | (0.90    | )
|Loss per share from discontinued operations basic and diluted                                   |  |                     |        |   |      |   |         |      |  |   | (0.05    | )
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per common share                                                     |  | $                   | (0.34   | ) |      | $ | (0.75    | )    |  | $ | (0.95    | )
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  
|Weighted-average number of shares used in computing basic and diluted net loss per common share |  |                     | 163,242 |   |      |   | 144,253  |      |  |   | 130,561  |  
|                                                                                                |  |                     |         |   |      |   |          |      |  |   |          |  



See accompanying notes.



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##### Table of Contents

AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
LOSS

(In thousands, except share and per share data)



|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | --- | -------------------------- | - | ------- | --------------------------- |  | - | ------------------- | - |  | --------------------------------------------- | -------- | - | -------------------------- | - | ------ | - |  | - | -------- | -
|                                                                                                               |  | Common Stock |     | Additional Paid-in Capital |   |         | Deferred Stock Compensation |  |   | Accumulated Deficit |   |  | Accumulated Other Comprehensive Income (Loss) |          |   | Total Stockholders Equity |  
|Balance at July 1, 2003                                                                                        |  | $            | 69  |                            | $ | 484,028 |                             |  | $ | (828                | ) |  | $                                             | (387,007 | ) |                            | $ |        |   |  | $ | 96,262   |  
|Issuance of 715,730 shares of common stock upon exercise of stock options and share purchase rights            |  |              | 1   |                            |   | 1,297   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 1,298    |  
|Issuance of 610,171 shares of common stock relating to employee stock purchase plan                            |  |              | 1   |                            |   | 726     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 727      |  
|Issuance of 192,584 shares of common stock relating to exercise of warrants                                    |  |              |     |                            |   | 648     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 648      |  
|Issuance of 21,474,507 shares of common stock in relation to the acquisition of Corning Assets                 |  |              | 21  |                            |   | 38,268  |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 38,289   |  
|Issuance of 35,369,869 shares of common stock in relation to the acquisition of Alcatel Assets                 |  |              | 36  |                            |   | 63,028  |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 63,064   |  
|Issuance of 1,371,430 shares of common stock in relation to the acquisition of Vitesse Assets                  |  |              | 1   |                            |   | 6,508   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 6,509    |  
|Issuance of 14,135,316 shares of common stock in a private placement                                           |  |              | 14  |                            |   | 68,245  |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 68,259   |  
|Charge related to warrants issued                                                                              |  |              |    |                            |   | 407     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 407      |  
|Deferred stock based compensation                                                                              |  |              |    |                            |   | 643     |                             |  |   | (643                | ) |  |                                               |         |   |                            |   |       |   |  |   |         |  
|Amortization of deferred stock compensation                                                                    |  |              |    |                            |   |        |                             |  |   | 875                 |   |  |                                               |         |   |                            |   |       |   |  |   | 875      |  
|Comprehensive loss:                                                                                            |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Cumulative translation adjustment                                                                              |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |         |   |                            |   | 5,193  |   |  |   | 5,193    |  
|Net loss                                                                                                       |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               | (124,067 | ) |                            |   |        |   |  |   | (124,067 | )
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Comprehensive loss                                                                                             |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   | (118,874 | )
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Balance at June 30, 2004                                                                                       |  |              | 143 |                            |   | 663,798 |                             |  |   | (596                | ) |  |                                               | (511,074 | ) |                            |   | 5,193  |   |  |   | 157,464  |  
|Issuance of 611,517 shares of common stock upon exercise of stock options                                      |  |              | 1   |                            |   | 458     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 459      |  
|Issuance of 986,123 shares of common stock relating to employee stock purchase plan                            |  |              | 1   |                            |   | 1,200   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 1,201    |  
|Warrants issued in connection with the issuance of senior secured debentures, net of issuance costs of $258    |  |              |    |                            |   | 2,602   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 2,602    |  
|Accelerated vesting of 168,750 executive shares                                                                |  |              |    |                            |   | 106     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 106      |  
|Issuance costs related to shelf registration                                                                   |  |              |    |                            |   | (258    | )                           |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | (258     | )
|Stock-based compensation                                                                                       |  |              |    |                            |   | 17      |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 17       |  
|Amortization of deferred stock compensation                                                                    |  |              |    |                            |   |        |                             |  |   | 243                 |   |  |                                               |         |   |                            |   |       |   |  |   | 243      |  
|Comprehensive loss:                                                                                            |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Unrealized loss on investments                                                                                 |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |         |   |                            |   | (484   | ) |  |   | (484     | )
|Cumulative translation adjustment                                                                              |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |         |   |                            |   | 769    |   |  |   | 769      |  
|Net loss                                                                                                       |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               | (108,371 | ) |                            |   |       |   |  |   | (108,371 | )
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Comprehensive loss                                                                                             |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   | (108,086 | )
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Balance at June 30, 2005                                                                                       |  |              | 145 |                            |   | 667,923 |                             |  |   | (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 1,551,789 shares of common stock upon exercise of stock options                                    |  |              | 2   |                            |   | 2,105   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 2,107    |  
|Issuance of 588,431 shares of common stock relating to employee stock purchase plan                            |  |              | 1   |                            |   | 408     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 409      |  
|Modifications of warrants, net of issuance costs of $258                                                       |  |              |    |                            |   | 686     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 686      |  
|Issuance of common stock, net of issuance costs of $3,509                                                      |  |              | 24  |                            |   | 44,641  |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 44,665   |  
|Issuance of common stock in connection with conversion of senior secured convertible notes                     |  |              | 32  |                            |   | 23,089  |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 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                                                                                       |  | $            | 204 |                            | $ | 742,951 |                             |  | $ |                    |   |  | $                                             | (674,504 | ) |                            | $ | 4,687  |   |  | $ | 73,338   |  
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  

See accompanying notes.



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AVANEX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands



|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                    |  | For the Year Ended June 30, |         
|                                                                                    |  | 2006                        |          |   | 2005 |   |          | 2004 | 
|Operating Activities:                                                               |  |                             |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                            |  | $                           | (54,692  | ) |      | $ | (108,371 | )    |  | $ | (124,067 | )
|Adjustments to reconcile net loss to net cash used in operating activities:         |  |                             |          |   |      |   |          |      |  |   |          |  
|(Gain) loss on disposal of property and equipment                                   |  |                             | (5,064   | ) |      |   | (2,226   | )    |  |   | 352      |  
|Depreciation and amortization                                                       |  |                             | 5,565    |   |      |   | 9,012    |      |  |   | 15,251   |  
|Amortization of intangibles                                                         |  |                             | 5,448    |   |      |   | 5,723    |      |  |   | 4,573    |  
|Impairment of investment                                                            |  |                             |         |   |      |   | 4,400    |      |  |   |         |  
|Prepaid amortization                                                                |  |                             |         |   |      |   | 322      |      |  |   |         |  
|Stock-based compensation                                                            |  |                             | 4,452    |   |      |   | 365      |      |  |   | 875      |  
|(Reversal of) provision for doubtful accounts and sales returns                     |  |                             | (2,538   | ) |      |   | 663      |      |  |   | 1,005    |  
|Loss in connection with convertible notes modification                              |  |                             | 4,525    |   |      |   |         |      |  |   |         |  
|Non-cash gain on derivatives                                                        |  |                             |         |   |      |   | (740     | )    |  |   |          |  
|Non-cash interest expense                                                           |  |                             | 2,160    |   |      |   |         |      |  |   |         |  
|Write-down of excess and obsolete inventory                                         |  |                             | 12,790   |   |      |   | 8,234    |      |  |   | 1,000    |  
|Changes in operating assets and liabilities:                                        |  |                             |          |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                                 |  |                             | (10,727  | ) |      |   | (9,714   | )    |  |   | (11,774  | )
|Inventories                                                                         |  |                             | 5,488    |   |      |   | (4,982   | )    |  |   | (8,089   | )
|Other current assets                                                                |  |                             | 16,828   |   |      |   | 529      |      |  |   | 916      |  
|Other assets                                                                        |  |                             | (53      | ) |      |   | (1,147   | )    |  |   | 6,549    |  
|Due to/from related parties                                                         |  |                             | 10,364   |   |      |   | (1,818   | )    |  |   | 1,168    |  
|Accounts payable                                                                    |  |                             | 8,127    |   |      |   | 1,743    |      |  |   | 4,909    |  
|Accrued compensation                                                                |  |                             | (2,912   | ) |      |   | (418     | )    |  |   | 764      |  
|Accrued restructuring                                                               |  |                             | (26,787  | ) |      |   | 6,654    |      |  |   | (65,409  | )
|Accrued warranty                                                                    |  |                             | (3,521   | ) |      |   | (857     | )    |  |   | (3,340   | )
|Other accrued expenses and deferred revenues                                        |  |                             | (12,053  | ) |      |   | 1,141    |      |  |   | (1,736   | )
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                               |  |                             | (42,600  | ) |      |   | (91,487  | )    |  |   | (177,053 | )
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Investing Activities:                                                               |  |                             |          |   |      |   |          |      |  |   |          |  
|Purchases of investments                                                            |  |                             | (123,005 | ) |      |   | (41,996  | )    |  |   | (192,097 | )
|Maturities of investments                                                           |  |                             | 123,699  |   |      |   | 125,837  |      |  |   | 193,830  |  
|Decrease (increase) in restricted cash                                              |  |                             | 1,489    |   |      |   | (8,165   | )    |  |   |         |  
|Acquisitions, net of cash acquired                                                  |  |                             |         |   |      |   |         |      |  |   | 117,986  |  
|Purchase of other investments                                                       |  |                             |         |   |      |   |         |      |  |   | (4,400   | )
|Purchases of property and equipment                                                 |  |                             | (2,508   | ) |      |   | (882     | )    |  |   | (2,514   | )
|Proceeds from sale of property and equipment                                        |  |                             | 4,824    |   |      |   | 4,782    |      |  |   | 684      |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Net cash provided by investing activities                                           |  |                             | 4,499    |   |      |   | 79,576   |      |  |   | 113,489  |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Financing Activities:                                                               |  |                             |          |   |      |   |          |      |  |   |          |  
|Payments on capital lease obligations                                               |  |                             | (2,268   | ) |      |   | (4,563   | )    |  |   | (5,265   | )
|Payments in connection with convertible notes modification                          |  |                             | (4,075   | ) |      |   |         |      |  |   |         |  
|Proceeds from short-term borrowings                                                 |  |                             |         |   |      |   | 31,219   |      |  |   | 107,582  |  
|Payments on short-term borrowings                                                   |  |                             |         |   |      |   | (34,942  | )    |  |   | (106,999 | )
|Borrowings under financing arrangements                                             |  |                             |         |   |      |   | 24,466   |      |  |   | 865      |  
|Proceeds from issuance of common stock                                              |  |                             | 47,181   |   |      |   | 1,402    |      |  |   | 70,932   |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                           |  |                             | 40,838   |   |      |   | 17,582   |      |  |   | 67,115   |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate changes on cash                                             |  |                             | (585     | ) |      |   | (497     | )    |  |   | 7,447    |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Net increase in cash and cash equivalents                                           |  |                             | 2,152    |   |      |   | 5,174    |      |  |   | 10,998   |  
|Cash and cash equivalents at beginning of period                                    |  |                             | 26,811   |   |      |   | 21,637   |      |  |   | 10,639   |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                          |  | $                           | 28,963   |   |      | $ | 26,811   |      |  | $ | 21,637   |  
|                                                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Supplemental Information:                                                           |  |                             |          |   |      |   |          |      |  |   |          |  
|Cash paid during the period for:                                                    |  |                             |          |   |      |   |          |      |  |   |          |  
|Interest expense                                                                    |  | $                           | 164      |   |      | $ | 849      |      |  | $ | 966      |  
|Non-cash investing and financing activities:                                        |  |                             |          |   |      |   |          |      |  |   |          |  
|Property and equipment acquired under capital lease                                 |  | $                           |         |   |      | $ | 2,815    |      |  | $ |         |  
|Issuance of common stock upon acquisitions                                          |  | $                           |         |   |      | $ |         |      |  | $ | 107,861  |  
|Issuance and modifications of warrants                                              |  | $                           | 686      |   |      | $ | 3,602    |      |  | $ | 407      |  
|Conversion of senior convertible notes into common stock, net of discount of $6,334 |  | $                           | 23,121   |   |      | $ |         |      |  | $ |         |  
|Investment in equity securities in exchange for equipment                           |  | $                           | 658      |   |      | $ |         |      |  | $ |         |  

See accompanying notes.



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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, and litigation and contingency assessments.

Discontinued Operations

The operating results of the
Companys silica planar lightwave circuit (PLC) product line manufactured in Livingston, Scotland, which was sold in February 2004, are reflected as discontinued operations in the accompanying consolidated statement of operations for the year
ended June 30, 2004.

Cash and Cash Equivalents and Investments

The Company considers all highly liquid investment securities with maturity from the date of purchase of three months or less to be cash equivalents.

Restricted cash is security for certain leasing and borrowing arrangements.

All of our 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 and valuation methodologies. The use of different market assumptions and estimation methodologies could have



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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.

The Company sells its products primarily to large communications equipment vendors. The Company extends
reasonably short collection terms 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 prior years, we also recorded an allowance for doubtful accounts based on the length of time the receivables were past due. In the last three years, our uncollectible accounts experience has been almost nil. At
June 30, 2006, we determined that an allowance was not required. In addition, when the Company approves sales returns or becomes aware of disputed sales invoices, the Company records a specific allowance for sales returns and price adjustments. 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, with respect to these financial instruments, 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 forecast in fiscal 2006 and 2005. 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. If actual market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we maybe 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 that expected in that period.



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 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

If the carrying amount of the reporting
unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in net income (loss). We operate in one segment, which we consider our sole operating unit. Measurement of the fair value of the reporting unit is
determined annually using the market capitalization approach. The capitalization approach focuses on the fair value of the enterprise, which was determined based on our current market capitalization, to exceed its carrying value and goodwill was
determined not to be impaired at June 30, 2006.

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 depreciation and amortization expense recorded in earnings.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of long-lived assets in accordance with SFAS 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.

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



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

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.

Contingency Accruals

The Company evaluates contingent liabilities including threatened or pending litigation in accordance with Statement of Financial Accounting Standards
No. 5 (SFAS 5), Accounting for Contingencies. If the potential loss from any claim or legal proceedings is considered probable and the amount can be estimated, 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.

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 Avanex 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, 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 in stockholders equity. Currency transaction gains and losses are included in the Companys results of operations.

Accumulated
Other Comprehensive Income

Statement of Accounting Standards 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. Foreign currency translation adjustments for the years
ended June 30, 2006, 2005 and 2004 resulted in loss of $1.3 million and gains of approximately $0.8 million and $5.2 million respectively. For the years ended June 30, 2006 and 2005, there was an unrealized gain on investments of $0.5
million and an unrealized loss on investments of $0.5 million, respectively. Comprehensive loss was $55.5 million, $108.1 million and $118.9 million respectively for the years ended June 30, 2006, 2005 and 2004.



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Revenue Recognition

The Companys revenue recognition policy complies with SEC Staff Accounting Bulletin No. 104, 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 a specific allowance for sales returns and price adjustments. If future sales returns differ from the historical data used to calculate these estimates, changes to the
provision may be required. 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 Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment, 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. Prior to July 1, 2005, we followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for our stock compensation. For more information, please see Note 13 to Consolidated Financial Statements.

We have elected the modified prospective transition method for adopting SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. Our deferred stock compensation
balance of $353,000 as of June 30, 2005, which was accounted for under APB 25, was reclassified as a reduction of our additional paid-in-capital upon the adoption of SFAS 123(R).

In addition, the unrecognized expense of awards not yet vested at the July 1, 2005 date of adoption is recognized in net loss in the periods after
the date of adoption using the same Black-Scholes valuation method and assumptions determined under the original provisions of SFAS 123, Accounting for Stock-Based Compensation, as disclosed in our previous quarterly and annual
reports. The cumulative effect of the change in accounting principle from APB 25 to SFAS 123(R) was not material, because amortization of options granted prior to adoption was based on the single-option approach.

As permitted under the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123) as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148), for the
years ending June 30, 2005 and 2004, the Company accounted for stock option grants and stock purchase rights to employees and directors in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25) and, accordingly, recognized no compensation expense for stock option grants or stock purchase rights with an exercise price equal to or greater than the fair value of the shares at the date of
grant. Accordingly, deferred stock compensation was recognized for an option or share purchase right that had an exercise price that was less than the fair value of the common shares and was calculated as the difference between the option price or
share purchase right exercise price at the date of grant and the fair value of the Companys common shares at that date. Such deferred stock



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



compensation is amortized over the vesting period, generally a maximum of four years, using the multiple option approach pursuant to Financial Accounting
Standards Board Interpretation No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (FIN 28).

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.

Pro forma information regarding net loss and net loss per common share under the fair value method for
options and share repurchase rights granted prior to the Companys initial public offering was estimated at the date of grant using the minimum value method. The fair value of stock options, share purchase rights and shares issued under the
employee stock purchase plan (collectively the options) granted subsequent to the initial public offering were valued using Black-Scholes valuation model based on the actual stock closing price on the day previous to the date of grant.
The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions.
The fair value of these options was estimated at the date of grant using the following weighted-average assumptions:



|                               |  |                            |   |  |                              |   |  |           |   |  |           |  
|------------------------------ |  | -------------------------- | - |  | ---------------------------- | - |  | --------- | - |  | --------- | -
|                               |  | Employee Stock Option Plan |   |  | Employee Stock Purchase Plan |  
|                               |  | Years Ended June 30,       |   |  | Years Ended June 30,         |  
|                               |  | 2005                       |   |  | 2004                         |   |  | 2005      |   |  | 2004      |  
|Risk-free interest rate        |  | 2.8                        | % |  | 3.3                          | % |  | 3.0       | % |  | 1.2       | %
|Weighted-average expected life |  | 3.3 years                  |   |  | 4 years                      |   |  | 0.5 years |   |  | 0.5 years |  
|Volatility                     |  | 1.04                       |   |  | 1.23                         |   |  | 0.76      |   |  | 0.82      |  
|Dividend yield                 |  |                           |   |  |                             |   |  |          |   |  |          |  

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. The Companys pro forma information is as follows (in thousands, except per share data):



|                                                                                                         |  |                      |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                         |  | Years Ended June 30, |         
|                                                                                                         |  | 2005                 |          |   | 2004 |  
|Net loss:                                                                                                |  |                      |          |   |      |   |          |  
|As reported                                                                                              |  | $                    | (108,371 | ) |      | $ | (124,067 | )
|Stock-based employee compensation expense included in reported net loss                                  |  |                      | 366      |   |      |   | 875      |  
|Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                      | (26,136  | ) |      |   | (17,014  | )
|                                                                                                         |  |                      |          |   |      |   |          |  
|Pro forma net loss                                                                                       |  | $                    | (134,141 | ) |      | $ | (140,206 | )
|                                                                                                         |  |                      |          |   |      |   |          |  
|Basic and diluted net loss per common share:                                                             |  |                      |          |   |      |   |          |  
|As reported                                                                                              |  | $                    | (0.75    | ) |      | $ | (0.95    | )
|                                                                                                         |  |                      |          |   |      |   |          |  
|Pro forma                                                                                                |  | $                    | (0.93    | ) |      | $ | (1.07    | )
|                                                                                                         |  |                      |          |   |      |   |          |  

Research and Development Costs

Research and development costs are expensed as incurred.



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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.

Earnings per Share

Basic net 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. Common equivalent shares consist of stock options issued to employees under employee stock option plans and warrants. For more information, please see Note 12 to Consolidated Financial Statements.

Recent Accounting Pronouncements

In
November 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, (SFAS 151), which amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. This statement now requires that these costs be expensed as current period charges. In addition, this statement requires that the allocation of fixed
production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Our
adoption of SFAS 151 on July 1, 2005 did not have a material effect on our financial position, results of operations or cash flows.

In December 2004, the FASB issued Statement No. 153 (SFAS 153), exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope
of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for non-monetary asset exchanges beginning in our first quarter of fiscal 2006. Our adoption of SFAS 153 did not have a material
effect on our consolidated financial position or results of operations.

In June 2005, the FASB issued Statement No. 154 (SFAS 154),
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. The new standard requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion 20 (Accounting
Changes) previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. We do not believe that our
adoption of SFAS 154 on July 1, 2006 will have a material effect on our consolidated financial position or results of operations.

In
June 2006, FASB issued interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FAS No. 109) (FIN 48). This interpretation prescribes a recognition
threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. The evaluation of a tax position in accordance with this interpretation



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



is a two-step process. In the first step, recognition, it is determined whether it is more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criteria. The tax position
is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally
result in a) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, b) a reduction in a deferred tax asset or an increase in a deferred tax liability or c) both a and b. Tax positions that previously
failed to meet the more- likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in FAS No. 109 is not an appropriate substitute for the
de-recognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is unchanged by this interpretation. This Interpretation is effective for fiscal
years beginning after December 15, 2006. We are currently evaluating the impact FIN 48 will have to our consolidated balance sheet and statement of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Investmentsan amendment of FASB Statements No. 133 and 140. This standard permits fair value
remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133;
requires evaluation of interests in securitized financial assets; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and eliminates the prohibition of a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest of another derivative financial instrument. This standard is effective for all financial instruments acquired or issued after fiscal years beginning after
September 15, 2006. The Company does not believe that adoption of SFAS No. 155 will have a material effect on its financial position, results of operations or cash flows.

In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for
the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the companys balance sheet and statement of operations financial statements and
the related financial statement disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting
adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method
requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. We are currently evaluating the impact SAB 108 may have to our consolidated balance sheet and
statement of operations.

In various areas, including revenue recognition and stock option accounting, accounting standards and practices
continue to evolve. Additionally, the SEC and the FASBs Emerging Issues Task Force continue to address revenue and stock option related accounting issues. The management of Avanex believes it is in compliance with all of the rules and related
guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas could impact Avanexs future accounting.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 2. Acquisitions

On July 31, 2003, the Company acquired Alcatel Optronics France SA, a subsidiary of Alcatel that operated the optical components business of Alcatel, to augment its optical technologies and intelligent photonic
solutions product line with dense wave division multiplexing (DWDM) lasers, photodetectors, optical amplifiers, highspeed interface modules and key passive devices such as arrayed waveguide multiplexers and Fiber Bragg Grating (FBG) filters.
Alcatel also assigned and licensed certain intellectual property rights to the Company. In addition, the Company acquired certain assets of the optical components business of Corning to augment its optical technologies and intelligent photonic
solutions product line with optical amplifiers and lithium-niobate modulators. Corning also assigned and licensed certain intellectual property rights to the Company. In consideration for the above, the Company issued shares of its common stock to
Alcatel and to Corning, representing 28% (35.4 million shares) and 17% (21.5 million shares), respectively, of the outstanding shares of the Companys common stock on a post-transaction basis. The transactions were accounted for under the
purchase method of accounting.

On August 28, 2003, the Company acquired certain assets of Vitesse Semiconductor Corporations
Optical Systems Division to enhance its presence in transponders and expand its product offerings in subsystem products. The Company acquired substantially all of the assets of Vitesses Optical Systems Division in exchange for 1.4 million
shares of Avanex common stock. The transaction was accounted for under the purchase method of accounting.

The purchase price for these
acquisitions was as follows (in thousands):



|                               |  |                             |        |                      |   |                      |  |       |       |  |   |        
|------------------------------ |  | --------------------------- | ------ | -------------------- | - | -------------------- |  | ----- | ----- |  | - | -------
|                               |  | AlcatelOptronicsAcquisition |        | CorningAssetPurchase |   | VitesseAssetPurchase |  | Total
|Value of securities issued     |  | $                           | 63,064 |                      | $ | 38,289               |  | $     | 6,509 |  | $ | 107,862
|Transaction costs and expenses |  |                             | 6,533  |                      |   | 3,820                |  |       | 297   |  |   | 10,650 
|                               |  |                             |        |                      |   |                      |  |       |       |  |   |        
|Total purchase price           |  | $                           | 69,597 |                      | $ | 42,109               |  | $     | 6,806 |  | $ | 118,512
|                               |  |                             |        |                      |   |                      |  |       |       |  |   |        

The common stock issued in the acquisitions were valued based on the average closing price for two
trading days prior, the day of and two trading days subsequent to the public announcement of the transactions.



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Under the purchase method of accounting, the total purchase price as shown in the table above was
allocated to the net tangible and intangible assets based on their estimated fair values as of the date of the completion of the transaction. The purchase price allocation was as follows (in thousands):



|                                                         |  |                             |         |   |                      |   |        |                      |  |       |       |  |   |         |  
|-------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------- | - | ------ | -------------------- |  | ----- | ----- |  | - | ------- | -
|                                                         |  | AlcatelOptronicsAcquisition |         |   | CorningAssetPurchase |   |        | VitesseAssetPurchase |  | Total |      
|Cash, cash equivalents and short-term investments        |  | $                           | 108,613 |   |                      | $ | 20,023 |                      |  | $     |      |  | $ | 128,636 |  
|Long-term investments                                    |  |                             | 2,085   |   |                      |   |       |                      |  |       |      |  |   | 2,085   |  
|Accounts receivable                                      |  |                             | 8,050   |   |                      |   |       |                      |  |       |      |  |   | 8,050   |  
|Inventories                                              |  |                             | 14,169  |   |                      |   | 11,646 |                      |  |       | 1,731 |  |   | 27,546  |  
|Other current assets                                     |  |                             | 14,509  |   |                      |   | 500    |                      |  |       |      |  |   | 15,009  |  
|Due from related party                                   |  |                             | 8,389   |   |                      |   | 4,237  |                      |  |       |      |  |   | 12,626  |  
|Property and equipment                                   |  |                             | 10,176  |   |                      |   | 8,679  |                      |  |       | 1,612 |  |   | 20,467  |  
|Accounts payable                                         |  |                             | (15,564 | ) |                      |   |       |                      |  |       |      |  |   | (15,564 | )
|Accrued expenses                                         |  |                             | (25,228 | ) |                      |   | (2,433 | )                    |  |       |      |  |   | (27,661 | )
|Restructuring                                            |  |                             | (61,586 | ) |                      |   | (2,466 | )                    |  |       |      |  |   | (64,052 | )
|Warranty                                                 |  |                             | (1,406  | ) |                      |   | (5,237 | )                    |  |       |      |  |   | (6,643  | )
|Supply agreement                                         |  |                             |        |   |                      |   | (7,095 | )                    |  |       |      |  |   | (7,095  | )
|Other long-term obligations                              |  |                             | (3,185  | ) |                      |   |       |                      |  |       |      |  |   | (3,185  | )
|                                                         |  |                             |         |   |                      |   |        |                      |  |       |       |  |   |         |  
|Net tangible assets                                      |  |                             | 59,022  |   |                      |   | 27,854 |                      |  |       | 3,343 |  |   | 90,219  |  
|Intangible assets acquired core and developed technology |  |                             | 10,575  |   |                      |   | 5,990  |                      |  |       | 2,320 |  |   | 18,885  |  
|Goodwill                                                 |  |                             |        |   |                      |   | 8,265  |                      |  |       | 1,143 |  |   | 9,408   |  
|                                                         |  |                             |         |   |                      |   |        |                      |  |       |       |  |   |         |  
|Total purchase price                                     |  | $                           | 69,597  |   |                      | $ | 42,109 |                      |  | $     | 6,806 |  | $ | 118,512 |  
|                                                         |  |                             |         |   |                      |   |        |                      |  |       |       |  |   |         |  

The Company acquired developed technology from Alcatel, which is comprised of products that are
technologically feasible, primarily including DWDM lasers, photodetectors, optical amplifiers, high-speed interface modules and passive optical devices. Core technology and patents represent a combination of Alcatels Optronics division
processes, patents and trade secrets. The Company acquired developed technology from Corning, which is comprised of products that are technologically feasible, primarily including amplifiers, dispersion compensation modules and modulators. Core
technology and patents represent a combination of the optical components business of Corning processes, patents and trade secrets. The Company acquired developed technology from Vitesse, which is comprised of products that are technologically
feasible, primarily including transponders. Core technology and patents represent a combination of the optical systems business of Vitesse processes, patents and trade secrets. The Company amortizes the developed technology acquired from Alcatel,
Corning and Vitesse on a straight-line basis over an estimated life of 3-4 years.

The Company allocated the purchase price of acquired
companies and assets to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Such valuations require management to make significant estimations and assumptions, especially with respect to
intangible assets.

The purchase price for the Corning and Vitesse assets resulted in the recognition of goodwill. The primary factor
contributing to the recognition of goodwill for Vitesse assets was the ability to integrate a workforce with technical expertise. The primary factors contributing to the recognition of goodwill for the Corning Assets included the integration of a
workforce with the technical expertise and a deeper penetration of the Companys current customer base with a broader portfolio of products.



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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, |       
|                             |  | 2006     |        |   | 2005 |  
|Acquisition-related accruals |  | $        | 3,433  |   |      | $ | 4,804   |  
|Other                        |  |          | 16,140 |   |      |   | 41,373  |  
|                             |  |          |        |   |      |   |         |  
|Total restructuring accruals |  |          | 19,573 |   |      |   | 46,177  |  
|Less current portion         |  |          | (6,321 | ) |      |   | (32,040 | )
|                             |  |          |        |   |      |   |         |  
|Total ending balance         |  | $        | 13,252 |   |      | $ | 14,137  |  
|                             |  |          |        |   |      |   |         |  

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. A summary of the
acquisition-related accrued liability relating to these acquisitions is as follows (in thousands):



|                                                                 |  |                      |        |   |      |   |        |  
|---------------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | -
|                                                                 |  | Years ended June 30, |       
|                                                                 |  | 2006                 |        |   | 2005 |  
|Accrued restructuring related to acquisitions, beginning balance |  | $                    | 4,804  |   |      | $ | 13,135 |  
|Additions                                                        |  |                      | 911    |   |      |   |       |  
|Recovery                                                         |  |                      | (312   | ) |      |   | (3,940 | )
|Cash payments                                                    |  |                      | (1,970 | ) |      |   | (4,391 | )
|                                                                 |  |                      |        |   |      |   |        |  
|Ending balance                                                   |  | $                    | 3,433  |   |      | $ | 4,804  |  
|                                                                 |  |                      |        |   |      |   |        |  

During fiscal 2005, it was determined that certain estimated payments were no longer required
resulting in recoveries of approximately $2.6 million and $1.3 million in the Companys European and U.S. operations, respectively.

During fiscal 2006, the Company accrued a net of $0.6 million relating to revised estimates associated with the employee severance payment for our Nozay, France operation.

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 year 2006, we had an additional 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 costs associated with this restructuring consisted primarily of severance costs.
Our estimate of such costs was $1.7 million, with final payments to be made by October 2006.



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##### Table of Contents

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In fiscal 2005, the Company approved a work force reduction in its U.S. operations that resulted in
the termination of 145 employees in order to reduce operating expenses and improve its cost structure. This reduction in force was completed in December 2005. The costs associated with this restructuring consisted primarily of severance costs of
$4.7 million.

In fiscal 2005, the Company approved a work force reduction in its Nozay, France operations that resulted in the termination
of 156 full-time employees in France, leaving approximately 150 employees. The costs of $23.6 million associated with this restructuring were accrued in the quarter ending June 30, 2005 and consisted primarily of severance costs.

In addition, during fiscal 2005 we accrued $4.3 million in additional costs to expand the scope of our 2004 Horseheads restructuring plan. This amount
was offset by recoveries of $0.8 million after it was determined that certain estimated payments were no longer required.

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.

During fiscal 2004, the Company announced and implemented several restructuring programs throughout the organization. Restructuring expenses for fiscal
2004 were comprised of $7.9 million of accruals and costs incurred, offset by $3.5 million of recovery relating to revised estimates of the costs associated with the Companys abandoned leased facilities, and $0.6 million relating to sales of
previously abandoned equipment, resulting in net restructuring expense of $3.8 million. In connection with the restructured leased facilities, the Company issued warrants to purchase 60,000 shares of its common stock to the landlord amounting to
$0.4 million (valued using the Black-Scholes method). These warrants have an exercise price of $7.39 per share and expire on November 30, 2010.

The following table summarizes changes in accrued restructuring for fiscal 2006 and 2005, excluding accruals related to the acquisitions noted above (in thousands):



|                                        |  |                                  |        |                                     |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|--------------------------------------- |  | -------------------------------- | ------ | ----------------------------------- | - | ------------------------------- |  | - | -------------------------- | - |  | -------------------------------- | ------ | - |  | - | ------
|                                        |  | AccruedLiability atJune 30, 2005 |        | AdditionalAccrualsDuringFiscal 2006 |   | Cash PaymentsDuring Fiscal 2006 |  |   | Recovery DuringFiscal 2006 |   |  | AccruedLiability atJune 30, 2006
|Workforce reduction, fiscal 2004        |  | $                                | 758    |                                     | $ | 247                             |  | $ | (463                       | ) |  | $                                |       |   |  | $ | 542   
|Workforce reduction, fiscal 2005        |  |                                  | 25,723 |                                     |   | 228                             |  |   | (21,270                    | ) |  |                                  | (1,853 | ) |  |   | 2,828 
|Workforce reduction, fiscal 2006        |  |                                  |       |                                     |   | 2,234                           |  |   | (1,636                     | ) |  |                                  | (536   | ) |  |   | 62    
|Abandonment of excess leased facilities |  |                                  | 14,892 |                                     |   | 1,682                           |  |   | (3,091                     | ) |  |                                  | (775   | ) |  |   | 12,708
|                                        |  |                                  |        |                                     |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|Total                                   |  | $                                | 41,373 |                                     | $ | 4,390                           |  | $ | (26,459                    | ) |  | $                                | (3,164 | ) |  | $ | 16,140
|                                        |  |                                  |        |                                     |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|                                        |  |                                  |        |                                     |  
|                                        |  | AccruedLiability atJune 30, 2004 |        | AdditionalAccrualsDuringFiscal 2005 |   | Cash PaymentsDuring Fiscal2005  |  |   | Recovery DuringFiscal 2005 |   |  | AccruedLiability atJune 30, 2005
|Workforce reduction, fiscal 2004        |  | $                                | 6,271  |                                     | $ | 4,289                           |  | $ | (8,966                     | ) |  | $                                | (836   | ) |  | $ | 758   
|Workforce reduction, fiscal 2005        |  |                                  |       |                                     |   | 28,343                          |  |   | (2,620                     | ) |  |                                  |       |   |  |   | 25,723
|Abandonment of excess leased facilities |  |                                  | 18,812 |                                     |   | 552                             |  |   | (4,472                     | ) |  |                                  |       |   |  |   | 14,892
|Capital leases                          |  |                                  | 446    |                                     |   |                                |  |   | (446                       | ) |  |                                  |       |   |  |   |      
|                                        |  |                                  |        |                                     |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|Total                                   |  | $                                | 25,529 |                                     | $ | 33,184                          |  | $ | (16,504                    | ) |  | $                                | (836   | ) |  | $ | 41,373
|                                        |  |                                  |        |                                     |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       



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##### Table of Contents

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 4. Net Loss per Share

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



|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                |  | Years Ended June 30, |        
|                                                                                                |  | 2006                 |         |   | 2005 |   |          | 2004 | 
|Loss from continuing operations before discontinued operations                                  |  | $                    | (54,692 | ) |      | $ | (108,371 | )    |  | $ | (118,013 | )
|Loss from discontinued operations                                                               |  |                      |        |   |      |   |         |      |  |   | (6,054   | )
|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  
|Net loss                                                                                        |  | $                    | (54,692 | ) |      | $ | (108,371 | )    |  | $ | (124,067 | )
|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  
|                                                                                                |  |                      |        
|Basic and diluted:                                                                              |  |                      |         |   |      |   |          |      |  |   |          |  
|Weighted-average number of shares of common stock outstanding                                   |  |                      | 163,242 |   |      |   | 144,253  |      |  |   | 130,596  |  
|Less: weighted-average number of shares subject to repurchase                                   |  |                      |        |   |      |   |         |      |  |   | (35      | )
|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  
|Weighted-average number of shares used in computing basic and diluted net loss per common share |  |                      | 163,242 |   |      |   | 144,253  |      |  |   | 130,561  |  
|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  
|Loss per share from continuing operations before discontinued operations                        |  | $                    | (0.34   | ) |      | $ | (0.75    | )    |  | $ | (0.90    | )
|Loss per share from discontinued operations                                                     |  |                      |        |   |      |   |         |      |  |   | (0.05    | )
|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per common share                                                     |  | $                    | (0.34   | ) |      | $ | (0.75    | )    |  | $ | (0.95    | )
|                                                                                                |  |                      |         |   |      |   |          |      |  |   |          |  

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,
|                                                     |  | 2006                |  | 2005       |  | 2004      
|Employee stock options                               |  | 12,688,341          |  | 19,651,000 |  | 17,292,000
|Employee restricted stock units                      |  | 4,066,002           |  |           |  |          
|8% convertible notes                                 |  | 6,161,511           |  | 28,925,620 |  |          
|Warrants issued with 8% convertible notes            |  | 8,677,689           |  | 8,677,689  |  |          
|Warrants issued to landlord                          |  | 60,000              |  | 60,000     |  | 60,000    
|Warrants issued with equity securities in March 2006 |  | 7,222,500           |  |           |  |          
|                                                     |  |                     |  |            |  |           
|                                                     |  | 38,876,043          |  | 57,314,309 |  | 17,352,000
|                                                     |  |                     |  |            |  |           

Note 5. Consolidated Balance Sheet Detail

Cash Equivalents, Short-term and Long-term Investments

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



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##### Table of Contents

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The table below summarizes the amortized cost, fair value and gross unrealized gains and losses
related to held-to-maturity and available-for-sale securities, aggregated by security type.

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



|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|--------------------------------------------------------------------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|                                                                                              |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|June 30, 2006                                                                                 |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Cash Equivalents                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Money Market Funds                                                                            |  | $             | 9,693  |                      | $ |                      |  | $ |                   |   |  | $ | 9,693 
|Restricted cash and investments Certificates of Deposit and United States Government Agencies |  |               | 6,676  |                      |   |                      |  |   |                   |   |  |   | 6,676 
|Short-term Investments (classified as available-for-sale)                                     |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Certificates of Deposit                                                                       |  |               | 209    |                      |   |                      |  |   |                   |   |  |   | 209   
|United States Government Agencies                                                             |  |               | 8,985  |                      |   | 163                   |  |   |                   |   |  |   | 9,148 
|Corporate Bonds                                                                               |  |               | 29,339 |                      |   |                      |  |   |                   |   |  |   | 29,339
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Subtotal, short-term investments                                                              |  |               | 38,533 |                      |   | 163                   |  |   |                   |   |  |   | 38,696
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Total cash equivalents and short-term investments                                             |  | $             | 54,902 |                      | $ | 163                   |  | $ |                   |   |  | $ | 55,065
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|June 30, 2005                                                                                 |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Cash Equivalents                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Money Market Funds                                                                            |  | $             | 15,248 |                      | $ |                      |  | $ |                   |   |  | $ | 15,248
|Restricted cash and investments Certificates of Deposit and United States Government Agencies |  |               | 8,166  |                      |   |                      |  |   | (38                | ) |  |   | 8,128 
|Short-term Investments (classified as available-for-sale)                                     |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Certificates of Deposit                                                                       |  |               | 426    |                      |   |                      |  |   |                   |   |  |   | 426   
|United States Government Agencies                                                             |  |               | 33,458 |                      |   |                      |  |   | (394               | ) |  |   | 33,064
|Corporate Bonds                                                                               |  |               | 5,527  |                      |   |                      |  |   | (51                | ) |  |   | 5,476 
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Subtotal, short-term investments                                                              |  |               | 39,411 |                      |   |                      |  |   | (445               | ) |  |   | 38,966
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Total cash equivalents and short-term investments                                             |  | $             | 62,825 |                      | $ |                      |  | $ | (483               | ) |  | $ | 62,342
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       

Inventory

Inventories consist of the following (in thousands):



|                |  |          |        |      |   |       
|--------------- |  | -------- | ------ | ---- | - | ------
|                |  | June 30,
|                |  | 2006     |        | 2005
|Raw materials   |  | $        | 6,114  |      | $ | 20,199
|Work-in-process |  |          | 974    |      |   | 5,208 
|Finished goods  |  |          | 11,329 |      |   | 10,607
|                |  |          |        |      |   |       
|                |  | $        | 18,417 |      | $ | 36,014
|                |  |          |        |      |   |       

In fiscal 2006, the Company recorded charges to cost of revenue of $12.8 million for excess and
obsolete inventory. Management did not believe it could fully recover the purchase price of this inventory in the future. In fiscal 2005, the Company recorded charges to cost of revenue of $8.2 million for excess and obsolete inventory primarily due
to excess inventory resulting from decreased demand from certain products, and from discontinued products. In fiscal 2004, the Company recorded charges to cost of revenue of $1.0 million for excess and obsolete inventory primarily as a result of
decreased demand for the Companys products.



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##### Table of Contents

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company sold inventory previously written-off with original cost totaling $0.2 million in fiscal
2006, $1.1 million in fiscal 2005 and $1.2 million in fiscal 2004. 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.

Property and Equipment

Property and equipment
consist of the following (in thousands):



|                                          |  |          |         |   |      |   |         |  
|----------------------------------------- |  | -------- | ------- | - | ---- | - | ------- | -
|                                          |  | June 30, |        
|                                          |  | 2006     |         |   | 2005 |  
|Computer hardware and software            |  | $        | 8,538   |   |      | $ | 6,727   |  
|Production and engineering equipment      |  |          | 33,025  |   |      |   | 41,340  |  
|Office equipment, furniture and fixtures  |  |          | 827     |   |      |   | 1,532   |  
|Leasehold improvements                    |  |          | 1,518   |   |      |   | 2,485   |  
|                                          |  |          |         |   |      |   |         |  
|Total acquisition cost                    |  |          | 43,908  |   |      |   | 52,084  |  
|Accumulated depreciation and amortization |  |          | (38,240 | ) |      |   | (43,472 | )
|                                          |  |          |         |   |      |   |         |  
|Net book value                            |  | $        | 5,668   |   |      | $ | 8,612   |  
|                                          |  |          |         |   |      |   |         |  

Other Current Assets

Other current assets consist of the following (in thousands):



|                                                  |  |          |        |      |   |       
|------------------------------------------------- |  | -------- | ------ | ---- | - | ------
|                                                  |  | June 30,
|                                                  |  | 2006     |        | 2005
|VAT receivable and research tax credit receivable |  | $        | 1,504  |      | $ | 7,405 
|Prepaid interest                                  |  |          |       |      |   | 2,797 
|Prepaid rent                                      |  |          | 231    |      |   | 332   
|Billings to contract manufacturers                |  |          | 11,526 |      |   | 6,187 
|Prepaid expenses and other assets                 |  |          | 2,212  |      |   | 3,924 
|                                                  |  |          |        |      |   |       
|                                                  |  | $        | 15,473 |      | $ | 20,645
|                                                  |  |          |        |      |   |       

Other Long-term Assets

Other long-term assets consist of the following (in thousands):



|                              |  |          |       |      |   |      
|----------------------------- |  | -------- | ----- | ---- | - | -----
|                              |  | June 30,
|                              |  | 2006     |       | 2005
|Prepaid interest, non-current |  | $        |      |      | $ | 2,478
|Deposits and other assets     |  |          | 1,839 |      |   | 1,763
|                              |  |          |       |      |   |      
|                              |  | $        | 1,839 |      | $ | 4,241
|                              |  |          |       |      |   |      

In February 2004, the Company entered into a share acquisition agreement with Gemfire Corporation
(Gemfire) pursuant to which Gemfire acquired the Companys silica planar lightwave circuit (PLC) product line manufactured in Livingston, Scotland, which was acquired in the Companys acquisition of Alcatel
Optronics in the first quarter of fiscal 2004. The cost basis of the acquired Gemfire shares was $4.4 million and was recorded in other long-term assets. In the fourth quarter of fiscal 2005, management evaluated the carrying value of its investment
in Gemfire shares as zero, and accordingly, recorded impairment expense of $4.4 million for the full carrying amount in other expense.



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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. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing
those claims, the Companys warranty costs will increase resulting in decreases to gross profit. Conversely, to the extent the Company experiences decreased warranty claim activity, or decreased costs associated with servicing those claims, our
warranty costs will decrease, resulting in increases to gross profit. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Companys product warranty accrual for fiscal 2006 and fiscal 2005 are as follows (in thousands):



|                                                        |  |                      |        |   |      |   |        |  
|------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | Years Ended June 30, |       
|                                                        |  | 2006                 |        |   | 2005 |  
|Balance at beginning of year                            |  | $                    | 5,268  |   |      | $ | 6,125  |  
|Accrual for sales during the year                       |  |                      | 1,826  |   |      |   | 3,251  |  
|Cost of warranty repair                                 |  |                      | (877   | ) |      |   | (1,344 | )
|Changes in estimate and expiration for prior provisions |  |                      | (4,418 | ) |      |   | (2,764 | )
|                                                        |  |                      |        |   |      |   |        |  
|Balance at end of year                                  |  | $                    | 1,799  |   |      | $ | 5,268  |  
|                                                        |  |                      |        |   |      |   |        |  

During fiscal 2006, the Company determined that the pattern for replacement as opposed to repair
had shifted resulting in decreases to previous estimates for product warranty costs.

Note 6. Goodwill

Statement of Financial Accounting Standard 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 will continue to be tested for impairment at the enterprise level. The fair value of the enterprise, which was determined based on our current market capitalization, exceeded its carrying
value, and goodwill was determined not to be impaired at June 30, 2006 and 2005. Goodwill at June 30, 2006 and 2005 was $9.4 million.

Note 7.
Other Intangibles

The following table reflects the carrying amount of intangible assets at June 30, 2006 and June 30, 2005
(in thousands):



|                     |  |                                  |  |                                |        |                                  |   |    |                             |  |   |                                |   |                             |   |       |                                |   |        |   |  |   |      
|-------------------- |  | -------------------------------- |  | ------------------------------ | ------ | -------------------------------- | - | -- | --------------------------- |  | - | ------------------------------ | - | --------------------------- | - | ----- | ------------------------------ | - | ------ | - |  | - | -----
|                     |  | Weighted-averageLife, inQuarters |  | NetCarryingAmount,June 30,2004 |        | Adjustmentto GrossCarryingAmount |   |    | Less Fiscal2005Amortization |  |   | NetCarryingAmount,June 30,2005 |   | Less Fiscal2006Amortization |   |       | NetCarryingAmount,June 30,2006
|Purchased technology |  | 21                               |  | $                              | 12,423 |                                  | $ | (6 | )                           |  | $ | (4,789                         | ) |                             | $ | 7,628 |                                | $ | (4,594 | ) |  | $ | 3,034
|Supply agreement     |  | 15                               |  |                                | 1,276  |                                  |   |   |                             |  |   | (599                           | ) |                             |   | 677   |                                |   | (541   | ) |  |   | 136  
|Other                |  | 15                               |  |                                | 701    |                                  |   | 88 |                             |  |   | (408                           | ) |                             |   | 381   |                                |   | (305   | ) |  |   | 76   
|                     |  |                                  |  |                                |        |                                  |   |    |                             |  |   |                                |   |                             |   |       |                                |   |        |   |  |   |      
|                     |  |                                  |  | $                              | 14,400 |                                  | $ | 82 |                             |  | $ | (5,796                         | ) |                             | $ | 8,686 |                                | $ | (5,440 | ) |  | $ | 3,246
|                     |  |                                  |  |                                |        |                                  |   |    |                             |  |   |                                |   |                             |   |       |                                |   |        |   |  |   |      



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##### Table of Contents

AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|            |  |                       |      
|----------- |  | --------------------- | -----
|            |  | Amount to beAmortized
|Fiscal Year |  |                       |      
|2007        |  | $                     | 2,690
|2008        |  |                       | 556  
|            |  |                       |      
|            |  | $                     | 3,246
|            |  |                       |      

Note 8. Related Party Transactions

One of the Companys directors was a senior vice president of MCI at June 30, 2005. MCI accounted for less than 1% of our net revenue for the
years ended June 30, 2006, 2005, and 2004, respectively.

On July 31, 2003, Alcatel 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. As of June 30, 2006, Alcatel and Corning owned shares representing 14% and zero percent respectively, of the outstanding shares of Avanex common
stock. As of June 30, 2005, Alcatel and Corning owned shares representing approximately 20% and 9% respectively, of the outstanding shares of Avanex common stock. The Company sells products to and purchases raw materials and components from
Alcatel and Corning in the regular course of business. Additionally, Alcatel 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,
|                                                                                                                             |  | 2006                |        | 2005 |   | 2004  
|Related party transactions(1)                                                                                                |  |                     |        |      |   |        |  |   |       
|Sales to related parties                                                                                                     |  | $                   | 43,890 |      | $ | 55,127 |  | $ | 32,181
|Direct material purchases from related parties                                                                               |  |                     | 2,726  |      |   | 10,202 |  |   | 27,706
|Administrative and transitional services purchased from related parties; fiscal 2006 amounts include facilities rent credits |  |                     | 951    |      |   | 5,891  |  |   | 6,851 
|Royalty income                                                                                                               |  |                     | 190    |      |   | 483    |  |   | 494   

---

|(1) | At December 31, 2005, Corning no longer owned shares in Avanex. As a result, we have not included transactions with Corning in related party transactions for the second, third,
and fourth, quarters of fiscal 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                                                                     |  |             |        |      |   |       
|------------------------------------------------------------------------------------ |  | ----------- | ------ | ---- | - | ------
|                                                                                     |  | At June 30,
|                                                                                     |  | 2006        |        | 2005
|Due from related parties                                                             |  |             |        |      |   |       
|Total receivables                                                                    |  | $           | 10,404 |      | $ | 15,357
|Receivables originating at date of acquisition of related parties, included in above |  | $           |       |      | $ | 1,710 
|Due to related parties(2)                                                            |  | $           | 4,475  |      | $ | 1,549 

---

|(2) | At June 30, 2006, Alcatel was the only related party, as Corning no longer owned shares in Avanex. At June 30, 2005, Alcatel and Corning were both related parties.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Receivables due from related parties originating at the date of acquisition are amounts owed by
Alcatel contractually payable to the Company subsequent to the original transaction. Additionally, amounts are due from Corning related to warranty repairs of optical products sold by Corning prior to the acquisition.

Note 9. 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 of which 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, 2006 are as follows
(in thousands):



|                             |  |                      |        |                                                  |   |         |               |  |   |       
|---------------------------- |  | -------------------- | ------ | ------------------------------------------------ | - | ------- | ------------- |  | - | ------
|                             |  | Total CashObligation |        | Amount Included inAccrued RestructuringLiability |   |         | FutureExpense
|Years ending June 30,        |  |                      |        |                                                  |   |         |               |  |   |       
|2007                         |  | $                    | 5,048  |                                                  | $ | (2,915  | )             |  | $ | 2,133 
|2008                         |  |                      | 6,056  |                                                  |   | (3,113  | )             |  |   | 2,943 
|2009                         |  |                      | 6,036  |                                                  |   | (2,247  | )             |  |   | 3,789 
|2010                         |  |                      | 5,128  |                                                  |   | (2,235  | )             |  |   | 2,893 
|2011                         |  |                      | 4,160  |                                                  |   | (2,198  | )             |  |   | 1,962 
|Remaining years              |  |                      | 1,483  |                                                  |   |        |               |  |   | 1,483 
|                             |  |                      |        |                                                  |   |         |               |  |   |       
|Total minimum lease payments |  | $                    | 27,911 |                                                  | $ | (12,708 | )             |  | $ | 15,203
|                             |  |                      |        |                                                  |   |         |               |  |   |       

Amounts shown in the above table are net of sublease income. The Companys rental expense
under operating leases was $7.3 million, $7.5 million and $5.5 million for the years ended June 30, 2006, 2005 and 2004, respectively.

Contingencies

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



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. On October 9, 2002, the claims against Avanexs directors and
officers were dismissed without prejudice pursuant to a tolling agreement. The issuer defendants filed a coordinated motion to dismiss all common pleading issues, which the court granted in part and denied in part in an order dated February 19,
2003. The courts order did not dismiss the Section 10(b) or Section 11 claims against Avanex. In June 2004, a stipulation of settlement for the claims against the issuer defendants, including Avanex, was submitted to the court. On
August 31, 2005, the court granted preliminary approval of the settlement. On April 24, 2006, the court held a fairness hearing in connection with the motion for final approval of the settlement. The court did not issue a ruling on the
motion for final approval at the fairness hearing. The settlement remains subject to a number of conditions, including final approval of the court. If the settlement does not occur, and litigation against Avanex continues, Avanex believes it has
meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert managements attention and resources, which could seriously harm our business,
financial condition, results of operations or cash flows in a particular period.

Note 10. 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.

In accordance
with the Financial Accounting Standards Board Statement No. 132, the Company has analyzed the change in unfunded status between the end of the prior fiscal year and the end of the current fiscal year.



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                                                                           |  | 2006 |        |   | 2005 |  
|Change in benefit obligation:                                                                                                                                                                                              |  |      |        |   |      |   |        |  
|Benefit obligation at the beginning of year                                                                                                                                                                                |  | $    | 2,871  |   |      | $ | 4,360  |  
|Service cost                                                                                                                                                                                                               |  |      | 163    |   |      |   | 271    |  
|Interest cost                                                                                                                                                                                                              |  |      | 103    |   |      |   | 195    |  
|Settlements and curtailments                                                                                                                                                                                               |  |      |       |   |      |   | (2,932 | )
|Actuarial (gain) loss                                                                                                                                                                                                      |  |      | (2,075 | ) |      |   | 977    |  
|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|Benefit obligation at the end of year                                                                                                                                                                                      |  | $    | 1,062  |   |      | $ | 2,871  |  
|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|                                                                                                                                                                                                                           |  |     
|Weighted-average assumptions as of June 30:                                                                                                                                                                                |  |      |        |   |      |   |        |  
|Discount rate                                                                                                                                                                                                              |  |      | 4.09   | % |      |   | 3.50   | %
|Rate of compensation increase                                                                                                                                                                                              |  |      | 2.50   | % |      |   | 2.50   | %
|Expected residual active life (year)                                                                                                                                                                                       |  |      | 12     |   |      |   | 12     |  
|                                                                                                                                                                                                                           |  |     
|Amounts recognized in consolidated balance sheets:                                                                                                                                                                         |  |      |        |   |      |   |        |  
|Set forth below is a summary of the amounts reflected in the Companys consolidated balance sheets at the end of the last two fiscal
years:                                                                                |  |      |        |   |      |   |        |  
|Accumulated benefit obligation                                                                                                                                                                                             |  | $    | 1,062  |   |      | $ | 2,871  |  
|Unrecognized actuarial gain (loss)                                                                                                                                                                                         |  |      | 1,620  |   |      |   | (521   | )
|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|Net amount recognized                                                                                                                                                                                                      |  | $    | 2,682  |   |      | $ | 2,350  |  
|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|                                                                                                                                                                                                                           |  |     
|Components of net periodic cost:                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|The Company has developed the net periodic pension cost to be charged to income for the fiscal year ended June 30, 2005. A comparison
with the components of net periodic pension cost for the prior period is also shown. |  |      |        |   |      |   |        |  
|Service cost                                                                                                                                                                                                               |  | $    | 163    |   |      | $ | 271    |  
|Interest cost                                                                                                                                                                                                              |  |      | 103    |   |      |   | 195    |  
|Amortization of actuarial gain                                                                                                                                                                                             |  |      | (21    | ) |      |   |       |  
|Effect of curtailments                                                                                                                                                                                                     |  |      |       |   |      |   | 189    |  
|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|Net periodic benefit cost                                                                                                                                                                                                  |  | $    | 245    |   |      | $ | 655    |  
|                                                                                                                                                                                                                           |  |      |        |   |      |   |        |  
|                                                                                                                                                                                                                           |  |     
|Cash flows:                                                                                                                                                                                                                |  |      |        |   |      |   |        |  
|Contributions: The Company did not contribute to its pension plan for 2004, 2005, 2006.                                                                                                                                    | 
|                                                                                                                                                                                                                           |  |     
|Expected benefit payments:                                                                                                                                                                                                 |  |      |        |   |      |   |        |  
|2007                                                                                                                                                                                                                       |  | $    | 9      |   |      |   |        |  
|2008                                                                                                                                                                                                                       |  | $    |       |   |      |   |        |  
|2009                                                                                                                                                                                                                       |  | $    | 19     |   |      |   |        |  
|2010                                                                                                                                                                                                                       |  | $    |       |   |      |   |        |  
|2011                                                                                                                                                                                                                       |  | $    | 78     |   |      |   |        |  
|2012 through 2017                                                                                                                                                                                                          |  | $    | 580    |   |      |   |        |  
|After 2017                                                                                                                                                                                                                 |  | $    | 1,814  |   |      |   |        |  



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The benefit obligations of $2.7 million and $2.4 million are included in other long-term obligations
in the consolidated balance sheets at June 30, 2006 and 2005, respectively. The last actuarial valuation of the plan was as of June 30, 2006.

The Company maintains a savings and retirement plan under Section 401(k) of the Internal Revenue Code. All employees are eligible to participate on the first day of the month following their hire date with the
Company. Under the plan, employees may contribute up to 15% of their pre-tax salaries per year but not more than the statutory limits. The Company contributes 50% of the employees contribution up to the first 3% of compensation.

Note 11. Financing Arrangements

Short-term Borrowings

During fiscal 2006, the company had no borrowings with any financial institution. The Company fully repaid and terminated its revolving
line of credit with a financial institution during fiscal 2005.

Other Long-term 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. As described below, 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. The original notes could be
converted into shares of the Companys common stock at the option of the holder prior to the maturity of the notes on May 19, 2008. The conversion price of the original notes was $1.21, which represented a premium approximately 10% over
the closing price of the Companys common stock on May 16, 2005. Subject to certain conditions, at any time after May 19, 2007, we could automatically convert all of the outstanding original notes into common stock if the weighted
average price of the common stock of Avanex equals or exceeds 175% of the conversion price for a specified period. The original warrants provided holders with the right to purchase up to 8,677,689 shares of common stock and were exercisable during
the three-year period ending May 19, 2008, at an exercise price of $1.5125 per share, which represented a premium of approximately 35% over the closing price of the Companys common stock on May 16, 2005. The conversion price of the
original notes and the exercise price of the original warrants were each subject to adjustment upon specified events, including a broad-based anti-dilution provision that until October 27, 2005, contained a floor price of $1.1375 (subject to
adjustment for stock splits, combinations or similar events). The floor price relating to the original notes and warrants was eliminated upon stockholder approval at the 2005 Annual Meeting of Stockholders on October 27, 2005. Our obligations
under the original notes were secured by substantially all of our assets, substantially all of the assets of our domestic subsidiaries, and a pledge of 65% of the capital stock of our non U.S. subsidiaries.

The Company applied the guidance from 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 in accounting for the debentures, the accompanying warrants and the
value of the conversion feature.

The Company assigned a relative fair value of $3.6 million and $31.4 million to the original warrants and
original notes, respectively, by using a Black-Scholes model and assuming a historic volatility in the Companys



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stock price of 79.5% and a contractual term of three years for the life of the instrument. The relative fair value of the original warrants increased
additional paid-in-capital on the balance sheet at June 30, 2005. Interest expense of $5.6 million was prepaid for two years and was recorded in other current assets and other assets. In addition, the Company capitalized $1.9 million related to
issuance costs associated with the original notes to be amortized as interest expense over the term of the original notes. The Company reduced additional paid-in capital by $260,000 related to issuance costs associated with the original warrants.

Prior to registration in June 2005 of the shares of common stock that would be received upon exercise of the warrants, the Company
accounted for the value of the warrants as a derivative which upon the registration of the shares, the Company realized a gain of $740,000 from the change in fair value of the derivative and reclassified the fair value of the warrants as debt
discount, to be amortized as interest expense over the term of the convertible note.

On November 8, 2005, the Company and each note
holder entered into a separate Amendment Agreement (each an Amendment Agreement and collectively Amendment Agreements). Pursuant to each Amendment Agreement, each holder agreed to withdraw the purported default notice, if any,
delivered by such holder. In addition the Company and each holder entered into a mutual release. The Company also agreed to pay to each holder a release amount which, in the aggregate, totaled $3.5 million.

In addition, pursuant to the Amendment Agreement, the company and each holder agreed to amend the restate such holders note (the Amended and
Restated Notes) primarily to amend the conversion price to $0.90. The Amended and Restated Notes provide for adjustments for stock splits and similar events.

Pursuant to each Amendment Agreement, the Company and each holder also agreed to amend and restate such holders Warrants (the Amended and Restated Warrants), primarily to amend the exercise price to
$1.13 per share. The Amended and Restated Warrants provide for adjustments for stock splits and similar events.

Pursuant to each Amendment
Agreement, the Company and each holder amended certain portions of the Registration Rights Agreement dated as of May 16, 2005. The Company on December 2, 2005 filed a registration statement on Form S-3 to cover the resale of the shares
issued upon conversion of the Amended and Restated Notes and the Amended and Restated Warrants.

The modification of the convertible notes
and attached warrants, as described in the Amended Agreement and the Amended and Restated Warrants, has been accounted for as a debt extinguishment and the issuance of new debt instrument, in accordance with EITF 96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments. Accordingly, in connection with extinguishment of the original debt, the Company recognized a $4.5 million loss, comprised of $3.5 million paid to settle the note holders
alleged default claims, $575,000 of issuance costs and $450,000 from the increase in fair value from the modification of warrants (a reduction in the exercise price).

The modified notes were determined to have fair a value at November 8, 2005, as follows (in thousands):



|                                                         |  |   |        |  
|-------------------------------------------------------- |  | - | ------ | -
|Note principal                                           |  | $ | 35,000 |  
|Less:                                                    |  |   |        |  
|Unaccreted discount, issuance costs and prepaid interest |  |   | (8,662 | )
|Embedded interest rate derivative                        |  |   | (248   | )
|                                                         |  |   |        |  
|Fair value of modified convertible notes                 |  | $ | 26,090 |  
|                                                         |  |   |        |  

The Company assigned an increase in fair value of $450,000 to the Amended and Restated Warrants by
using a Black-Scholes model and assuming a historic volatility in the Companys stock price of 79.5%, a risk-



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



free interest rate of 4.42% and a contractual term of 2.5 years for the remaining life of the instrument. The fair value of the Amended and Restated Warrants
increased additional paid-in-capital on the balance sheet at December 31, 2005 and was included in the $4.5 million loss incurred in the convertible notes modification during the quarter ended December 31, 2005.

During the fiscal year 2006 the amortization of prepaid interest, accretion of notes discount and the increase in the valuation of the warrants prior to
their registration totaled $3.8 million. Unaccreted discount was $1.0 million at June 30, 2006.

During fiscal year 2006, holders of
$29.5 million of the outstanding Amended and Restated Notes converted to common stock. At June 30, the notes balance was $5.5 million at face value, and $4.6 million net of unaccreted discount. Subsequent to June 30, 2006, one note holder
further converted its note into 605,956 common shares.

Other Long-term Obligations and Other

In January 2004, the Company entered into an installment payment agreement with a financial institution whereby the financial institution agreed to loan
to the Company an aggregate principal amount of $865,000 to finance the acquisition of SAP software, which was collateral for the outstanding loan under the agreement. The outstanding balance on the loan was fully repaid in January 2006.

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, 2006 capital lease obligations amounted to $823,000 at an interest rate of 7.7% with maturity in fiscal 2007. At June 30, 2005, capital lease obligations totaled $8.3 million at interest
rates of 3.1% and 7.7%.

The Companys facilities in Nozay, France are leased from Alcatel. When the Company acquired the business of
Alcatel Optronics in August 2003, certain of the Nozay facilities leases were accounted for as capital leases. In October 2005, the Company and Alcatel agreed to revised lease terms, which will provide the following benefits to Avanex: approximately
$6.6 million in rent credits to be received in a combination of cash and free rent; allowance for Avanex to exit unneeded space and obtain early termination of leases; and funding by Alcatel of Avanexs relocation and environmental remediation
costs. Due to the related party relationship with Alcatel, and the Companys obligation to continue lease facilities from Alcatel through 2012, the $5.3 million Nozay facilities capital lease liability at October 1, 2005 is being
recognized as a reduction of rent over the remaining lease period, which will end in 2012. Accordingly, we reclassified the remaining capital lease liability to other long-term liabilities at December 31, 2005.

Capital Lease Obligations

Payments due under capital
lease agreements for equipment as of June 30, 2006 are as follows (in thousands):



|                                            |  |                      |     |  
|------------------------------------------- |  | -------------------- | --- | -
|                                            |  | Total CashObligation |    
|Year ending June 30, 2007                   |  | $                    | 840 |  
|Less: Amounts representing interest         |  |                      | (17 | )
|                                            |  |                      |     |  
|Present value of net minimum lease payments |  | $                    | 823 |  
|                                            |  |                      |     |  



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 12. Stockholders Equity

Securities Purchase Agreements

In November 2003, the Company entered into a securities purchase
agreement pursuant to which investors purchased 6.8 million shares of the Companys common stock at a price of $4.63 per share for aggregate gross proceeds of approximately $31.5 million. Net proceeds from this transaction amounted to
approximately $29.6 million after payment of fees to financial and legal advisors and other direct costs. In connection with the issuance of the shares of common stock, the investors were issued rights, which were exercisable for up to an additional
1.4 million shares of its common stock at $4.63 per share. During fiscal 2004, 0.2 million shares of common stock were issued upon the exercise of certain of such rights. The remainder of the rights expired on March 16, 2004.

In February 2004, the Company entered into a securities purchase agreement pursuant to which investors purchased 7.3 million shares
of the Companys common stock at a price of $5.49 per share for aggregate gross proceeds of approximately $40.2 million. Net proceeds from this transaction amounted to approximately $38.7 million after payment of fees to financial and legal
advisors and other direct costs. In connection with the issuance of the shares of common stock, the investors were issued rights that were exercisable for up to an additional 1.5 million shares of the Companys common stock at $5.49 per
share, none of which were exercised. These rights expired on June 9, 2004.

On March 6, 2006, the Company entered into a
Securities Purchase Agreement (the Purchase Agreement) with certain buyers who were parties to the Purchase Agreement (the Investors) for the sale of 24.1 million registered shares of common stock at a price per share of
$2.00 for an aggregate purchase price of approximately $48.1 million. The Investors also received warrants to purchase up to an aggregate of 7.2 million shares of common stock at an exercise price of $2.73 per share, subject to adjustment for
antidilution, exercisable on and after September 9, 2006 and 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, provided however, that unless we receive shareholder approval as provided in the Purchase Agreement, the exercise price for the warrants shall not be lower than $2.47 per share.

The net proceeds from the sale of the shares of common in 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.

Stock Option and Stock Rights Plans

The Company adopted the 1998 Stock Plan (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) 6,000,000 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 20,221,256 shares of the Companys common stock have been reserved for future issuance under the Option Plan as of June 30, 2006.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Option Plan also permits the Company to grant restricted stock units to employees. During fiscal
2006 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 (the Director Plan). Non-employee directors are entitled to participate in the Director Plan. The Director Plan generally provides for an automatic initial grant of an option to purchase 40,000
shares of Avanex common stock to each non-employee director on the date when a person first becomes a non-employee director. After the initial grant, each non-employee director will automatically be granted subsequent options to purchase 20,000
shares of the Companys common stock each year on the date of the Companys annual stockholders meeting. Grants generally shall have a term of 10 years. Each initial option grant will vest as to 25% of the shares subject to the
option on each anniversary of its date of grant. Each subsequent option grant will fully vest on the anniversary of its date of grant. The exercise price of all options will be the fair market value per share of Avanex common stock on 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) 150,000 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 1.1 million shares of the Companys common stock have been
reserved for future issuance under the Director Plan as of June 30, 2006.

Stock option and awards activity under the Option Plans and
the Director Plan is as follows:



|                         |  |                 |   |  |                                |                        |  |                          |                 |            |   |                                |   |      
|------------------------ |  | --------------- | - |  | ------------------------------ | ---------------------- |  | ------------------------ | --------------- | ---------- | - | ------------------------------ | - | -----
|                         |  | Stock Options   |   |  |                                | Restricted Stock Units
|                         |  | Number ofShares |   |  | Weighted-averageExercise Price |                        |  |                          | Number ofShares |            |   | Weighted-averageExercise Price
|Balance at June 30, 2003 |  | 8,920,055       |   |  | $                              | 8.54                   |  | Balance at June 30, 2003 |                 |           |   |                                | $ |     
|Granted                  |  | 10,614,136      |   |  |                                | 3.84                   |  | Granted                  |                 |           |   |                                |   |     
|Exercised                |  | (715,730        | ) |  |                                | 1.81                   |  | Exercised                |                 |           |   |                                |   |     
|Canceled                 |  | (1,526,898      | ) |  |                                | 4.12                   |  | Canceled                 |                 |           |   |                                |   |     
|                         |  |                 |   |  |                                |                        |  |                          |                 |            |   |                                |   |      
|Balance at June 30, 2004 |  | 17,291,563      |   |  |                                | 6.33                   |  | Balance at June 30, 2004 |                 |           |   |                                |   |     
|Granted                  |  | 7,565,950       |   |  |                                | 2.18                   |  | Granted                  |                 |           |   |                                |   |     
|Exercised                |  | (611,517        | ) |  |                                | 0.75                   |  | Exercised                |                 |           |   |                                |   |     
|Canceled                 |  | (4,595,079      | ) |  |                                | 5.59                   |  | Canceled                 |                 |           |   |                                |   |     
|                         |  |                 |   |  |                                |                        |  |                          |                 |            |   |                                |   |      
|Balance at June 30, 2005 |  | 19,650,917      |   |  |                                | 5.08                   |  | Balance at June 30, 2005 |                 |           |   |                                |   |     
|Granted                  |  | 2,675,455       |   |  |                                | 1.76                   |  | Granted                  |                 | 5,899,956  |   |                                |   | 0.001
|Exercised                |  | (1,567,288      | ) |  |                                | 1.36                   |  | Exercised                |                 | (1,130,487 | ) |                                |   | 0.001
|Canceled                 |  | (8,070,587      | ) |  |                                | 5.07                   |  | Canceled                 |                 | (703,467   | ) |                                |   | 0.001
|                         |  |                 |   |  |                                |                        |  |                          |                 |            |   |                                |   |      
|Balance at June 30, 2006 |  | 12,688,516      |   |  | $                              | 4.84                   |  | Balance at June 30, 2006 |                 | 4,066,002  |   |                                | $ | 0.001
|                         |  |                 |   |  |                                |                        |  |                          |                 |            |   |                                |   |      



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                        |  |                                     |  |                                     |  |                               |       |                                     |           |                               |   |      
|----------------------- |  | ----------------------------------- |  | ----------------------------------- |  | ----------------------------- | ----- | ----------------------------------- | --------- | ----------------------------- | - | -----
|Range of ExercisePrices |  | NumberOutstandingas ofJune 30, 2006 |  | WeightedAverageRemainingContractual |  | WeightedAverageExercise Price |       | NumberExercisableas ofJune 30, 2006 |           | WeightedAverageExercise Price
|$0.39  $    0.99       |  | 1,387,723                           |  | 8.63                                |  | $                             | 0.90  |                                     | 340,184   |                               | $ | 0.85 
|$1.01  $    1.35       |  | 1,292,307                           |  | 9.01                                |  | $                             | 1.14  |                                     | 250,504   |                               | $ | 1.11 
|$1.73  $    2.18       |  | 393,652                             |  | 7.53                                |  | $                             | 1.99  |                                     | 286,841   |                               | $ | 2.01 
|$2.19  $    2.19       |  | 1,299,780                           |  | 8.15                                |  | $                             | 2.19  |                                     | 758,113   |                               | $ | 2.19 
|$2.32  $    2.61       |  | 1,836,803                           |  | 8.49                                |  | $                             | 2.51  |                                     | 1,228,520 |                               | $ | 2.59 
|$2.69  $    3.42       |  | 1,295,304                           |  | 8.63                                |  | $                             | 3.08  |                                     | 688,304   |                               | $ | 3.17 
|$3.43  $    3.95       |  | 1,773,849                           |  | 7.02                                |  | $                             | 3.76  |                                     | 1,773,849 |                               | $ | 3.76 
|$4.00  $    4.67       |  | 1,276,444                           |  | 7.07                                |  | $                             | 4.40  |                                     | 1,276,444 |                               | $ | 4.40 
|$4.75  $    6.96       |  | 1,373,534                           |  | 5.60                                |  | $                             | 5.12  |                                     | 1,373,534 |                               | $ | 5.12 
|$7.45  $139.25         |  | 758,945                             |  | 4.38                                |  | $                             | 35.82 |                                     | 758,945   |                               | $ | 35.82
|                        |  |                                     |  |                                     |  |                               |       |                                     |           |                               |   |      
|                        |  | 12,688,341                          |  | 7.60                                |  | $                             | 4.84  |                                     | 8,735,238 |                               | $ | 6.26 
|                        |  |                                     |  |                                     |  |                               |       |                                     |           |                               |   |      

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 27,000 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, 2005 and 2004. During fiscal 2006, 116,594 shares were
withheld from employees exercising shares under restricted stock units to settle their tax liability. As of June 30, 2006 no shares were subject to repurchase. No shares were repurchased for the years ended June 30, 2005 and 2004.

The weighted-average fair value of stock options granted during fiscal 2006, 2005 and 2004 were $1.47, $1.84 and $2.61, respectively.

The total intrinsic value of options exercised was $0.9 million, $0.9 million and $2.2 million for the years ended June 30, 2006,
2005 and 2004, respectively.

For the years ended June 30, 2006, 2005, and 2004, the Company recorded deferred stock compensation of
$0, $0 and $643,000 respectively, representing the difference between the exercise price and the fair value for accounting purposes of the Companys common stock on the date such stock options were granted. The fair value of stock options
granted was based on the actual stock closing price on the day previous to the date of grant. For the years ended June 30, 2005 and 2004, the Company recorded amortization (recovery) of deferred stock compensation of $243,000 and $875,000,
respectively. At June 30, 2005, the Company had $353,000 of remaining unamortized deferred compensation, which was reclassified as a reduction of our additional paid-in-capital upon the adoption of SFAS 123(R) on July 1, 2005.

On June 28, 2005, the Companys Board of Directors approved the acceleration of vesting of certain unvested and out-of-the-money
stock options with exercise prices equal to or greater than $2.60 per share previously awarded to its employees, including its executive officers, under Avanexs 1998 Stock Plan. The acceleration of vesting was effective for stock options
outstanding as of June 28, 2005. Options to purchase approximately 5.9 million shares of common stock or 38% of Avanexs outstanding unvested options (of which options to purchase approximately 5.5 million shares or 44% of
Avanexs outstanding unvested options are held



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



by executive officers) are subject to the acceleration. The weighted average exercise price of the options subject to the acceleration is $3.56.

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 3,000 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) 750,000 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 2,780,627 shares of the Companys common stock have been reserved for future issuance under the Stock Purchase Plan as of June 30, 2006.

Shares Reserved

Common stock reserved for future issuance is as follows:



|                                          |  |              
|----------------------------------------- |  | -------------
|                                          |  | June 30, 2006
|Stock Option:                             |  |              
|Options outstanding                       |  | 12,688,341   
|Restricted stock units outstanding        |  | 4,066,002    
|Reserved for future grants                |  | 21,136,731   
|Employee stock purchase plan              |  | 2,780,627    
|Warrants                                  |  | 17,695,727   
|Conversion of senior secured notes        |  | 6,161,511    
|                                          |  |              
|Total shares reserved for future issuance |  | 64,528,939   
|                                          |  |              

Note 13. Stock-based Compensation

Adoption of SFAS 123R

We adopted Statement of Financial Accounting Standards (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 stock compensation
expense over the requisite service period of the individual grantees, which generally equals the vesting period. Prior to July 1, 2005, we followed Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for our stock compensation.

We elected the modified prospective transition
method for adopting SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. Our deferred stock compensation balance of $353,000 as of June 30, 2005, which was accounted
for under APB 25, was reclassified as a reduction of our additional paid-in-capital upon the adoption of SFAS 123(R).



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In addition, the unrecognized expense of awards not yet vested at the July 1, 2005 date of
adoption is recognized in net loss in the periods after the date of adoption using the same Black-Scholes valuation method and assumptions determined under the original provisions of SFAS 123, Accounting for Stock-Based
Compensation, as disclosed in our previous annual reports. There was no cumulative effect of the change in accounting principle from APB 25 to SFAS 123(R) because amortization of options granted prior to adoption was based on the
single-option approach.

Determining Fair Value

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

Expected TermThe
Companys expected term represents the period that the Companys stock-based awards are expected to be outstanding and is determined based on the Staff Accounting Bulletin 107 simplified method.

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, 2006, 2005
and 2004 was estimated using the following weighted-average assumptions:



|                            |  |                        |      |  
|--------------------------- |  | ---------------------- | ---- | -
|                            |  | YearEndedJune 30, 2006 |     
|Option Plan Shares          |  |                        |      |  
|Expected term (in years)    |  |                        | 6.25 |  
|Volatility                  |  |                        | 80.0 | %
|Expected dividend           |  |                        | 0    | %
|Risk-free interest rate     |  |                        | 4.63 | %
|Weighted-average fair value |  | $                      | 1.72 |  
|                            | 
|ESPP Shares                 |  |                        |      |  
|Expected term (in years)    |  |                        | 1.00 |  
|Volatility                  |  |                        | 79.5 | %
|Expected dividend           |  |                        | 0    | %
|Risk-free interest rate     |  |                        | 4.31 | %
|Weighted-average fair value |  | $                      | 1.93 |  



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock Compensation Expense

Under the provisions of SFAS 123(R), we recorded $4.5 million of stock compensation expense in our consolidated statement of operations for the year ended June 30, 2006.

At June 30, 2006, 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 $10.6 million, net of estimated forfeitures of $2.8 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 2.3 years and will be adjusted for
subsequent changes in estimated forfeitures.

The amortization of stock compensation under SFAS 123(R) for the year ended June 30, 2006 is
based on the single-option approach.

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 since our adoption of SFAS 123(R):



|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|-------------------------------------------- |  | --------------- | - |  | ----------------------------- | ---- | ---------------------------------------- | --- | ------------------------------------ | - | -----
|                                             |  | Number ofShares |   |  | Weighted-averageExercisePrice |      | Weighted-averageRemainingContractualTerm |     | AggregateIntrinsicValue, inthousands
|Outstanding at July 1, 2005                  |  | 19,650,917      |   |  | $                             | 5.08 |                                          |     |                                      |   |      
|Granted                                      |  | 2,675,455       |   |  | $                             | 1.76 |                                          |     |                                      |   |      
|Exercised                                    |  | (1,567,288      | ) |  | $                             | 1.34 |                                          |     |                                      |   |      
|Forfeitures and cancellations                |  | (8,070,568      | ) |  | $                             | 5.07 |                                          |     |                                      |   |      
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|Outstanding at June 30, 2006                 |  | 12,688,516      |   |  | $                             | 4.83 |                                          | 7.6 |                                      | $ | 1,986
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|Vested and expected to vest at June 30, 2006 |  | 12,095,524      |   |  | $                             | 4.83 |                                          | 7.6 |                                      | $ | 1,759
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|Exercisable at June 30, 2006                 |  | 8,735,238       |   |  | $                             | 6.26 |                                          | 6.9 |                                      | $ | 473  
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      

The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Companys common stock for the 2.7 million options that were in-the-money at June 30, 2006. During the years ended June 30, 2006 and 2005, the aggregate intrinsic value of options
exercised under the Companys stock option plans was $915,000 and $928,000, respectively. Intrinsic value was determined as of the date of option exercise.



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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 summary of option activity for Avanexs stock option plans since our adoption of SFAS 123(R):



|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|-------------------------------------------- |  | --------------- | - |  | ----------------------------- | ---- | ---------------------------------------- | --- | ------------------------------------ | - | -----
|                                             |  | Number ofShares |   |  | Weighted-averageExercisePrice |      | Weighted-averageRemainingContractualTerm |     | AggregateIntrinsicValue, inthousands
|Outstanding at July 1, 2005                  |  |                |   |  |                               |      |                                          |     |                                      |   |      
|Granted                                      |  | 5,899,956       |   |  | $                             | 0.01 |                                          |     |                                      |   |      
|Exercised                                    |  | (1,130,487      | ) |  | $                             | 0.01 |                                          |     |                                      |   |      
|Forfeitures and cancellations                |  | (703,467        | ) |  | $                             | 0.01 |                                          |     |                                      |   |      
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|Outstanding at June 30, 2006                 |  | 4,066,002       |   |  | $                             | 0.01 |                                          | 2.5 |                                      | $ | 7,154
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|Vested and expected to vest at June 30, 2006 |  | 3,456,102       |   |  |                               |      |                                          |     |                                      | $ | 6,081
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      
|Exercisable at June 30, 2006                 |  |                |   |  |                               |      |                                          |     |                                      | $ |     
|                                             |  |                 |   |  |                               |      |                                          |     |                                      |   |      

The aggregate intrinsic value is calculated as the difference between the exercise price of the
shares and the quoted price of the Companys common stock for the 4.1 million of outstanding restricted stock shares at June 30, 2006, all of which were in-the-money. During the years ended June 30, 2006 and 2005, the aggregate intrinsic
value of options exercised under the Companys stock option plans was $2.8 million and $0, respectively. Intrinsic value was determined as of the date of restricted stock unit exercise.

Employee Stock Purchase Plan (ESPP) Information

In connection with our ESPP, the following shares were issued during the years ended June 30, 2006, 2005 and 2004:



|                                |  |                     |         |      |   |         |  |   |        
|------------------------------- |  | ------------------- | ------- | ---- | - | ------- |  | - | -------
|                                |  | Year Ended June 30,
|                                |  | 2006                |         | 2005 |   | 2004   
|Number of shares issued         |  |                     | 588,431 |      |   | 986,123 |  |   | 610,171
|Weighted-average purchase price |  | $                   | 0.80    |      | $ | 1.22    |  | $ | 1.19   

During the years ended June 30, 2006 and 2005, the aggregate intrinsic value of options exercised
under the Companys ESPP was $143,000 and $688,000, respectively.

Note 14. 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 loss before provision for income
taxes were as follows (in thousands):



|         |  |            |         |   |           |   |          |  
|-------- |  | ---------- | ------- | - | --------- | - | -------- | -
|         |  | Year Ended |        
|         |  | 6/30/2006  |         |   | 6/30/2005 |  
|Domestic |  | $          | (46,678 | ) |           | $ | (48,531  | )
|Foreign  |  |            | (8,012  | ) |           |   | (59,840  | )
|         |  |            |         |   |           |   |          |  
|Total    |  | $          | (54,690 | ) |           | $ | (108,371 | )
|         |  |            |         |   |           |   |          |  



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



There has been no provision for U.S. Federal, U.S. and state income taxes for any annual period as
the Company has incurred operating losses since inception for all jurisdictions.

The provision for income taxes differs from the amount
computed by applying the statutory Federal income tax rate as follows (in thousands):

|                                               |  |            |         |   |           |   |         |  
|---------------------------------------------- |  | ---------- | ------- | - | --------- | - | ------- | -
|                                               |  | Year Ended |        
|                                               |  | 6/30/2006  |         |   | 6/30/2005 |  
|Tax at federal statutory rate                  |  | $          | (18,595 | ) |           | $ | (36,846 | )
|State, net of federal benefit                  |  |            |         |   |           |   |         |  
|Foreign loss not benefited                     |  |            | 2,712   |   |           |   | 18,912  |  
|Reversal of excess stock compensation benefits |  |            | 12,426  |   |           |   |        |  
|R&D credit                                     |  |            |        |   |           |   | (524    | )
|Change in valuation allowance                  |  |            | 2,868   |   |           |   | 19,891  |  
|Other                                          |  |            | 589     |   |           |   | 1,433   |  
|                                               |  |            |         |   |           |   |         |  
|Provision for taxes                            |  | $          |        |   |           | $ |        |  
|                                               |  |            |         |   |           |   |         |  

Significant components of the Companys deferred tax assets are as follows (in thousands):



|                                        |  |            |         |   |           |   |         |  
|--------------------------------------- |  | ---------- | ------- | - | --------- | - | ------- | -
|                                        |  | Year Ended |        
|                                        |  | 6/30/2006  |         |   | 6/30/2005 |  
|Deferred tax assets (liabilities):      |  |            |         |   |           |   |         |  
|Net operating loss carry forwards       |  | $          | 153,194 |   |           | $ | 148,960 |  
|Tax credit carry forwards               |  |            | 5,076   |   |           |   | 5,047   |  
|Inventory reserves                      |  |            | 9,993   |   |           |   | 8,715   |  
|Restructuring charges                   |  |            | 4,845   |   |           |   | 7,080   |  
|Other                                   |  |            | 5,965   |   |           |   | 6,852   |  
|Goodwill and intangible assets          |  |            | 822     |   |           |   | (445    | )
|                                        |  |            |         |   |           |   |         |  
|Total deferred tax assets (liabilities) |  |            | 179,895 |   |           |   | 176,209 |  
|                                        |  |            |         |   |           |   |         |  
|Valuation Allowance                     |  |            | 179,895 |   |           |   | 176,209 |  
|                                        |  |            |         |   |           |   |         |  
|Net deferred tax assets (liabilities)   |  | $          | (      | ) |           | $ | (      | )
|                                        |  |            |         |   |           |   |         |  

The valuation allowance provides a reverse against deferred tax assets that may expire or go
unutilized. In accordance with SFAS No. 109, Accounting for Income Taxes, the Company believes it is more likely than not that it will not fully realize these benefits and, accordingly, has continued to provide a valuation allowance
for them.

The valuation allowance increased by approximately $3.7 million during the year ended June 30, 2006. The first component of
this net increase included a decrease of approximately $14.6 million relating to the U.S. income tax benefit of stock option deductions. This benefit will be credited to additional paid in capital. The second component is an increase to the
valuation allowance of approximately $18.3 million related to other net increases in the Companys deferred assets.

As of
June 30, 2006, the Company had net operating loss carry forwards for federal income tax purposes of approximately $283.1 million which will expire in the beginning in the year 2012 through 2026. The Company also has foreign net operating loss
carry forwards of approximately $192.4 million. The Company also has state



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



net operating loss carry forwards of approximately $178.8 million which will expire beginning fiscal year June 30, 2007. The Company also has federal
and California research and development tax credits of $2.7 million and $2.8 million. The federal research credits will begin to expire in the year 2013 through 2024 and the state research credits have no expiration date.

Utilization of the Companys net operating loss maybe subject to substantial annual limitation due to the ownership change limitation provided by
the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.

We have not provided for U.S. federal income taxes on non-U.S. subsidiaries undistributed earnings, if any, because such earnings are intended to be indefinitely reinvested in the operations outside the United States.

Note 15. 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 NetRevenue |   |  | Percent ofAccountsReceivable atJune 30, |  
|          |  | 2006                     |   |  | 2005                                    |   |  | 2004 |   |  | 2006 |   |  | 2005 |  
|Company A |  | 27                       | % |  | 34                                      | % |  | 30   | % |  | 28   | % |  | 30   | %
|Company B |  | 11                       | % |  | *                                       |   |  | *    |   |  | *    |   |  | *    |  
|Company C |  | *                        |   |  | *                                       |   |  | 20   | % |  | *    |   |  | *    |  
|Company D |  | *                        |   |  | *                                       |   |  | 11   | % |  | *    |   |  | *    |  
|          |  |                          |   |  |                                         |   |  |      |   |  |      |   |  |      |  
|          |  | 38                       | % |  | 34                                      | % |  | 61   | % |  | 28   | % |  | 30   | %
|          |  |                          |   |  |                                         |   |  |      |   |  |      |   |  |      |  

| | 
| | 

| | * | less than 10%
| | - | -------------

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



|       |  |                     |         |      |   |         |  |   |        
|------ |  | ------------------- | ------- | ---- | - | ------- |  | - | -------
|       |  | Year Ended June 30,
|       |  | 2006                |         | 2005 |   | 2004   
|U.S.   |  | $                   | 98,709  |      | $ | 96,123  |  | $ | 75,511 
|France |  |                     | 60,988  |      |   | 61,711  |  |   | 28,662 
|Italy  |  |                     | 3,247   |      |   | 2,861   |  |   | 2,759  
|       |  |                     |         |      |   |         |  |   |        
|       |  | $                   | 162,944 |      | $ | 160,695 |  | $ | 106,932
|       |  |                     |         |      |   |         |  |   |        



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AVANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Long-lived assets by geographical area were as follows (in thousands):



|         |  |                     |       |      |   |      
|-------- |  | ------------------- | ----- | ---- | - | -----
|         |  | Year Ended June 30,
|         |  | 2006                |       | 2005
|U.S.     |  | $                   | 3,888 |      | $ | 3,959
|Non-U.S. |  |                     | 1,780 |      |   | 4,653
|         |  |                     |       |      |   |      
|         |  | $                   | 5,668 |      | $ | 8,612
|         |  |                     |       |      |   |      

Note 16. Quarterly Financial Data (Unaudited)



|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------ | ------- | - | ----------- | - | ------- | ----------- |  | - | ----------- | - |  | ----------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Jun 30,2006                          |         |   | Mar 31,2006 |   |         | Dec 31,2005 |  |   | Sep 30,2005 |   |  | Jun 30,2005 |         |   | Mar 31,2005 |   |         | Dec 31,2004 |  |   | Sep 30,2004 |  
|                                                  |  | (In thousands except per share data) |        
|                                                  |  | (Unaudited)                          |        
|Consolidated Statement of Operations Data:        |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Net revenue                                       |  | $                                    | 45,458  |   |             | $ | 40,128  |             |  | $ | 36,125      |   |  | $           | 41,233  |   |             | $ | 42,712  |             |  | $ | 40,317      |   |  | $ | 41,868  |   |  | $ | 35,798  |  
|Cost of revenue                                   |  |                                      | 43,685  |   |             |   | 38,485  |             |  |   | 33,207      |   |  |             | 39,107  |   |             |   | 42,826  |             |  |   | 41,386      |   |  |   | 44,305  |   |  |   | 36,741  |  
|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Gross loss                                        |  |                                      | 1,773   |   |             |   | 1,643   |             |  |   | 2,918       |   |  |             | 2,126   |   |             |   | (114    | )           |  |   | (1,069      | ) |  |   | (2,437  | ) |  |   | (943    | )
|Operating expenses:                               |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Research and development                          |  |                                      | 5,703   |   |             |   | 5,189   |             |  |   | 5,452       |   |  |             | 7,127   |   |             |   | 8,179   |             |  |   | 8,663       |   |  |   | 8,036   |   |  |   | 8,246   |  
|Sales and marketing                               |  |                                      | 3,677   |   |             |   | 2,988   |             |  |   | 2,783       |   |  |             | 3,788   |   |             |   | 3,747   |             |  |   | 4,163       |   |  |   | 4,512   |   |  |   | 4,381   |  
|General and administrative                        |  |                                      | 3,346   |   |             |   | 4,191   |             |  |   | 3,841       |   |  |             | 5,274   |   |             |   | 4,327   |             |  |   | 4,386       |   |  |   | 4,046   |   |  |   | 4,999   |  
|Amortization of intangibles                       |  |                                      | 912     |   |             |   | 1,386   |             |  |   | 1,385       |   |  |             | 1,765   |   |             |   | 2,000   |             |  |   | 1,242       |   |  |   | 1,242   |   |  |   | 1,239   |  
|Restructuring costs (recovery)                    |  |                                      | (1,225  | ) |             |   | 155     |             |  |   | 2,942       |   |  |             | 40      |   |             |   | 21,229  |             |  |   | 14          |   |  |   | 5,441   |   |  |   | 2,588   |  
|(Gain)/loss on disposal of property and equipment |  |                                      | (1,810  | ) |             |   | (2,486  | )           |  |   | (775        | ) |  |             | 7       |   |             |   | 36      |             |  |   | (410        | ) |  |   | (1,476  | ) |  |   |        |  
|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Total operating expenses                          |  |                                      | 10,603  |   |             |   | 11,423  |             |  |   | 15,628      |   |  |             | 18,001  |   |             |   | 39,518  |             |  |   | 18,058      |   |  |   | 21,801  |   |  |   | 21,453  |  
|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Loss from operations                              |  |                                      | (8,830  | ) |             |   | (9,780  | )           |  |   | (12,710     | ) |  |             | (15,875 | ) |             |   | (39,632 | )           |  |   | (19,127     | ) |  |   | (24,238 | ) |  |   | (22,396 | )
|Interest and other (expense) income, net          |  |                                      | (229    | ) |             |   | (387    | )           |  |   | (5,833      | ) |  |             | (1,048  | ) |             |   | (3,180  | )           |  |   | 241         |   |  |   | (113    | ) |  |   | 74      |  
|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Net loss                                          |  | $                                    | (9,059  | ) |             | $ | (10,167 | )           |  | $ | (18,543     | ) |  | $           | (16,923 | ) |             | $ | (42,812 | )           |  | $ | (18,886     | ) |  | $ | (24,351 | ) |  | $ | (22,322 | )
|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share              |  | $                                    | (0.04   | ) |             | $ | (0.06   | )           |  | $ | (0.13       | ) |  | $           | (0.12   | ) |             | $ | (0.30   | )           |  | $ | (0.13       | ) |  | $ | (0.17   | ) |  | $ | (0.16   | )
|                                                  |  |                                      |         |   |             |   |         |             |  |   |             |   |  |             |         |   |             |   |         |             |  |   |             |   |  |   |         |   |  |   |         |  
|Basic and diluted shares outstanding              |  |                                      | 204,040 |   |             |   | 158,246 |             |  |   | 145,501     |   |  |             | 145,182 |   |             |   | 144,822 |             |  |   | 144,468     |   |  |   | 144,079 |   |  |   | 143,644 |  

During the quarter ended June 30, 2006, Avanex recorded the following year-end adjustments in the
statement of operations:



| |  |  | a $846,000 increase to revenue to reduce the allowance for sales returns and customer credits based on revised estimates;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | a $6.9 million increase to cost of revenue to write down excess and obsolete inventory;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | a $2.5 million reduction in cost of revenue to reduce the accrued warranty liability based upon revised cost estimates utilizing recent repair experience;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.7 million increase to cost of revenue to accrue for resolution of disputed invoices for the purchase of inventory from our contract manufacturer; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.0 million reduction in general and administrative expense to reduce the allowance for doubtful accounts as a result of analysis of favorable credit risk and
write-off experience.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



86



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to the Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.



AVANEX CORPORATION (Registrant)By:

/S/    JO S. MAJOR,
JR.Jo S. Major, Jr. President, Chief Executive Officer and Chairman of the Board of
Directors (Duly Authorized Officer and Principal Executive Officer)Date:

March 30, 2007


Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed by the following persons in the capacities and on the dates indicated.



|                                         |  |                                                                                                         |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                |  | Title                                                                                                   |  | Date          
|                                         |  |                                                                                                        
|/S/    JO S. MAJOR,
JR. Jo S. Major, Jr. |  | President, Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) |  | March 30, 2007
|                                         |  |                                                                                                        
|/S/    MARLA
SANCHEZ Marla Sanchez       |  | Senior Vice President and Chief Financial Officer (principal financial officer)                         |  | March 30, 2007
|                                         |  |                                                                                                        
|/S/    TONY
RILEY Tony Riley             |  | Vice President Finance (principal accounting officer)                                                   |  | March 30, 2007
|                                         |  |                                                                                                        
|* Vinton Cerf                            |  | Director                                                                                                |  | March 30, 2007
|                                         |  |                                                                                                        
|* Greg Dougherty                         |  | Director                                                                                                |  | March 30, 2007
|                                         |  |                                                                                                        
|* Joel A. Smith III                      |  | Director                                                                                                |  | March 30, 2007
|                                         |  |                                                                                                        
|* Susan Wang                             |  | Director                                                                                                |  | March 30, 2007
|                                         |  |                                                                                                         | 
|By:                                      |  | /s/    Jo S. Major, Jr. Jo S. Major, Jr.                                                                |  |                |  | 
|                                         |  | Pursuant to Powers of Attorney previously filed with the Securities and Exchange Commission             |  |                |  | 



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                     
|2.1           |  | Share Acquisition and Asset Purchase Agreement, dated as of May 12, 2003, by and between Avanex Corporation, Alcatel and Corning Incorporated (which is incorporated herein by reference to
Exhibit 2.1 of the Registrants Current Report on Form 8-K filed on May 16, 2003).                                                  
|              | 
|3.1           |  | Certificate of Incorporation of the Registrant, as amended to date (which is incorporated herein by reference to Exhibit 3.1 of the Registrants Quarterly Report on Form 10-Q filed on
May 16, 2000).                                                                                                                          
|              | 
|3.2           |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Avanex Corporation (which is incorporated herein by reference to Exhibit 3.4
of the Registrants Form 8-A filed on August 24, 2001).                                                                              
|              | 
|3.3           |  | Bylaws of the Registrant (which are incorporated herein by reference to Exhibit 3.1 of the Registrants Quarterly Report on Form 10-Q filed on November 14, 2005).                                                                                                                                                              
|              | 
|4.1           |  | Reference is made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                                                                                                                                                                                 
|              | 
|4.2           |  | Specimen Common Stock Certificate (which is incorporated herein by reference to Exhibit 4.1 of the Registrants Amendment No. 2 to Registration Statement No. 333-92097 on Form S-1
filed on January 14, 2000).                                                                                                                 
|              | 
|4.3           |  | Preferred Stock Rights Agreement dated as of July 26, 2001, between the Registrant and EquiServe Trust Company, N. A. (which is incorporated herein by reference to Exhibit 4.5 of the
Registrants Form 8-A filed on August 24, 2001).                                                                                         
|              | 
|4.4           |  | First Amendment to the Preferred Stock Rights Agreement dated as of March 18, 2002, between the Registrant and EquiServe Trust Company, N. A. (which is incorporated herein by reference to
Exhibit 4.2 of the Registrants Form 8-A/A filed on March 28, 2002).                                                                
|              | 
|4.5           |  | Second Amendment to the Preferred Stock Rights Agreement dated as of May 12, 2003, between the Registrant and EquiServe Trust Company, N. A. (which is incorporated herein by reference to
Exhibit 4.3 of the Registrants Form 8-A/A filed on May 30, 2003).                                                                   
|              | 
|4.6           |  | Third Amendment to the Preferred Stock Rights Agreement dated as of May 16, 2005, between the Registrant and EquiServe Trust Company, N. A. (which is incorporated herein by reference to
Exhibit 4.1 of the Registrants Current Report on Form 8-K filed on May 17, 2005).                                                    
|              | 
|4.7           |  | Fourth Amendment to the Preferred Stock Rights Agreement, dated as of March 6, 2006 between the Registrant and Computershare Trust Company, N.A., formerly known as EquiServe Trust Company,
N.A. (which is incorporated herein by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K filed March 7, 2006).
|              | 
|4.8           |  | Form of Amended and Restated Notes (which is incorporated herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K file November 9,
2005).                                                                                                                                                            
|              | 
|4.9           |  | Form of Amended and Restated Warrants (which is incorporated herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed November 9,
2005).                                                                                                                                                        
|              | 
|4.10          |  | Description of Amendment of Amended and Restated Notes and Amended and Restated Warrants (which is incorporated herein by reference to Item 1.01 to the Registrants Current Report on
Form 8-K filed February 8, 2006).                                                                                                        
|              | 
|4.11          |  | Form of Warrant (which is incorporated by reference herein to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed March 7, 2006).                                                                                                                                                                                  
|              | 
|10.1*         |  | Form of Indemnification Agreement between Registrant and each of its directors and officers (which is incorporated herein by reference to Exhibit 10.1 of the Registrants Registration
Statement No. 333-92027 on Form S-1 filed on December 3, 1999).                                                                         
|              | 
|10.2*         |  | 1998 Stock Plan, as amended and restated (which is incorporated herein by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed November 2,
2005).                                                                                                                                                     



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|              |  |                                                                                                                                                                                                                                                                 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                     
|10.3*         |  | Forms of agreement under 1998 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.2 of the Registrants Amendment No. 2 to Registration Statement No.
333-92097 on Form S-1 filed on January 14, 2000).                             
|              | 
|10.4*         |  | 1999 Employee Stock Purchase Plan, as amended (which is incorporated herein by reference to Exhibit 4.2 of the Registrants Registration Statement on Form S-8 filed on September 17,
2002).                                                                    
|              | 
|10.5*         |  | 1999 Director Option Plan, as amended (which is incorporated herein by reference to Exhibit 4.3 of the Registrants Registration Statement on Form S-8 filed on September 17,
2002).                                                                            
|              | 
|10.6*         |  | Form of Restricted Stock Purchase Agreement between the Registrant certain of its executive officers (which is incorporated herein by reference to Exhibit 10.8 of the Registrants
Registration Statement No. 333-92027 on Form S-1 filed on December 3, 1999).
|              | 
|10.7*         |  | Form of Restricted Stock Purchase Agreement between the Registrant and certain of its directors (which is incorporated herein by reference to Exhibit 10.1 of the Registrants
Quarterly Report on Form 10-Q filed on November 14, 2005).                       
|              | 
|10.8*         |  | Form of stock option agreement between the Registrant and certain of its executive officers (which is incorporated herein by reference to Exhibit 10.9 of the Registrants Annual
Report on Form 10-K filed on September 20, 2002).                             
|              | 
|10.9*         |  | Form of stock option agreement between the Registrant and certain of its executive officers (which is incorporated herein by reference to Exhibit 10.8 of the Registrants Annual
Report on Form 10-K filed on September 26, 2003).                             
|              | 
|10.10*        |  | Forms of stock option agreements between the Registrant and certain of its directors (which are incorporated herein by reference to Exhibit 10.10 of the Registrants Annual Report on
Form 10-K filed on September 20, 2002).                                  
|              | 
|10.11*        |  | Forms of stock option agreements between the Registrant and certain of its directors (which are incorporated herein by reference to Exhibit 10.10 of the Registrants Annual Report on
Form 10-K filed on September 26, 2003).                                  
|              | 
|10.12*        |  | Form of stock option agreement between the Registrant and certain of its executive officers (which is incorporated herein by reference to Exhibit 10.5 of the Registrants Quarterly
Report on Form 10-Q filed on February 9, 2005).                            
|              | 
|10.13*        |  | Form of Restricted Stock Unit Agreement between the Registrant and certain of its employees (incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed January 4, 2006).                                            
|              | 
|10.14*        |  | Form of Restricted Stock Unit Agreement between the Registrant and certain of its executive officers (incorporated herein by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K filed January 4, 2006).                                   
|              | 
|10.15*        |  | Form of Restricted Stock Unit Agreement between the Registrant and certain of its executive officers (which is incorporated herein by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed February 8, 2006).                         
|              | 
|10.16*        |  | Employment Agreement between Jo. S. Major Jr. and the Registrant dated as of August 18, 2004 (which is incorporated herein by reference to Exhibit 10.1 of the Registrants Quarterly
Report on Form 10-Q filed on November 9, 2004).                           
|              | 
|10.17*        |  | Amendment No. 1 to Employment Agreement between Jo. S. Major Jr. and the Registrant dated as of November 1, 2004 (which is incorporated herein by reference to Exhibit 10.2 of the
Registrants Quarterly Report on Form 10-Q filed on November 9, 2004).       
|              | 
|10.18*        |  | Offer of Employment between Cal Hoagland and the Registrant dated March 24, 2006 (which is incorporation herein by reference to Exhibit 10.4 to the Registrants Quarterly Report on
Form 10-Q filed on May 10, 2006).                                          



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|              |  |                                                                                                                                                                                                                                                                                                                         
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                             
|10.19*        |  | Offer of Employment between Paul Negus and the Registrant dated October 8, 2002 (which is incorporated herein by reference to Exhibit 10.18 to the Registrants Annual Report on Form
10-K filed on September 28, 2005).                                                                                                
|              | 
|10.20*        |  | Offer of Employment between Jaime Reloj and the Registrant dated October 25, 2002 (which is incorporated herein by reference to Exhibit 10.14 of the Registrants Annual Report on
Form 10-K filed on September 13, 2004).                                                                                              
|              | 
|10.21*        |  | Offer of Employment between Yves LeMaitre and the Registrant dated May 25, 2005 (which is incorporated herein by reference to Exhibit 10.20 to the Registrants Annual Report on Form
10-K filed on September 28, 2005).                                                                                                
|              | 
|10.22*        |  | Offer of Employment between Tony Riley and the Registrant dated September 20, 2005 (which is incorporated herein by reference to Exhibit 10.21 to the Registrants Annual Report on
Form 10-K filed on September 28, 2005).                                                                                             
|              | 
|10.23*        |  | Offer of Employment between Bradley Kolb and the Registrant dated February 24, 2006 (filed previously).                                                                                                                                                                                                                 
|              | 
|10.24*        |  | Description of Fiscal 2006 Incentive Bonus Plan (which is incorporated herein by reference to Item 1.01 of the Registrants Current Report on Form 8-K filed on August 1,
2005).                                                                                                                                        
|              | 
|10.25*        |  | Description of Sales Compensation Plan (which is incorporated herein by reference to Item 1.01 of the Registrants Current Report on Form 8-K filed on August 1,
2005).                                                                                                                                                 
|              | 
|10.26*        |  | Description of Non-Employee Director Restricted Stock Awards (which is incorporated herein by reference to Exhibit 10.26 to the Registrants Annual Report on Form 10-K filed on
September 28, 2005).                                                                                                                   
|              | 
|10.27*        |  | Description of Severance Policy (which is incorporated herein by reference to Exhibit 10.27 to the Registrants Annual Report on Form 10-K filed on September 28,
2005).                                                                                                                                                
|              | 
|10.28         |  | Lease between the Registrant and Stevenson Business Park LLC for Building B of 40919 Encyclopedia Circle, Fremont, California dated September 8, 1999 (which is incorporated herein by
reference to Exhibit 10.25 of the Registrants Registration Statement No. 333-92027 on Form S-1 filed on December 3, 1999).      
|              | 
|10.29         |  | Lease Agreement between Stevenson Business Park, LLC and the Registrant for Building C of 40919 Encyclopedia Circle, Fremont, California dated March 1, 2000 (which is incorporated herein
by reference to Exhibit 10.38 of the Registrants Quarterly Report on Form 10-Q filed on May 16, 2000).                      
|              | 
|10.30         |  | Lease Agreement between GAL-LPC Stevenson Boulevard, LP and the Registrant for Buildings A and E of 39611 and 39630 Eureka Boulevard, Newark, California dated August 9, 2000 (which is
incorporated herein by reference to Exhibit 10.35 of the Registrants Quarterly Report on Form 10-Q filed on November 15, 2000).
|              | 
|10.31         |  | Stockholders Agreement between Avanex Corporation, Alcatel and Corning Incorporation dated as of July 31, 2003 (which is incorporated herein by reference to Exhibit 10.1 of the
Registrants Quarterly Report on Form 10-Q filed on November 14, 2003).                                                               
|              | 
|10.32         |  | Description of Restrictions on Alcatels Sale of Common Stock of the Company (which is incorporated herein by reference to Item 1.01 of the Registrants Current Report on Form
8-K filed November 10, 2005).                                                                                                           
|              | 
|10.33        |  | Intellectual Property Rights Agreement between Corning Incorporated and Avanex Corporation Relating to Photonics dated as of July 31, 2003 (which is incorporated herein by reference to
Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q/A filed on January 16, 2004).                                   
|              | 
|10.34         |  | Intellectual Property License Agreement between Alcatel and Avanex Corporation dated as of July 31, 2003 (which is incorporated herein by reference to Exhibit 10.6 of the Registrants
Quarterly Report on Form 10-Q filed on November 14, 2003).                                                                      



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|              |  |                                                                                                                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                        
|10.35        |  | Supply Agreement between Alcatel and Avanex Corporation dated as of July 31, 2003 (which is incorporated herein by reference to Exhibit 10.7 of the Registrants Quarterly Report on
Form 10-Q/A filed on January 16, 2004).                                       
|              | 
|10.36         |  | First Addendum to the Supply Agreement between the Registrant and Alcatel (which is incorporated herein by reference to Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q
filed on February 14, 2006).                                                
|              | 
|10.37         |  | Amendment to the First Addendum to the Supply Agreement between the Registrant and Alcatel (which is incorporated herein by reference to Exhibit 10.11 of the Registrants Quarterly
Report on Form 10-Q filed on February 14, 2006).                              
|              | 
|10.38        |  | Frame Purchase Agreement for Opto Electronic Components between Avanex Corporation and Alcatel dated as of July 31, 2003 (which is incorporated herein by reference to Exhibit 10.8 of the
Registrants Quarterly Report on Form 10-Q/A filed on January 16, 2004).
|              | 
|10.39         |  | First Addendum to the Transitional Service Agreement between the Registrant and Alcatel (which is incorporated herein by reference to Exhibit 10.1 of the Registrants Quarterly Report
on Form 10-Q filed on February 14, 2006).                                  
|              | 
|10.40         |  | Securities Purchase Agreement dated as of May 16, 2005 between the Registrant and the buyers named therein (which is incorporated herein by reference to Exhibit 10.1 of the
Registrants Current Report filed on May 17, 2005).                                   
|              | 
|10.41         |  | Form of Amendment Agreement, dated as of November 8, 2005, between Avanex and each investor named therein (which is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed November 9, 2005).                       
|              | 
|10.42         |  | Securities Purchase Agreement, dated as of March 6, 2006, by and among the Registrant and the buyers named therein (which is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed March 7, 2006).                 
|              | 
|10.43         |  | Registration Rights Agreement, dated as of May 16, 2005, between the Registrant and the buyers named therein (which is incorporated herein by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed May 17, 2005).                        
|              | 
|10.44         |  | Form of Pledge Agreement, dated as of May 16, 2005, between the Registrant and the buyers named therein (which is incorporated herein by reference to Exhibit 10.5 of the Registrants
Current Report on Form 8-K filed May 17, 2005).                             
|              | 
|10.45         |  | Form of Security Agreement, dated as of May 16, 2005, between the Registrant and the buyers named therein (which is incorporated herein by reference to Exhibit 10.6 of the
Registrants Current Report on Form 8-K filed May 17, 2005).                           
|              | 
|10.46         |  | Form of Guaranty, dated as of May 16, 2005, between the Registrant and the buyers named therein (which is incorporated herein by reference to Exhibit 10.7 of the Registrants Current
Report on Form 8-K filed May 17, 2005).                                     
|              | 
|10.47         |  | Acknowledgment and Ratification (which is incorporated herein by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed November 9, 2005).                                                                                                 
|              | 
|10.48       |  | Volume Supply Agreement between the Registrant and Fabrinet(which is incorporated herein by reference to Exhibit 10.12 of the Registrants Quarterly Report on Form 10-Q filed on
February 14, 2006).                                                              
|              | 
|16.1          |  | Letter from Ernst & Young LLP to the Securities and Exchange Commission, dated as of September 23, 2004 (which is incorporated herein by reference to Exhibit 16.1 of the
Registrants Current Report on Form 8-K filed September 23, 2004).                       
|              | 
|16.2          |  | Letter from Ernst & Young LLP to the Securities and Exchange Commission, dated as of November 15, 2004 (which is incorporated herein by reference to Exhibit 16.2 of the
Registrants Current Report on Form 8-K/A filed November 15, 2004).                       



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##### Table of Contents

|              |  |                                                                                                                          
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|ExhibitNumber |  | Description                                                                                                              
|              | 
|21.1          |  | List of subsidiaries of the Registrant (filed previously).                                                               
|              | 
|23.1          |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).                            
|              | 
|23.2          |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm (filed herewith).                        
|              | 
|24.1          |  | Power of Attorney (filed previously).                                                                                    
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith).                          
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith).                          
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith).

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| | Portions of this exhibit have been omitted pursuant to a request for confidential treatment granted by the Commission.
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| | Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.
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|* | Indicates management contract or compensatory plan or arrangement.
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