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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



(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, 2007



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, 2006, 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 $386.0 million
based upon the closing price on the Nasdaq Global Market reported for such date. As of August 22, 2007, the Registrant had 226,793,103 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 2007 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, 2007.



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AVANEX CORPORATION



ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2007



TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|PART I     |  | 1                                                                                                           
|Item 1.    |  | Business                                                                                                     |  | 1   
|Item 1A.   |  | Risk Factors                                                                                                 |  | 6   
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 21  
|Item 2.    |  | Properties                                                                                                   |  | 21  
|Item 3.    |  | Legal Proceedings                                                                                            |  | 21  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 22  
|           |  | Executive Officers of the Company                                                                            |  | 23  
|           | 
|PART II    |  | 25                                                                                                          
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 25  
|Item 6.    |  | Selected Financial Data                                                                                      |  | 26  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 27  
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 39  
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 41  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 78  
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 78  
|Item 9B.   |  | Other Information                                                                                            |  | 79  
|           | 
|PART III   |  | 82                                                                                                          
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 82  
|Item 11.   |  | Executive Compensation                                                                                       |  | 82  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 82  
|Item 13.   |  | Certain Relationships and Related Transactions and Director Independence                                     |  | 82  
|Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 82  
|           | 
|PART IV    |  | 83                                                                                                          
|Item 15.   |  | Exhibits, Financial Statement Schedules                                                                      |  | 83  
|SIGNATURES |  |                                                                                                             



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



Certain statements contained in this Annual Report on Form 10-K that are
not purely historical are forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements regarding our expectations, beliefs, anticipations, commitments, intentions and strategies
regarding the future. In some cases you can identify forward-looking statements by terms such as may, could, would, might, will, should, expect, plan,
intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. Actual
results could differ from those projected in any forward-looking statements for the reasons, among others, detailed in Risk Factors in Item 1A. The forward-looking statements are made as of the date of this Form 10-K and we assume
no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.



PART I



|ITEM 1. | BUSINESS
|------- | --------



Overview



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



In 2003, we acquired all of the outstanding
equity of Alcatel Optronics France, a subsidiary of Alcatel, certain assets of the optical components business of Corning Incorporated, and substantially all of the assets of Vitesses Optical Components Systems Division. As part of these
acquisitions, Alcatel and Corning Incorporated licensed certain intellectual property rights to us. Over the past four years, we have integrated and restructured these assets and have shifted most of our manufacturing operations to lower-cost
geographic regions. For instance, in March 2005, we opened an operations center in Bangkok, Thailand to centralize global manufacturing and operational overhead functions in a lower-cost region, and in July 2005, we announced the opening of a
product development office in Shanghai, China. In March 2007, we divested 90 percent of our interest in our subsidiary in France, including our Indium Phosphide (InP) and Gallium Arsenide (GaAs) semiconductor fabs, and our laser, terrestrial pump,
submarine pump and Fiber Bragg Grating (FBG) product lines, to 3S Photonics.



In order to expand our transmission product portfolio, on July 2, 2007, we acquired the assets relating to the MSA 300-pin transponder and XFP transceiver businesses of the Commercial Communication Products
Division of Essex Corporation, a subsidiary of Northrop Grumman Space and Mission Systems Corporation.



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



We were incorporated in October 1997 as a California corporation, and in
January 2000, we were reincorporated as a Delaware corporation. Our principal executive office is located at 40919 Encyclopedia Circle, Fremont, California, 94538. We also maintain facilities in Horseheads, New York; Melbourne, Florida; Shanghai,
China; Villebon Sur Yvette, France; San Donato, Italy; and Bangkok, Thailand. Our main telephone number is (510) 897-4188, and our web site address is www.avanex.com. The information that can be accessed through our web site, however, is not
part of this Annual Report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through our internet web site, as soon as reasonably practicable,
after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.



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Avanex and the Avanex logo are registered trademarks of Avanex Corporation. This Annual Report on Form
10-K also includes other trade names, trademarks and service marks of ours and other companies.



Industry



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



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



Products



LOGO



Our product portfolio is comprised
of the following product families (depicted visually above):



AmplificationOur Amplification product family includes products that optically amplify transmission signals, including Erbium doped fiber amplifiers and Raman amplifiers.



Wavelength ManagementOur Wavelength Management platform includes
Switching and Routing solutions, Multiplexing and Signal Processing solutions and Micro-Optics and Integrated Modules  including



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products that optically add and drop transmission signals in both fixed and reconfigurable versions, products that optically multiplex or demultiplex signals
based on thin film filters, planar and interleaver technologies, and products that optically attenuate signal power across a single or multiple wavelength bands.



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



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



Competition



The optical communications markets are rapidly evolving. We expect these markets to continue to be highly competitive because of the available capacity
and easily obtained funding. We believe that our principal competitors in the optical subsystems, modules and components industry include Bookham, Inc., JDS Uniphase Corporation, Oplink Communications, Inc., Opnext, Inc. and Optium Corporation. We
may also face competition from companies that expand into our industry in the future. We believe we differentiate ourselves from our competitors by offering high levels of customer value through collaborative product design, technology innovation,
optical/mechanical performance, intelligent features for configuration, control and monitoring, multi-function integration and overall customization. The principal competitive factors upon which we compete include breadth of product line,
availability, performance, product reliability, innovation and selling price. We believe that we compete favorably with our competitors with respect to the foregoing factors.



Consolidation in the optical systems and components industry in the past has intensified, and future consolidation could
intensify, the competitive pressures that we face. Significant consolidation has also taken place recently at the carrier level and at our customer level. Recent mergers among our customers include that of ADVA Optical Networking with Movaz Networks
Inc., Alcatel with Lucent Technologies Inc., Ericsson AB with Marconi, and the merger of the optical businesses of Marconi Communications and Nokia.



We also face competition from companies that may expand into our industry and introduce additional competitive products. Existing and potential customers
are also our potential competitors. These customers may develop or acquire additional competitive products or technologies, which may cause them to reduce or cease their purchases from us. Please see Risk Factors in Item 1A of this
Annual Report on Form 10-K, including in Section II: Market and Competitive Risks.



Research and Development



We believe that research and development is critical to our strategic product development objectives. Our research and development activities are focused on developing new products that incorporate multiple optical functions, offer
intelligent features for configuration, control and monitoring, and provide network-ready interfaces. To accomplish this, our research and development team possesses expertise in the areas of optical components, micro-optic and integrated-optic
design, as well as electronics, firmware, and software. Most of our efforts are directed toward the development of products with revenue potential, but we do continue to invest in new technological platforms to ensure our continued competitiveness
in the future.



Our research and development expenses totaled
$25.2 million for the fiscal year ended June 30, 2007, $23.5 million for the fiscal year ended June 30, 2006, and $33.1 million for the fiscal year ended June 30, 2005. During



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fiscal 2007, research and development expenditures increased as we added staff in China and increased patent-related expenses; however, by the end of fiscal
2007, these expenses had decreased to comparable levels with the prior year with the sale of our subsidiary in France. During fiscal 2006, we reduced research and development expenditures by taking advantage of internal consolidation opportunities
presented by our acquisitions and better aligning our resources with available market opportunities. In addition, we have moved significant engineering resources to our Shanghai location to increase the cost effectiveness of our overall research and
development activities and to provide support to our third-party contract manufacturers. As of June 30, 2007, we employed 151 people in our research and development groups in Fremont, California; Horseheads, New York; Villebon Sur Yvette,
France; San Donato, Italy; and Shanghai, China.



During fiscal
2006 and 2007, we saw an increase in the number of customers purchasing integrated subsystem products, as well as an increase in the complexity of such products with existing customers as the demand for more intelligent, efficient and flexible
optical fiber networks increases. We continue to invest in such products, as we believe applications for these types of products will become increasingly important in the future. For risks associated with our research and development efforts, please
see Risk Factors in Item 1A of this Annual Report on Form 10-K, including in Section IV: Operations, Research and Development Risks.



Sales and Marketing



We primarily market our products to telecommunications system integrators. Our marketing efforts are centered on the demonstration of, and education
about, our products performance at trade shows, and customer visits. We sell and market our products through a combination of direct sales, distributors and representatives.



As of June 30, 2007, our direct sales organization consisted of 24 sales account managers in the United States, Europe
and Asia, supported by application engineers and product line managers. We focus our direct sales efforts on service providers and telecommunications systems and optical module manufacturers. The direct sales account managers cover the market on an
assigned-account, regional basis and work as a team with systems engineers and product line managers. As of June 30, 2007, our sales and marketing organization consisted of 63 people. We provide customer service directly to our customers.



In order to further our international sales objectives, we
have established relationships with one distributor in Europe and two distributors in Japan. Additionally, we have relationships with two supplier manufacturer representatives, one in China and one in Korea, and with a sales representative in
Israel. These distributors and representatives have expertise in distributing complex telecommunications equipment in their markets and provide basic customer service to the end customers they serve.



While we have diversified our customer base, we expect that a substantial
proportion of our sales will continue to be concentrated with a limited number of customers. During fiscal 2007, Alcatel-Lucent accounted for 29% of our net revenue and Tellabs accounted for 17% of our net revenue. During fiscal 2006, Alcatel
accounted for 27% of our net revenue and Nortel accounted for 11% of our net revenue. During fiscal 2005, Alcatel accounted for 34% of our net revenue.



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



Backlog



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



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Manufacturing



During the first half of fiscal 2006, we performed optical sub-assembly, final integration, and shipment of our products at both our contract
manufacturers facilities and at our own facilities in Fremont, California; Erwin Park, New York; Nozay, France; and San Donato, Italy. During the second half of fiscal 2006 and in fiscal 2007, we completed the transition of most of our manufacturing
operations to third party contract manufacturers, whose operations are coordinated through our Asian Operations Center in Bangkok, Thailand; however, we continue to manufacture Lithium Niobate chips that are used in our products in San Donato,
Italy. As of June 30, 2007, our manufacturing support organization consisted of 243 people.



Currently, we see supplier lead-times increasing, as companies have re-aligned their capacity to lower levels. We currently purchase several key
components used in our products and equipment from single or limited sources of supply, including Bookham Inc., Corning, Eudyna Devices Inc., JDS Uniphase Corporation and Photop, Inc. These key components include lasers, variable optical
attenuators, thin film filters, gain flattening filters, and optical fiber. We also purchase turnkey solutions from contract manufacturers, such as Fabrinet, Browave Corporation and Optiworks. For risks associated with our manufacturing strategy,
please see Risk Factors in Item 1A of this Annual Report on Form 10-K, including Section IV: Operations, Research and Development Risks.



Our United States, Europe and Asia sites are currently TL-9000 certified. We will continue to refine our quality processes
to ensure that we maintain our high standards of product quality and customer satisfaction.



Patents and Intellectual Property



As of June 30, 2007, we held approximately 520 U.S. patents and approximately 272 foreign patents (issued and pending), covering a broad range of photonics and optical communications products and technologies.
These technologies are incorporated into our products and are covered by patents that expire through June 2024; however, we also have patents that have not been incorporated into our products. In addition, our intellectual property includes trade
secrets, trademarks, and copyrights. We do not expect to maintain or enhance our market position primarily through the exercise of our intellectual property rights because the rapid evolution of technology and the wide distribution of patents in our
industry preclude such market positioning through intellectual property. We will pursue opportunities to license our intellectual property if we believe that we can be adequately compensated or if there is the potential for a beneficial
cross-license agreement.



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



We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to and distribution of our proprietary information.



In addition, we have been granted licenses to use other intellectual property, including patents of Alcatel, Corning and various other third parties. For
risks associated with our patents and intellectual property, please see Risk Factors in Item 1A of this Annual Report on Form 10-K, including Section V: Intellectual Property and Litigation Risks.



Employees



As of June 30, 2007, we had 539 employees and consultants comprised of 243 employees in manufacturing support, 151
employees in research and development, 63 employees in sales and marketing, and 82 employees in



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general and administrative capacities. The work force is located in the United States, Canada, China, France, Germany, Italy, Thailand and the United
Kingdom.



As of June 30, 2007, some of our employees
located in Europe were represented by labor organizations.



We
consider our relations with our employees to be good. Our future success depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Please see Risk Factors in Item 1A
of this Annual Report on Form 10-K, including Section IV: Operations and Research and Development Risks, specifically the risk factor entitled We depend on key personnel to manage our business effectively, and if we are unable to
hire, retain or motivate qualified personnel, our ability to sell our products could be harmed.



|ITEM 1A. | RISK FACTORS
|-------- | ------------



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



I. Financial and
Revenue Risks.



We have a history of negative cash flow and losses,
which may continue for an indeterminate period of time, if we are unable to increase our revenues and/or further reduce our costs.



We have never been profitable. We have experienced operating losses in each quarterly and annual period since our inception in 1997, and we may continue
to incur operating losses for an indeterminate period of time. As of June 30, 2007, we had an accumulated deficit of $705.1 million. Also, for the fiscal year ended June 30, 2007 and for each of our prior fiscal years, we had negative
operating cash flow, and we may incur negative operating cash flow in future periods. There can be no assurance that our business will become profitable in the future or that additional losses and negative cash flows from operations will not be
incurred, which could have a material adverse affect on our financial condition.



Due to insufficient cash generated from operations, we have funded our operations primarily through the sale of equity securities, debt securities, bank borrowings, equipment lease financings, acquisitions and other
capital raising transactions. Although we implemented cost reduction programs during the past several years, we continue to have significant fixed expenses, and we expect to continue to incur considerable manufacturing, sales and marketing, product
development and administrative expenses.



If we do not increase our revenues
and/or reduce costs, and improve our gross margins, our financial condition and results of operations will be adversely impacted.



Our ability to achieve profitability depends on our ability to increase our revenues and/or control costs and expenses in relation to revenues and to
increase our gross margin. During the fiscal years ended June 30, 2007, 2006 and 2005, our gross margin percentage was positive 18%, positive 5% and negative 3%, respectively. Despite our continued efforts to improve our gross margins, there
can be no assurance that our gross margins will improve in the future.



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



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



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



As part of our cost reduction efforts, over the past several years we have implemented various restructuring programs to realign our resources in response
to changes in the industry and customer demand. These efforts have included transferring most of our manufacturing operations to lower-cost contract manufacturers and selling our semiconductor fabs and related product lines in France. Our past
restructuring programs may have a material effect on our financial position in the future as we pay severance to employees and rent for excess facilities. We may initiate future restructuring actions, which are likely to result in additional
expenses that could affect our results of operations or financial position. There can be no assurance that we will realize the benefits we anticipate from our current or future restructuring programs or that such programs will reduce our operating
expenses and improve our cost structure.



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



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



| |  |  | the current economic environment and other developments in the telecommunications industry, including the severe business setbacks of customers or potential
customers and the current perceived oversupply of communications bandwidth;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the average margin of the mix of products we sell;
| | - |  | --------------------------------------------------



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



| |  |  | cancellations of orders and shipment rescheduling;
| | - |  | --------------------------------------------------



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



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



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



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



| |  |  | the current practice of our customers in the telecommunications industry of sporadically placing large orders with short lead times;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to comply with new rules and regulations;
| | - |  | -----------------------------------------------------



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



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



| |  |  | the availability and cost of components for our products;
| | - |  | ---------------------------------------------------------



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



| |  |  | the unpredictability of customer demand and difficulties in meeting such demand;
| | - |  | --------------------------------------------------------------------------------



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



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



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



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



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



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



Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud,
our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal controls. For example, as more fully described in Item 9A of this Annual Report on Form 10-K, our
management concluded that as of June 30, 2007 we did not maintain effective internal controls over the following:



Controls over judgmental and complex processes and transactions were inadequate resulting in insufficient control over financial reporting.



Our management determined that these control deficiencies were considered a
material weakness that could result in a material misstatement to annual or interim financial statements that would not be prevented or detected. As a result, our management concluded that our internal control over financial reporting was not
effective as of June 30, 2007 using the criteria set forth in the Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). We expect the remediation of this
material weakness to occur during fiscal year 2008.



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



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



As a public company, we incur significant
legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as, rules subsequently implemented by the Securities and Exchange Commission and Nasdaq, has required changes in corporate governance practices of
public companies. These rules and regulations have increased our legal and financial compliance costs and made some activities more time consuming and costly. In addition, we incur additional costs associated with our public company reporting
requirements.



Our stock price is highly volatile.



The trading price of our common stock has fluctuated significantly since our
initial public offering in February 2000, and is likely to remain volatile in the future. For example, since the beginning of fiscal 2006, our common stock has closed as low as $0.62 and as high as $3.29 per share. The trading price of our common
stock could be subject to wide fluctuations in response to many events or factors, including the following:



| |  |  | quarterly variations in our operating results;
| | - |  | ----------------------------------------------



| |  |  | significant developments in the businesses of telecommunications companies;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------



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



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



| |  |  | any deviation from projected growth rates in revenues;
| | - |  | ------------------------------------------------------



| |  |  | any loss of a major customer or a major customer order;
| | - |  | -------------------------------------------------------



| |  |  | additions or departures of key management or engineering personnel;
| | - |  | -------------------------------------------------------------------



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



| |  |  | activities of short sellers and risk arbitrageurs;
| | - |  | --------------------------------------------------



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



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



| |  |  | material weaknesses in internal controls.
| | - |  | -----------------------------------------



In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology
companies, which often has been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. There is substantial risk that our quarterly
results will fluctuate.



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Sales of securities by our stockholders or warrantholders could affect the market price of our common stock or have a
dilutive effect upon our stockholders.



As of
August 22, 2007, Alcatel Lucent owned shares of our common stock representing 12% of the outstanding shares of our common stock. Previously, certain restrictions on transfer applied to Alcatel Lucent, making it more difficult for it to sell its
shares of Avanex common stock. After January 1, 2007, however, Alcatel Lucent was no longer subject to such selling restrictions. If Alcatel Lucent or our other stockholders sell substantial amounts of our common stock in the public market, it
could cause the market price of our common stock to fall, and could make it more difficult for us to raise capital through public offerings or other sales of our capital stock.



In addition, we have issued warrants to purchase initially up to an aggregate of 17,919,288 million shares of common
stock to certain institutional investors that are exercisable through 2008, 2009 and 2011 at exercise prices ranging from $1.13 to $2.68 per share, subject to broad-based anti-dilution provisions, including weighted average price-based anti-dilution
provisions. If these institutional investors exercise the warrants, we will issue shares of our common stock and such issuances may be dilutive to our stockholders. Because the exercise price of the warrants may be adjusted from time to time in
accordance with the provisions of the warrants, the number of shares that could actually be issued may be greater than the amount described above. For example, in connection with our March 1, 2007 financing, the holders of the warrants we
issued on March 9, 2006 received an antidilution adjustment pursuant to the terms of such warrants resulting in up to 117,221 additional shares being issued upon the exercise of such warrants and the reduction of the exercise price of the
warrants from $2.73 per share to $2.69 per share.



We may have difficulty
obtaining additional capital.



Our balance of cash, cash
equivalents, and unrestricted short-term investments decreased from $67.7 million at June 30, 2006 to $43.8 million at June 30, 2007. To date, we have not been profitable, and there can be no assurance that our business will be profitable
in the future. If these trends continue in the future, it could have an adverse affect on our financial condition. It may be difficult for us to raise additional capital. If adequate capital is not available to us as required, or is not available on
favorable terms, our business, operating results and financial condition would be adversely affected.



II. Market and Competitive Risks.



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



We sell our products primarily to a few large customers in the telecommunications industry. Two customers accounted for an aggregate of 29% and 17% of our
net revenue, respectively, for the fiscal year ended June 30, 2007. We expect that the majority of our revenues will continue to depend on sales of our products to a small number of customers. If current customers do not continue to place
significant orders, or if they cancel or delay current orders, we may not be able to replace those orders. In addition, any negative developments in the business of existing customers could result in significantly decreased sales to these customers,
which could seriously harm our business, operating results and financial condition. We have experienced, and in the future we may experience, losses as a result of the inability to collect accounts receivable, as well as the loss of ongoing business
from customers experiencing financial difficulties. If our customers fail to meet their payment obligations, we could experience reduced cash flows and losses in excess of amounts reserved. Because of our reliance on a limited number of customers,
any decrease in revenues from, or loss of, one or more of these customers without a corresponding increase in revenues from other customers would harm our business, operating results and financial condition.



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Few of our customers are under obligation to buy significant quantities of our products, and may cancel or delay
purchases with little or no advance notice to us.



Our
customers typically purchase our products pursuant to individual purchase orders. While we have executed long-term contracts with some of our customers, and may enter into additional long-term contracts with other customers in the future, these
contracts do not obligate our customers to buy significant quantities of our products. Our customers may cancel, defer or decrease purchases without significant consequence to them and with little or no advance notice. Further, certain of our
customers have a tendency to purchase our products near the end of a fiscal quarter. Cancellation or delays of such orders may cause us to fail to achieve that quarters financial and operating goals. Decreases in purchases, cancellations of
purchase orders, or deferrals of purchases may significantly harm our business, operating results and financial condition, particularly if we are not able to anticipate these events.



We experience intense competition with respect to our products.



We believe that our principal competitors in the optical systems and components industry include Bookham Inc., JDS Uniphase
Corporation, Oplink Communications, Inc., Opnext Inc. and Optium Corporation. We may also face competition from companies that expand into our industry in the future.



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



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



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



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



In the telecommunications industry, service providers and optical systems
manufacturers often undertake extensive qualification processes prior to placing orders for large quantities of products such as ours, because



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these products must function as part of a larger system or network. Once they decide to use a particular suppliers product or component, these
potential customers design the product into their system, which is known as a design-in win. Suppliers whose products or components are not designed in are unlikely to make sales to that company until the adoption of a future redesigned
system at the earliest, which could occur several years after the last design-in win. If we fail to achieve design-in wins in potential customers qualification processes, we may lose the opportunity for significant sales to such customers for
a significant period of time.



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



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



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



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



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



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



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III. Acquisition and Divestiture Risks.



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



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



| |  |  | potentially dilutive issuances of equity securities;
| | - |  | ----------------------------------------------------



| |  |  | reduced cash balances and related interest income;
| | - |  | --------------------------------------------------



| |  |  | higher fixed expenses, which require a higher level of revenues to maintain gross margins;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the incurrence of debt and contingent liabilities, including indemnification obligations;
| | - |  | -----------------------------------------------------------------------------------------



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



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



| |  |  | legal, accounting and advisory fees;
| | - |  | ------------------------------------



| |  |  | amortization expenses related to intangible assets; and
| | - |  | -------------------------------------------------------



| |  |  | one-time write-offs of large amounts.
| | - |  | -------------------------------------



For example, in connection with our acquisition of the optical components businesses of Alcatel and Corning, we issued shares of our common stock to
Alcatel and to Corning representing 28% and 17%, respectively, of the outstanding shares of our common stock on a post-transaction basis. In connection with such acquisitions, we recorded restructuring liabilities at July 31, 2003 with a
fair value of $64.1 million relating to workforce reductions, which were included in the purchase price of such acquisitions. Following these acquisitions, we recorded additional significant restructuring liabilities that involved the acquired
businesses and resulted in, among other things, a significant reduction in the size of our workforce, consolidation of our facilities and increased reliance on outsourced, third-party manufacturing.



In addition, as discussed above, we sold ninety percent (90%) of the
shares of Avanex France, the operator of our semiconductor fabs and associated product lines located in Nozay, France. Pursuant to the provisions of French bankruptcy law, in the event that Avanex France, now 3S Photonics, declares
bankruptcy after such sale, we may be held liable, as manager de facto of 3S Photonics for the payment of all or part of the liabilities of 3S Photonics, should it appear that we committed mismanagement, which would have solely or
partially led to the bankruptcy of 3S Photonics, and these liabilities could be significant. Such liability, if incurred, could have a material adverse effect on our business, results of operations, and financial condition. In addition, we agreed to
indemnify the buyers of Avanex France generally for a period of up to two years in an amount generally not exceeding 5 million for breaches of certain representations, warranties and covenants relating to the condition of the business
prior to, and at the time of sale, and approximately 2 million for other liabilities. Should any such liabilities or expenses be of a material amount, our finances could be materially and adversely affected. Finally, we may be dependent
on 3S Photonics to supply us with certain products and components that we sell to our customers. Any interruption in the operations of 3S Photonics, or any deficiency in the quality or quantity of the components or products built for us by 3S
Photonics, could impede our ability to meet our scheduled product deliveries to our customers. As a result, we may experience a shortfall in revenue, lose existing or potential customers, or otherwise experience material adverse effects upon our
business, results of operation, and financial condition.



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Additionally, if any potential acquisitions are not completed, we are required to expense the frequently
significant legal, accounting, consulting and other costs of pursuing these transactions in the period in which the activity ceases, which could adversely affect our operating results and may not be anticipated. In the quarter ended
December 31, 2006, we expensed approximately $2.1 million in legal, accounting, and consulting due diligence fees related to a potential acquisition in which Avanex decided not to proceed further.



Furthermore, our past acquisition and disposition activity has
involved, and our future acquisition, disposition and other significant transactions may involve, numerous operational risks, including:



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



| |  |  | diversion of managements attention from other business concerns;
| | - |  | -----------------------------------------------------------------



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



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



| |  |  | potential loss of key employees of acquired organizations.
| | - |  | ----------------------------------------------------------



IV. Operations and Research and Development Risks.



We have a limited operating history, which makes it difficult to evaluate our prospects and our operations.



We are in the optical systems and components industry. We were first
incorporated in October 1997. Because of our limited operating history, we have limited insight into trends that may emerge in our industry and affect our business. The revenue and income potential of the optical systems and components industry, and
our business in particular, are unproven. As a result of our limited operating history, we have limited financial data that can be used to evaluate our business. Our prospects must be considered in light of the risks, expenses and challenges we
might encounter because we are in a new and rapidly evolving industry.



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



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



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



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



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



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



| |  |  | changing product specifications and customer requirements;
| | - |  | ----------------------------------------------------------



| |  |  | difficulties in hiring and retaining necessary technical personnel;
| | - |  | -------------------------------------------------------------------



| |  |  | difficulties in reallocating engineering resources and overcoming resource limitations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | changing market or competitive product requirements;
| | - |  | ----------------------------------------------------



| |  |  | unanticipated engineering complexities, and
| | - |  | -------------------------------------------



| |  |  | failure to compete with new product releases by our competitors.
| | - |  | ----------------------------------------------------------------



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



The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as, the accurate anticipation of
technological and market trends. We cannot assure that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, or on a timely basis. In addition, the introduction of new and enhanced products may
cause our customers to defer or cancel orders for existing products. To the extent customers defer or cancel orders for existing products due to the expectation of a new product release, or if there is any delay in development or introduction of our
new products or enhancements of our products, our business, results of operations, and financial condition would suffer. Further, we cannot assure that our new products will gain market acceptance or that we will be able to respond effectively to
competitive products, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business, results of operations and financial condition.



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



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



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



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| |  |  | a lack of sufficient products to satisfy our customers needs, if estimates of our customers requirements are less than our customers actual needs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



We use a rolling six-month to twelve-month
demand forecast based on anticipated and historical product orders to determine our component and material requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the
necessary components and materials. It is very difficult to develop accurate forecasts of product demand, especially given the current uncertain conditions in the telecommunications industry. Order cancellations and lower order volumes by our
customers have in the past created excess inventories. For example, inventory write-downs are primarily the result of our inability to anticipate decreases in demand for certain of our products and variations in product mix ordered by our customers.
For the fiscal years ended June 30, 2007 and June 30, 2006, we recorded write-downs of $12.9 million and $12.8 million, respectively, for excess and obsolete inventory. If we fail to accurately predict both the demand for our products and
the lead times required to obtain the necessary components and materials in the future, we could incur additional excess and obsolete inventory write-downs. If we underestimate our component and material requirements, we may have inadequate
inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively affect our business, results of operations, and financial condition.



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



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



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



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



We rely on a limited number of outsourced manufacturers and suppliers to manufacture and provide a substantial majority of our components, subassemblies,
and finished products. In particular, one contract manufacturer, Fabrinet, currently manufactures products for sale, which constitutes a significant majority of our net revenue. We intend to develop further our relationships with this and other
manufacturers so that they will



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eventually manufacture many of our high volume key components and subassemblies in the future. The qualification of these independent manufacturers and
materials suppliers under quality assurance standards is an expensive and time-consuming process. Our independent manufacturers have a limited history of manufacturing optical subcomponents. Any interruption in the operations of these manufacturers,
or any deficiency in the quality or quantity of the subcomponents or products built for us by these manufacturers, could impede our ability to meet our scheduled product deliveries to our customers. Operational issues could result, such as, capacity
constraints at our contract manufacturers, raw materials shortages, logistics issues, and manufacturing yield issues for some of our new products. As a result, we may lose existing or potential customers.



We have limited experience in working with outsourced manufacturers and
suppliers. As a result, we may not be able to effectively manage our relationships with them. If we cannot effectively manage our manufacturing and supplier relationships, or if these manufacturers and suppliers fail to deliver components in a
timely manner, we could experience significant delays in product deliveries, which may have an adverse effect on our business and results of operations. Increased reliance on outsourced manufacturing and suppliers, and the ultimate disposition of
our manufacturing capacity in the future, may result in impairment expense relating to our long-lived assets in future periods, which would have an adverse impact on our business, financial condition, and results of operations.



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



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



| |  |  | loss of customers or customer orders;
| | - |  | -------------------------------------



| |  |  | loss of or delay in revenues;
| | - |  | -----------------------------



| |  |  | loss of market share;
| | - |  | ---------------------



| |  |  | loss or damage to our brand and reputation;
| | - |  | -------------------------------------------



| |  |  | inability to attract new customers or achieve market acceptance;
| | - |  | ----------------------------------------------------------------



| |  |  | diversion of development resources;
| | - |  | -----------------------------------



| |  |  | increased service and warranty costs;
| | - |  | -------------------------------------



| |  |  | legal actions by our customers; and
| | - |  | -----------------------------------



| |  |  | increased insurance costs.
| | - |  | --------------------------



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



| |  |  | costs and expenses incurred by our customers or their customers to fix the problems; or
| | - |  | ---------------------------------------------------------------------------------------



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



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



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



Our future success depends, in part, on certain key employees and on our ability to attract and retain highly skilled personnel. In addition, we have made changes in our executive management teams, and there can be no
assurance that these changes will be successful. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly engineering, sales or marketing
personnel, may seriously harm our business, results of operations, and financial condition. None of our officers or key employees has an employment agreement for a specific term, and these employees may terminate their employment at any time. We do
not have key person life insurance policies covering any of our employees. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for
highly skilled personnel is frequently intense, especially in the San Francisco Bay Area. We may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs.



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



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



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



| |  |  | greater difficulty in accounts receivable collection and longer collection periods;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | difficulties inherent in managing operations and employees in remote foreign operations;
| | - |  | ----------------------------------------------------------------------------------------



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



| |  |  | import or export licensing and product certification requirements;
| | - |  | ------------------------------------------------------------------



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



| |  |  | potential adverse tax consequences;
| | - |  | -----------------------------------



| |  |  | seasonal reductions in business activity in some parts of the world;
| | - |  | --------------------------------------------------------------------



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



| |  |  | the impact of recessions in economies outside of the United States;
| | - |  | -------------------------------------------------------------------



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



| |  |  | political and economic instability, terrorism and war.
| | - |  | ------------------------------------------------------



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



V. Intellectual
Property and Litigation Risks.



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



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



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



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



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



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



From time to time we may be required to license
technology or intellectual property from third parties for our product offerings or to develop new products or product enhancements. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all.
The inability to obtain a necessary third-party license required for our product offerings or to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards, or of greater cost,
either of



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which could prevent us from operating our business. If we are not able to obtain licenses from third parties, if necessary, then we may also be subject to
litigation to defend against infringement claims from these third parties.



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



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



| |  |  | stop selling, incorporating, or using our products that use the challenged intellectual property;
| | - |  | -------------------------------------------------------------------------------------------------



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



| |  |  | redesign the products that use the technology; or
| | - |  | -------------------------------------------------



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



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



VI. Other
Risks.



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



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



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



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additional regulations, both domestically and abroad, related to power consumption, electrical emissions and homologation. Any failure to successfully obtain
the necessary permits or comply with the necessary laws and regulations could have a material adverse effect on our operations.



Certain provisions of our certificate of incorporation and bylaws and Delaware law could delay or prevent a change of control of us.



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



In addition, Alcatel Lucent owned shares of Avanex common stock representing 12% of the outstanding shares of Avanex common stock as of August 22,
2007. Pursuant to the stockholders agreement entered into by Avanex and Alcatel Lucent, Alcatel Lucent is generally required to vote on all matters as recommended by the board of directors of Avanex, except for proposals relating to certain
acquisition transactions between Avanex and certain competitors of Alcatel Lucent. The concentration of ownership of our shares of common stock, combined with the voting requirements contained in the stockholders agreement, could have the
effect of delaying or preventing a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, unless the transaction is approved by our board of directors.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



Not applicable.



|ITEM 2. | PROPERTIES
|------- | ----------



We lease the following properties:



|                       |  |            |  |                                                  |  |                   
|---------------------- |  | ---------- |  | ------------------------------------------------ |  | ------------------
|Location               |  | SquareFeet |  | Principal Operations                             |  | Date Lease Expires
|Bangkok, Thailand      |  | 15,610     |  | Administrative office                            |  | February 28, 2009 
|Bangkok, Thailand      |  | 3,300      |  | Warehouse                                        |  | May 31, 2008      
|Horsehead, New York    |  | 15,000     |  | Administrative office and Research & Development |  | January 31, 2009  
|Fremont, California #1 |  | 54,000     |  | Corporate headquarters                           |  | October 17, 2009  
|Fremont, California #2 |  | 91,000     |  | Administrative office                            |  | April 15, 2010    
|Newark, California #1  |  | 48,000     |  | Administrative office (Vacant)                   |  | November 30, 2010 
|Newark, California #2  |  | 62,000     |  | Administrative office (Vacant)                   |  | November 30, 2010 
|Melbourne, Florida     |  | 7,000      |  | Administrative office and Research & Development |  | May 15, 2008      
|Villebon, France       |  | 8,830      |  | Administrative office and Research & Development |  | April 25, 2010    
|San Donato, Italy      |  | 65,700     |  | Manufacturing and Administrative                 |  | June 30, 2011     
|Shanghai, China        |  | 8,800      |  | Administrative office                            |  | May 17, 2008      
|Shanghai, China        |  | 24,400     |  | Administrative office and Research & Development |  | December 31, 2007 



We believe that
existing facilities are in excess of our needs. We are currently evaluating the most appropriate use of our existing facilities and the possibility of subleasing more of our space to third parties. We currently sublease some of the space at our
facilities in Fremont, California to other companies.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



From time to time, we are subject to various legal proceedings that arise from the normal course of business activities. In addition, from time to time,
third parties assert patent or trademark infringement claims against us in the form of letters and other forms of communication. We do not believe that any of these legal proceedings or



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claims is likely to have a material adverse effect on our consolidated results of operations, financial condition, or cash flows. However, it is possible
that an unfavorable resolution of one or more such proceedings could in the future materially affect our future results of operations, cash flows, or financial position in a particular period.



IPO Class Action Lawsuit



On August 6, 2001, Avanex, certain of its officers and directors, and
various underwriters in its initial public offering (IPO) were named as defendants in a class action filed in the United States District Court for the Southern District of New York, captioned Beveridge v. Avanex Corporation et al., Civil
Action No. 01-CV-7256. This action and other subsequently filed substantially similar class actions have been consolidated into In re Avanex Corp. Initial Public Offering Securities Litigation, Civil Action No. 01 Civ. 6890. The
consolidated amended complaint in the action generally alleges that various investment bank underwriters engaged in improper and undisclosed activities related to the allocation of shares in Avanexs IPO. Plaintiffs have brought claims for
violation of several provisions of the federal securities laws against those underwriters, and also against Avanex and certain of its directors and officers, seeking unspecified damages on behalf of a purported class of purchasers of Avanexs
common stock between February 3, 2000, and December 6, 2000. Various plaintiffs have filed similar actions asserting virtually identical allegations against more than 40 investment banks and 250 other companies. All of these IPO
allocation securities class actions currently pending in the Southern District of New York have been assigned to Judge Shira A. Scheindlin for coordinated pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92.
On October 9, 2002, the claims against Avanexs directors and officers were dismissed without prejudice pursuant to a tolling agreement. The issuer defendants filed a coordinated motion to dismiss all common pleading issues, which the
Court granted in part and denied in part in an order dated February 19, 2003. The Courts order did not dismiss the Section 10(b) or Section 11 claims against Avanex.



In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including Avanex, was
submitted to the Court for approval. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter
defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order
terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs have filed amended master allegations and amended complaints in the six focus cases. It is uncertain whether there will be any revised or
future settlement. If a settlement does not occur, and litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in
substantial costs and may divert managements attention and resources, which could seriously harm our business, financial condition, results of operations or cash flow in a particular period.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2007.



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EXECUTIVE OFFICERS OF THE COMPANY



Our executive officers as of June 30, 2007 are as follows:



|                    |  |     |  |                                                                          
|------------------- |  | --- |  | -------------------------------------------------------------------------
|Name                |  | Age |  | Position                                                                 
|Jo S. Major, Jr.    |  | 45  |  | Chairman of the Board of Directors, President and Chief Executive Officer
|Marla Sanchez       |  | 51  |  | Senior Vice President and Chief Financial Officer                        
|Giovanni Barbarossa |  | 45  |  | Senior Vice President and Chief Technology Officer                       
|Patrick Edsell      |  | 58  |  | Senior Vice President and General Manager                                
|Yves LeMaitre       |  | 43  |  | Senior Vice President and Chief Marketing Officer                        
|Bradley Kolb        |  | 48  |  | Senior Vice President, Operations                                        



Jo S. Major,
Jr. has served as Chairman of the Board since April 2005 and has served on our Board of Directors and as our President and Chief Executive Officer since August 2004. From February 2001 to August 2004, he served in various management roles in the
Active Components Group of JDS Uniphase, an optical technology company, including Senior Vice President, Component Products Group, and Vice President, Active Components Business Unit. Dr. Major was employed by SDL, Inc. in a variety of
technical managerial positions from 1990 to February 2001, when SDL was acquired by JDS Uniphase. Dr. Major holds a B.S., with high honors, M.S. and Ph.D. from the University of Illinois, and has been granted industry awards for the development
of 980nm lasers, high powered, near-infrared lasers, Raman amplifiers and high performance laser packaging. Dr. Major was an Intel Fellow from 1988 to 1990.



Marla Sanchezhas served as our Senior Vice-President and Chief Financial Officer since October 2006. She joined
Avanex as a consultant in August 2006. Prior to joining Avanex, Ms. Sanchez previously served as consultant to SDL Ventures, an investment firm, from January 2005 to October 2006, and in that capacity served as Interim Chief Financial Officer
for two of SDL Ventures portfolio companies. From April 2001 until January 2005, Ms. Sanchez was a consultant and a private investor. From January 1999 until April 2001, Ms. Sanchez served as Corporate Controller for SDL, Inc., a
fiber optic company. Previously, Ms. Sanchez served as Director, Manufacturing Finance and Cost Systems at VLSI Technology, as Division Controller at Diasonics Corporation and as Corporate Controller at Ridge Computers. Ms. Sanchez holds
an M.B.A. from the University of Santa Clara and a M.S. and B.S. degree in biological sciences from Stanford University.



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



Patrick Edsell has served as our Senior Vice President and General Manager since March 2007. Mr. Edsell brings over 30 years of
senior executive experience in the optical and microelectronic industries. Prior to joining Avanex, he was the President and Chief Executive Officer at NP Photonics, Inc. from February 2004 to March 2007, specializing in the sensing, medical and
R&D markets. From February 2002 to February 2004, Mr. Edsell was President and Chief Executive Officer at Gigabit Optics Corp., a start-up company focused on the invention and commercialization of micron level optical platforms for
enterprise and metro datacom and telecom networks. Previously, he was President and Chief Executive Officer at Spectra-Physics, Inc., a global company that develops broad-based laser technology for the worldwide computer/micro-electronics
manufacturing, medical, graphics, telecom and research markets, from October 1990 to February 2002. From 1975 to 1990, he also held upper management positions at Applied Power, Inc., Pharos AB in Stockholm, Sweden, GP Technologies, Sun



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Company and General Electric. Mr. Edsell received his M.B.A. in Finance from the University of New Mexico, a Masters in Economics from Ohio State
University, and B.S. in Economics from the U.S. Air Force Academy.



Yves LeMaitre has served as our Senior Vice President and Chief Marketing Officer since October 2006 and previously served as Vice President and General Manager of the Optical Components group from May 2005. Prior to joining Avanex,
Mr. LeMaitre was President and Chief Executive Officer of Lightconnect Inc., a supplier of MEMS components and modules for optical networking applications company based in California. Mr. LeMaitre worked at Lightconnect Inc. from September
2001 to April 2005. Previously, Mr. LeMaitre held various positions including Vice President and General Manager of Core Data Products at Alcatel USA, Inc. from July 1994 to September 2001. Mr. LeMaitre also worked with Alcatels
joint venture with Sprint International and various senior marketing and engineering management positions in France, the Netherlands and Italy for Alcatel and SITA. Mr. LeMaitre received an engineering degree from ENST (École Nationale
Supérieure des Télécommunications) in Paris, France and received his masters degree in mathematics and computer science at Nantes University in France.



Bradley Kolb joined Avanex in March 2006, as Senior Vice-President of Operations. Mr. Kolb has 20 years of
operational roles and an extensive background in the management of contract manufacturing in different continents including Europe, North America and Asia. Between October 2003 and March 2006, Mr. Kolb was Vice President of Operations and Chief
Financial Officer at Vivato, Inc., a venture capital backed startup firm. Between January 2001 and September 2003, Mr. Kolb was Vice President of Operations at Proxim Inc., a manufacturer of wireless networking equipment for WiFi and broadband
wireless networks. Between 1999 and 2001, Mr. Kolb was Vice President of Operations at Resilience Corporation, a venture backed company producing fault tolerant computers. Previously, Mr. Kolb held various positions at American
Microdevices Manufacturing Inc., Motorola-Indala Corporation, Litton Applied Technology and Varian Associates. Mr. Kolb holds an M.B.A. from the Graduate School of Business at the University of Chicago, and a B.S. degree in Electrical
Engineering from the University of Illinois.



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PART II.



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Our common stock is traded on the NASDAQ Global Market under the symbol
AVNX. The following table shows, for the periods indicated, the high and low per share closing prices of common stock, as reported by the NASDAQ Global Market for each of the last eight quarters ending June 30, 2007:



|                                 |  |      |      |     |   |     
|-------------------------------- |  | ---- | ---- | --- | - | ----
|                                 |  | High |      | Low
|Fiscal year 2006 Quarters Ended: |  |      |      |     |   |     
|September 30, 2005               |  | $    | 1.07 |     | $ | 0.81
|December 31, 2005                |  | $    | 1.40 |     | $ | 0.62
|March 31, 2006                   |  | $    | 3.25 |     | $ | 0.99
|June 30, 2006                    |  | $    | 3.29 |     | $ | 1.38
|                                 |  |     
|Fiscal year 2007 Quarters Ended: |  |      |      |     |   |     
|September 30, 2006               |  | $    | 1.92 |     | $ | 1.25
|December 31, 2006                |  | $    | 2.11 |     | $ | 1.49
|March 31, 2007                   |  | $    | 2.28 |     | $ | 1.76
|June 30, 2007                    |  | $    | 1.83 |     | $ | 1.49



On August 22,
2007, the last reported sale price of our common stock on the NASDAQ Global Market was $1.68 per share. As of August 22, 2007, there were approximately 545 stockholders of record of our common stock. Because brokers and other institutions on
behalf of stockholders hold many of our shares of common stock, we are unable to estimate the total number of stockholders represented by these record holders.



We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and
growth of our business and do not anticipate paying any cash dividends in the foreseeable future.



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



You should read the following selected consolidated financial data in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements and the notes thereto included elsewhere in this Annual Report. The statement of operations data set forth below for the years ended June 30, 2007, 2006 and
2005 and the balance sheet data as of June 30, 2007 and 2006 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this Annual Report. The statement of operations data set forth
below for the years ended June 30, 2004 and 2003 and the balance sheet data as of June 30, 2005, 2004 and 2003 are derived from audited financial statements not included in this Annual Report.



|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | -------- | - | ------- | ---- |  | - | -------- | - |  | -------- | -------- | - |  | - | -------- | -
|                                                                                                                              |  | 2007 (1)                              |         |   | 2006 (1) |   |         | 2005 |  |   | 2004 (2) |   |  | 2003 (3) |         
|                                                                                                                              |  | (In thousands, except per share data) |        
|Consolidated Statement of Operations Data:                                                                                    |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Net revenue                                                                                                                   |  | $                                     | 212,755 |   |          | $ | 162,944 |      |  | $ | 160,695  |   |  | $        | 106,932  |   |  | $ | 21,416   |  
|Cost of revenue                                                                                                               |  |                                       | 174,550 |   |          |   | 154,484 |      |  |   | 165,258  |   |  |          | 133,259  |   |  |   | 29,833   |  
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Gross (loss) profit                                                                                                           |  |                                       | 38,205  |   |          |   | 8,460   |      |  |   | (4,563   | ) |  |          | (26,327  | ) |  |   | (8,417   | )
|Operating expenses:                                                                                                           |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Research and development                                                                                                      |  |                                       | 25,231  |   |          |   | 23,471  |      |  |   | 33,124   |   |  |          | 42,107   |   |  |   | 16,063   |  
|Sales and marketing                                                                                                           |  |                                       | 15,261  |   |          |   | 13,236  |      |  |   | 16,803   |   |  |          | 19,808   |   |  |   | 5,921    |  
|General and administrative                                                                                                    |  |                                       | 23,278  |   |          |   | 16,652  |      |  |   | 17,758   |   |  |          | 24,718   |   |  |   | 13,358   |  
|Amortization of intangibles                                                                                                   |  |                                       | 2,703   |   |          |   | 5,448   |      |  |   | 5,723    |   |  |          | 4,573    |   |  |   | 200      |  
|Impairment of long-lived assets                                                                                               |  |                                       |        |   |          |   |        |      |  |   |         |   |  |          |         |   |  |   | 1,548    |  
|Restructuring                                                                                                                 |  |                                       | 1,511   |   |          |   | 1,912   |      |  |   | 29,272   |   |  |          | 3,779    |   |  |   | 22,438   |  
|Gain on disposal of property and equipment                                                                                    |  |                                       | (527    | ) |          |   | (5,064  | )    |  |   | (1,850   | ) |  |          |         |   |  |   |         |  
|Loss on sale of subsidiary                                                                                                    |  |                                       | 3,216   |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Total operating expenses                                                                                                      |  |                                       | 70,673  |   |          |   | 55,655  |      |  |   | 100,830  |   |  |          | 94,985   |   |  |   | 59,528   |  
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Loss from operations                                                                                                          |  |                                       | (32,468 | ) |          |   | (47,195 | )    |  |   | (105,393 | ) |  |          | (121,312 | ) |  |   | (67,945  | )
|Interest and other income (expense), net                                                                                      |  |                                       | 2,327   |   |          |   | (7,497  | )    |  |   | (2,978   | ) |  |          | 3,299    |   |  |   | 2,533    |  
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Loss from continuing operations before discontinued operations and cumulative effect of an accounting change                  |  |                                       | (30,141 | ) |          |   | (54,692 | )    |  |   | (108,371 | ) |  |          | (118,013 | ) |  |   | (65,412  | )
|Loss from discontinued operations                                                                                             |  |                                       |        |   |          |   |        |      |  |   |         |   |  |          | (6,054   | ) |  |   |         |  
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Loss before cumulative effect of an accounting change                                                                         |  |                                       | (30,141 | ) |          |   | (54,692 | )    |  |   | (108,371 | ) |  |          | (124,067 | ) |  |   | (65,412  | )
|Cumulative effect of an accounting change to adopt SFAS 142                                                                   |  |                                       |        |   |          |   |        |      |  |   |         |   |  |          |         |   |  |   | (37,500  | )
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Loss before income taxes                                                                                                      |  |                                       | (30,141 | ) |          |   | (54,692 | )    |  |   | (108,371 | ) |  |          | (124,067 | ) |  |   | (102,912 | )
|Provision for income taxes                                                                                                    |  |                                       | (464    | ) |          |   |        |      |  |   |         |   |  |          |         |   |  |   |         |  
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Net loss                                                                                                                      |  | $                                     | (30,605 | ) |          | $ | (54,692 | )    |  | $ | (108,371 | ) |  | $        | (124,067 | ) |  | $ | (102,912 | )
|                                                                                                                              |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Loss per share from continuing operations before discontinued operations and effect of an accounting change basic and diluted |  | $                                     | (0.14   | ) |          | $ | (0.34   | )    |  | $ | (0.75    | ) |  | $        | (0.90    | ) |  | $ | (0.96    | )
|Loss per share from discontinued operations basic and diluted                                                                 |  | $                                     |        |   |          | $ |        |      |  | $ |         |   |  | $        | (0.05    | ) |  | $ |         |  
|Loss per share before cumulative effect of an accounting change basic and diluted                                             |  | $                                     | (0.14   | ) |          | $ | (0.34   | )    |  | $ | (0.75    | ) |  | $        | (0.95    | ) |  | $ | (0.96    | )
|Cumulative effect of an accounting change basic and diluted                                                                   |  | $                                     |        |   |          | $ |        |      |  | $ |         |   |  | $        |         |   |  | $ | (0.55    | )
|Net loss per common share basic and diluted                                                                                   |  | $                                     | (0.14   | ) |          | $ | (0.34   | )    |  | $ | (0.75    | ) |  | $        | (0.95    | ) |  | $ | (1.51    | )
|Weighted average number of shares used in computing basic and diluted net loss per common share                               |  |                                       | 212,952 |   |          |   | 163,242 |      |  |   | 144,253  |   |  |          | 130,561  |   |  |   | 68,371   |  
|                                                                                                                              |  |                                       |         |   |         
|Balance Sheet Data:                                                                                                           |  |                                       |         |   |          |   |         |      |  |   |          |   |  |          |          |   |  |   |          |  
|Cash, cash equivalents, restricted cash and short-term investments                                                            |  | $                                     | 47,399  |   |          | $ | 74,335  |      |  | $ | 73,905   |   |  | $        | 89,090   |   |  | $ | 87,591   |  
|Long-term investments                                                                                                         |  | $                                     |        |   |          | $ |        |      |  | $ |         |   |  | $        | 55,145   |   |  | $ | 47,063   |  
|Working capital                                                                                                               |  | $                                     | 63,149  |   |          | $ | 82,364  |      |  | $ | 75,720   |   |  | $        | 83,804   |   |  | $ | 64,708   |  
|Total assets                                                                                                                  |  | $                                     | 135,000 |   |          | $ | 165,558 |      |  | $ | 199,656  |   |  | $        | 275,196  |   |  | $ | 154,615  |  
|Long-term liabilities                                                                                                         |  | $                                     | 9,619   |   |          | $ | 29,187  |      |  | $ | 52,919   |   |  | $        | 26,556   |   |  | $ | 28,173   |  
|Total stockholders equity                                                                                                    |  | $                                     | 72,082  |   |          | $ | 73,338  |      |  | $ | 53,748   |   |  | $        | 157,464  |   |  | $ | 96,262   |  

---

|(1) | Net loss for fiscal 2007 and fiscal 2006 included stock-based compensation expense under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) of $7.1 and $4.5 million, respectively, related to employee stock options and employee stock purchases. For the years ending June 30, 2005, 2004 and 2003, 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. See Note 13 to the Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | We acquired Alcatels and Cornings optical components businesses on July 31, 2003 in a transaction accounted for as a purchase. Additionally, we acquired certain
assets of Vitesse Semiconductors Optical Systems Division on August 28, 2003 in a transaction accounted for as a purchase. The consolidated statement of operations for fiscal year 2004 include the results of operations of the optical
components businesses acquired from Alcatel and Corning subsequent to July 31, 2003 and the optical systems business acquired from Vitesse subsequent to August 28, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In fiscal 2003, we recognized a cumulative charge of $37.5 million for the impairment of goodwill upon the adoption of SFAS 142, Goodwill and Other Intangible
Assets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



You should read the following discussion and analysis of our financial condition and results of operations together with
Selected Financial Data and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under Risk Factors in
Item 1A and elsewhere in this Annual Report on Form 10-K. For ease of reference, we refer to the fiscal years ended June 30, 2007, June 30, 2006 and June 30, 2005 as fiscal 2007, fiscal 2006 and fiscal 2005, respectively.



Overview



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



In fiscal 2004, we assumed restructuring liabilities with fair values of $64.1 million at the date of acquisition of the optical components businesses of
Alcatel Lucent and Corning, which were included in the purchase price. Subsequent to these acquisitions, we have continued to restructure our organization, primarily through the downsizing of our workforce and the abandonment of excess facilities.
As of June 30, 2007, our accrued restructuring liability balance was $11.1 million, consisting of excess facilities costs payable through 2013.



The restructurings have resulted in, among other things, a significant reduction in the size of our workforce, consolidation of our facilities, and
increased reliance on outsourced, third-party manufacturing. In March 2005, we announced that we had opened an operations center in Thailand to centralize global manufacturing and operational overhead functions in a lower-cost region. In July 2005,
we announced the opening of a development and marketing office in Shanghai, China. In March 2007, we announced the sale of ninety percent (90%) of the share capital and voting rights of our wholly owned subsidiary, Avanex France, which operated
our semiconductor fabs and associated product lines located in Nozay, France. This transaction closed on April 16, 2007.



Although we have relocated most of our manufacturing operations to reduce our production costs, we expect to continuously take actions to further reduce
costs and improve our gross margins. However, there can be no assurance that our cost structure will not increase in the future or that we will be able to align our cost structure with our expectations.



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



To date, a substantial proportion of our sales have
been concentrated with a limited number of customers. During fiscal 2007, sales to Alcatel-Lucent and Tellabs accounted for 29% and 17% of our net revenue, respectively. During fiscal 2006, sales to Alcatel and Nortel accounted for 27% and 11% of
our net revenue, respectively. During fiscal 2005, sales to Alcatel accounted for 34% of our net revenue. We expect that a substantial portion of our sales will remain concentrated with a limited number of customers, as evidenced by the increase in
customer concentration.



Cost of Revenue. Our cost of
revenue consists of costs of components and raw materials, direct labor, warranty, manufacturing overhead, payments to our contract manufacturers and inventory write-offs for obsolete and excess



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inventory. We rely on a single or limited number of suppliers to manufacture some key components and raw materials used in our products, and we rely on the
outsourcing of some turnkey solutions.



We write off the cost
of inventory that we specifically identify and consider obsolete or in excess of future sales estimates. We define obsolete inventory as products that we no longer market, for which there is no demand, or inventory that will no longer be used in the
manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using managements best estimate of future demand at the time, based upon information then available to us. We wrote off
excess and obsolete inventory of $12.9 million in fiscal 2007, $12.8 million in fiscal 2006 and $8.2 million in fiscal 2005.



Gross Margin.Gross margin represents revenue less cost of revenue. During fiscal 2007, gross margin increased to 18% of revenue, which was an
increase in gross margin of 13 percentage points over our fiscal 2006 gross margin of 5%. The increase was due to a more profitable mix of products sold to our customers, decreased vendor costs, improved yields, and cost reductions resulting from
having our design and operations teams working with our contract manufacturers to lower production costs.



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



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



General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive, finance, accounting, legal, and human resources personnel, costs
of allocated facilities, recruiting expenses, professional fees, and other corporate expenses.



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



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



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



Loss on Sale of Subsidiary. Loss on sale of subsidiary consists of the net loss from the sale of our subsidiary in France on March 1, 2007.



Interest and Other Income. Interest and other income
consist primarily of interest earned from the investment of our cash and cash equivalents, short-term investments, and long-term investments. In addition, other income in fiscal 2005 includes a gain recognized in relation to warrants issued in
connection with our May, 2005 convertible notes offering.



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Interest and Other Expense. Interest and other expense consists primarily of interest expense
associated with borrowings under our line of credit, senior secured convertible notes, capital lease obligations, equipment loans, and foreign currency exchange rate loss.



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



Critical Accounting Policies and
Estimates



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



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



Allowance for Doubtful Accounts. In the last three years, our
uncollectible accounts experience has been almost zero. At June 30, 2007, we determined that an allowance was not required. When we become aware, subsequent to delivery, of a customers potential inability to meet its obligations, we
record a specific allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Such an allowance may be
magnified due to the concentration of our sales to a limited number of customers.



Excess and Obsolete Inventory. We write off the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. We define obsolete inventory as products
that we no longer market or for which there is no demand, or inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using
managements best estimate of future demand at the time, based upon information then available to us.



In estimating excess inventory, we use a range of six-month to twelve-month demand forecast. 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 levels 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 may be required to record additional inventory write



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downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of sales and
higher income from operations than expected in that period.



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



Goodwill. 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 in our annual test for impairment is determined 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, and goodwill was determined not to be impaired at June 30, 2007.



Impairment of Long-lived Assets. We evaluate 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, we
recognize such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets.



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



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



Purchase Accounting. We account for business combinations under the
purchase method of accounting and accordingly, the assets acquired and liabilities assumed are recorded at their fair values. The recorded values of



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assets and liabilities are based on management estimates making use of third-party valuations, or if market price information is not available, based on the
best information available. The values are based on our judgments and estimates, and accordingly, our financial position or results of operations may be affected by changes in these estimates and judgments. Specifically, our valuation of intangible
assets is based on a discounted cash flow valuation methodology that incorporates estimates of future revenue, revenue growth, expenses, estimated useful lives, balance sheet assumptions and weighted average cost of capital. Should these assumptions
prove incorrect, we may be required to recognize an impairment of our intangible assets.



Contingencies. We are or have been subject to proceedings, lawsuits and other claims related to our initial public offering and other matters. We evaluate contingent liabilities including threatened or pending
litigation in accordance with 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, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based upon managements judgment and the best information available to management at the time. As additional information
becomes available, we reassess the potential liability related to its pending claims and litigation and may revise its estimates.



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



In March 2007, we sold our subsidiary in
France. Pursuant to the provisions of French bankruptcy law, in the event that Avanex France, now 3S Photonics, declares bankruptcy after such sale, we may be held liable, as manager de facto of 3S Photonics for the payment
of all or part of the liabilities of 3S Photonics, should it appear that we committed mismanagement, which would have solely or partially led to the bankruptcy of 3S Photonics, and these liabilities could be significant. Such liability, if incurred,
could have a material adverse effect on our business, results of operations, and financial condition. In addition, we agreed to indemnify the buyers of Avanex France generally for a period of up to two years in an amount generally not exceeding
5 million for breaches of certain representations, warranties and covenants relating to the condition of the business prior to, and at the time of sale, and approximately 2 million for other liabilities. As of June 30, 2007, the Company
had accrued $2.7 million under Other Accrued Expenses for an escrow account related to the sale.



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



Change in accounting policy



Share-based
Payments: On July 1, 2005, we adopted the fair value-based method for measurement and expense recognition of employee share-based compensation arrangements under the provisions of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS 123(R)), using the modified prospective transitional method. Previously, we had elected to account for employee share-based compensation using the
intrinsic value method based upon Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related



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interpretations. The intrinsic value method generally did not result in any compensation cost being recorded for employee stock options since the exercise
price was equal to the market price of the underlying shares on the date of grant.



Under the modified prospective transitional method, share-based compensation is recognized for awards granted, modified, repurchased, or cancelled subsequent to the adoption of SFAS 123(R). In addition, share-based
compensation is recognized, subsequent to the adoption of SFAS 123(R), for the remaining portion of the vesting period (if any) for outstanding awards granted prior to the date of adoption. Prior periods have not been adjusted and we continue to
provide pro forma disclosure as if we had accounted for employee share-based payments in all periods presented under the fair value provisions of SFAS No. 123, Accounting for Stock-based Compensation, which is presented in Note 13
to Consolidated Financial Statements, under the topic Stock-based Compensation.



We measure share-based compensation costs on the grant date, based on the calculated fair value of the award. We have elected to treat awards with graded vesting as a single award when estimating fair value.
Compensation cost is recognized on a straight-line basis over the employee requisite service period. Compensation cost is initially based on the estimated number of options for which the requisite service is expected to be rendered. This estimate is
adjusted in the period once actual forfeitures are known.



Refer to Note 13 Stock-based Compensation in the Notes to Consolidated Financial Statements for details of stock options and share-based compensation costs recorded during the year ended June 30, 2007.



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



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Results of Operations



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



|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|------------------------------------------ |  | -------------------- | - |  | -------- | - |  | ------- | - |  | -------- | - |  | -------- | - |  | -------- | -
|                                           |  | Years Ended June 30, |  
|                                           |  | 2007                 |   |  | % of rev |   |  | 2006    |   |  | % of rev |   |  | 2005     |   |  | % of rev |  
|Net revenue                                |  | 212,755              |   |  | 100      | % |  | 162,944 |   |  | 100      | % |  | 160,695  |   |  | 100      | %
|Cost of revenue                            |  | 174,550              |   |  | 82       | % |  | 154,484 |   |  | 95       | % |  | 165,258  |   |  | 103      | %
|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|Gross profit                               |  | 38,205               |   |  | 18       | % |  | 8,460   |   |  | 5        | % |  | (4,563   | ) |  | -3       | %
|Operating expenses:                        |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|Research and development                   |  | 25,231               |   |  | 12       | % |  | 23,471  |   |  | 14       | % |  | 33,124   |   |  | 21       | %
|Sales and marketing                        |  | 15,261               |   |  | 7        | % |  | 13,236  |   |  | 8        | % |  | 16,803   |   |  | 10       | %
|General and administrative                 |  | 23,278               |   |  | 11       | % |  | 16,652  |   |  | 10       | % |  | 17,758   |   |  | 11       | %
|Amortization of intangibles                |  | 2,703                |   |  | 1        | % |  | 5,448   |   |  | 3        | % |  | 5,723    |   |  | 4        | %
|Restructuring                              |  | 1,511                |   |  | 1        | % |  | 1,912   |   |  | 1        | % |  | 29,272   |   |  | 18       | %
|Gain on disposal of property and equipment |  | (527                 | ) |  | 0        | % |  | (5,064  | ) |  | -3       | % |  | (1,850   | ) |  | -1       | %
|Loss on sale of subsidiary                 |  | 3,216                |   |  | 2        | % |  |        |   |  | 0        | % |  |         |   |  | 0        | %
|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|Total operating expenses                   |  | 70,673               |   |  | 33       | % |  | 55,655  |   |  | 34       | % |  | 100,830  |   |  | 63       | %
|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|Loss from operations                       |  | (32,468              | ) |  | -15      | % |  | (47,195 | ) |  | -29      | % |  | (105,393 | ) |  | -66      | %
|Interest and other income                  |  | 2,292                |   |  | 1        | % |  | 2,787   |   |  | 2        | % |  | 3,607    |   |  | 2        | %
|Interest and other expense                 |  | 35                   |   |  | 0        | % |  | (10,284 | ) |  | -6       | % |  | (6,585   | ) |  | -4       | %
|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|Loss before income taxes                   |  | (30,141              | ) |  | -14      | % |  | (54,692 | ) |  | -34      | % |  | (108,371 | ) |  | -67      | %
|Provision for income taxes                 |  | (464                 | ) |  | 0        | % |  |        |   |  | 0        | % |  |         |   |  | 0        | %
|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  
|Net loss                                   |  | (30,605              | ) |  | -14      | % |  | (54,692 | ) |  | -34      | % |  | (108,371 | ) |  | -67      | %
|                                           |  |                      |   |  |          |   |  |         |   |  |          |   |  |          |   |  |          |  



Net Revenue



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



Net revenue for fiscal 2006 was $162.9 million, which represents an increase
of $2.2 million or 1% from net revenue of $160.7 million for fiscal 2005. The increase in revenue was primarily attributable to an increase in demand from certain existing customers and the introduction of new products, which contributed to revenue
during the year.



During fiscal 2007, sales to Alcatel-Lucent
and Tellabs accounted for 29% and 17% of our net revenue, respectively. During fiscal 2006, sales to Alcatel and Nortel accounted for 27% and 11% of our net revenue, respectively. During fiscal 2005, sales to Alcatel accounted for 34% of our net
revenue. Sales to our major customers vary significantly from year to year, and we do not have the ability to predict sales to these customers.



Net revenue from customers outside the United States accounted for $137.6 million, $113.8 million and $98.7 million of total net revenue, or 65%, 70%
and 61%, for the years ended June 30, 2007, 2006 and 2005, respectively.



Cost of Revenue and Gross Margin



Cost of
revenue increased to $174.5 million for fiscal 2007 from $154.5 million for fiscal 2006. The increase was primarily due to the increase in total net revenue.



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Cost of revenue decreased to $154.5 million for fiscal 2006 from $165.3 million for fiscal 2005. The
decrease was primarily due to the transfer of most of our internal manufacturing operations to contract manufacturers, which reduced our direct labor and manufacturing overhead costs.



We wrote off excess and obsolete inventory of $12.9 million in fiscal 2007, $12.8 million in fiscal 2006 and $8.2 million in
fiscal 2005. In fiscal 2007, the write-off was primarily due to lower demand for certain products and lower expected usage of previously purchased inventory. In fiscal 2006 the write-off was primarily due to lower than expected usage of previously
purchased inventory. In fiscal 2005 the write-off was due primarily to lower demand for certain products, and secondarily to discontinued products. We sold inventory previously written-off with original cost totaling $1.2 million, $0.2 million and
$1.1 million for fiscal 2007, 2006 and 2005, respectively, due to unforeseen demand for such inventory. As a result, cost of revenue associated with the sale of this inventory was zero. Cost of revenue for fiscal 2007, 2006 and 2005 was also offset
by $1.4 million, $4.4 million and $2.8 million, respectively, for reversals of previous warranty accruals.



Our gross margin percentage improved to 18% for fiscal 2007 from 5% for fiscal 2006, primarily due to cost reductions associated with shifting global
manufacturing operations to contract manufacturers in lower-cost regions and increased focus on design for manufacturability to achieve lower costs. In addition, the improvement in gross margin percentage was driven by a shift to products with
higher volume and higher gross margins. Our gross margin percentage improved to positive 5% for fiscal 2006, compared to negative 3% for fiscal 2005, primarily due to cost reductions resulting from the transfer of most of our global manufacturing
operations to contract manufacturers in lower-cost regions.



We
have recently experienced consistent positive gross margins due to new product introductions and the transfer of our global manufacturing operations to contract manufacturers in lower-cost regions. Our gross margins are and will be primarily
affected by changes in mix of products sold, manufacturing volume, changes in sales prices, product demand, inventory write-downs, sales of previously written-off inventory, warranty costs, and product yields. We expect cost of revenue, as a
percentage of net revenue, to fluctuate from period to period.



Research and
Development



Research and development expenses increased
$1.7 million to $25.2 million for fiscal 2007 from $23.5 million for fiscal 2006. As a percentage of net revenue, research and development expenses decreased to 12% for fiscal 2007 from 14% for fiscal 2006. The increase in research and development
expenses was primarily due to increased personnel-related costs (such as stock-based compensation expenses and increased headcount in China, offset by closure of our R&D office in Thailand and sale of our office in France) and patent-related
legal expenses. We expect our research and development expenses to remain level as a percentage of revenue in fiscal 2008. Despite our continued efforts to reduce expenses, there can be no assurance that our research and development expenses will
not increase in the future.



Research and development expenses
decreased $9.6 million to $23.5 million for fiscal 2006 from $33.1 million for fiscal 2005. As a percentage of net revenue, research and development expenses decreased to 14% for fiscal 2006 from 21% for fiscal 2005. During fiscal 2006, we reduced
the number of research and development employees from 204 at June 20, 2005 to 179 at June 30, 2006.



Sales and Marketing



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



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revenue in fiscal 2008. There can be no assurance that our sales and marketing expense will not increase in the future.



Sales and marketing expenses decreased $3.6 million to $13.2 million for
fiscal 2006 from $16.8 million for fiscal 2005. As a percentage of net revenue, sales and marketing expenses decreased to 8% in fiscal 2006 from 10% in fiscal 2005. The decrease in sales and marketing expenses was primarily due to decreased
headcount, decreased travel expenses, decreased commissions paid to distributors, and a reduction in corporate marketing expenses.



General and Administrative



General and administrative expenses increased $6.6 million to $23.3 million for fiscal 2007 from $16.7 million for fiscal 2006. As a percentage of net
revenue, general and administrative expenses increased to 11% in fiscal 2007 from 10% in fiscal 2006. The primary reasons for the increase were increased audit and legal expenses, consulting due diligence expenses related to a potential acquisition
that we decided not to pursue, and increased personnel-related expenses (such as stock-based compensation expense). We expect general and administrative expenses to decline as a percentage of revenue in fiscal 2008. There can be no assurance that
our general and administrative expenses will decline in the future.



General and administrative expenses decreased $1.1 million to $16.7 million for fiscal 2006 from $17.8 million for fiscal 2005. The primary reasons for the decrease were reductions in our allowance for doubtful accounts, salaries, and
fringe benefits, offset by increased stock-based compensation expense, facilities expenses and audit and legal expenses.



Amortization of Intangible Assets



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



Amortization of intangible assets decreased by $0.3 million to $5.4 million for fiscal 2006, from $5.7 million for fiscal 2005. The decrease was
primarily attributable to some of the intangible assets becoming fully amortized during fiscal 2006, which resulted in less expense during the remainder of fiscal 2006.



Restructuring



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



For fiscal 2007, restructuring expenses of $1.5 million resulted from an additional provision for severance benefits totaling $0.3 million, combined with
expenses for abandoned facilities in the amount of $1.2 million.



For fiscal 2006, restructuring expenses of $1.9 million resulted from an additional provision for severance benefits totaling $1.6 million, combined with expenses for abandoned facilities in the amount of $0.9 million, offset by recovery of
previously recorded provisions in the amount of $0.6 million.



During fiscal 2006, we approved work force reduction plans affecting 41 employees in order to reduce operating expenses and improve our cost structure. The reduction in force was completed in October 2006. The costs associated with this
restructuring consisted primarily of severance costs. In addition, other previously announced workforce reduction plans remain in progress, including plans in connection with our fiscal 2004



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acquisitions of the optical components businesses of Alcatel and Corning. Our accrued restructuring liability balance at June 30, 2007 was $11.1 million
and will be payable through 2013.



During fiscal 2005, we
announced and implemented several restructuring programs throughout the organization, primarily downsizing our workforce in our U.S. and France facilities, resulting in net restructuring expenses of $29.3 million. We approved work force reduction
plans for our U.S. facilities that resulted in the termination of 145 employees in order to reduce operating expenses and improve our cost structure. This reduction in force was completed in December 2005. The costs associated with this
restructuring consisted primarily of severance costs. In addition, we approved a work force reduction plan that resulted in the termination of 156 full time employees at our facility in France, leaving approximately 150 employees. The reduction in
force in France has been completed. The costs associated with the restructuring in France consisted of employee severance costs.



Loss on Sale of Subsidiary



On March 1, 2007, we entered into a Share Purchase Agreement with Global Research Company, a société à responsibilité
limitée incorporated under the laws of France (GRC), and Mr. Didier Sauvage, an individual and former employee of Avanex (together with GRC, the Purchasers), pursuant to which we would sell ninety percent
(90%) of the share capital and voting rights of our wholly owned subsidiary, Avanex France (Avanex France), a société anonyme incorporated under the laws of France, which owned our semiconductor fabs and associated
product lines located in Nozay, France, to the Purchasers for the nominal amount of 1.00. The sale closed on April 16, 2007. The Purchasers changed the name of Avanex France to 3S Photonics following the closing.



The sale involved the divestiture of our laser, terrestrial and submarine
pumps and Fiber Bragg Grating (FBG) product lines. We will continue to operate our optical interfaces (OIF) business and optical fiber amplifiers and raman amplifiers (OAX) business, which have been transferred to a new wholly owned subsidiary of
Avanex in France, prior to the Closing.



We recorded a loss of
$3.2 million on the sale primarily as a result of the approximately $24.9 million cash paid, transaction expenses incurred of approximately $1.0 million, and transfer of approximately $4.3 million of assets, partially offset by approximately $15.9
million of liabilities written-off, the assumption of approximately $6.7 million of liabilities by 3S Photonics, write-off of cumulative translation gain related to Nozay of approximately $3.3 million, and a reduction of the pension obligation of
approximately $1.1 million related to the sale.



Interest and Other Income



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



Interest and other income decreased $0.8 million to $2.8 million in fiscal
2006 from $3.6 million in fiscal 2005. The primary reason for the decrease was no-reoccurrence of the $0.7 million gain experienced in fiscal 2005 from a derivative instrument in connection with our convertible notes offering.



Interest and Other Expense



Interest and other expense decreased by $10.2 million in fiscal 2007 to $0.1
million from $10.3 million in fiscal 2006. The primary reason for the decrease was the loss on extinguishment of debt in fiscal 2006, a decrease in interest expense due to the conversion of the senior convertible notes, and a decrease in foreign
currency transaction gains.



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Interest and other expense increased by a net $3.7 million in fiscal 2006 to $10.3 million from $6.6
million in fiscal 2005. An increase aggregating $4.5 million loss on extinguishment of debt which comprises $3.5 million paid to settle our convertible note holders alleged default claims, $0.6 of issuance costs and $0.4 million increase in
fair value from the modification of warrants (see Note 11 of Notes to Consolidated Financial Statements). This increase was offset by a reduction in interest expense during the later part of fiscal 2006 as certain convertible note holders converted
$29.5 million of convertible note into shares of our common stock.



Provision for Income Taxes



The provisions for
income taxes of $0.5 million and $0 million were recorded for estimated taxes due on income generated in certain state and foreign tax jurisdictions for fiscal 2007 and 2006, respectively. The income tax provision for fiscal 2007 reflects an
effective tax rate of negative 2%, which differs from the statutory tax rate due to the tax impact of income from foreign operations and unbenefited losses in the U.S. taxes due to the full valuation allowance on our net deferred tax assets in
accordance with SFAS 109.



The Financial Accounting Standards
Boards Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes  provides for the recognition of deferred tax assets, if realization of such assets is more likely than not to occur. Based upon the weight
of available evidence, which includes its historical operating performance and reported cumulative net losses since inception, we provide a full valuation allowance against our net deferred tax assets. We reassess the need for our valuation
allowance on a quarterly basis.



Liquidity and Capital Resources



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



On May 19, 2005, we issued an aggregate of $35 million principal amount
of 8.0% senior secured convertible notes due 2008 in a private placement to institutional investors. Net proceeds, after an aggregate of $2.1 million in issuance costs and two years of prepaid interest in the amount of $5.6 million, were $27.3
million. 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 we issued amended and restated notes and amended
and restated warrants to such holders. The amended and restated notes were convertible into shares of common stock at a price of $0.90 per share, subject to adjustment upon specified events, including a broad-based anti-dilution provision that until
January 27, 2006 contained a floor price of $0.7279 (subject to adjustment for stock splits, combinations or similar events). The floor price was eliminated upon receipt of stockholder approval of the issuance of the common stock underlying the
amended and restated notes at a Special Meeting of Stockholders held on January 27, 2006. Pursuant to each Amendment Agreement, we and each holder also agreed to amend and restate such holders warrants, primarily to amend the exercise
price to $1.13. During the years ended June 30, 2006 and 2007, $29.5 million and $5.5 million of the outstanding notes were converted to common stock at the request of the convertible note holders. As a result of the conversions, no convertible
notes were outstanding at June 30, 2007.



On March 6,
2006, we sold 24.1 million shares of common stock at a price per share of $2.00 for an aggregate purchase price of $48.2 million. The net proceeds from such sale of the shares of common stock were $44.7 million, after deducting the placement
fee and offering expenses. The purchasers 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 anti-dilution, exercisable on and after
September 9, 2006 and on or before March 9, 2010.



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In connection with our March 1, 2007 financing, the holders of such warrants received an
antidilution adjustment pursuant to the terms of such warrants resulting in up to 117,221 additional shares being issued upon the exercise of such warrants and the reduction of the exercise price of the warrants from $2.73 per share to $2.68 per
share. The sale of common stock and issuance of the warrants was made pursuant to an effective registration statement on Form S-3.



On March 1, 2007, we sold 10,795,056 shares of common stock of Avanex at a price per share of $1.8527 for an aggregate purchase price of $20 million.
The purchaser also received a warrant to purchase up to an additional 2,698,764 shares of common stock. The warrant is exercisable at an exercise price of $2.1452 per share and for a term starting March 31, 2007 and ending March 1, 2011.
For more information, please see Note 12 to Consolidated Financial Statements.



Avanex leases certain of its equipment and other fixed assets under capital lease agreements. The assets and liabilities under 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. There were minimal payments due
under capital lease agreements as of June 30, 2007.



As of
June 30, 2007, Avanex had cash and cash equivalents of $14.9 million and short-term investments of $28.9 million for an aggregate of $43.8 million, excluding restricted cash of $3.6 million.



The fiscal 2007 decrease in cash and cash equivalents was due primarily to
the sale of 10.8 million shares of common stock in March 2007 generating $18.7 million in proceeds net of offering costs and $9.8 million decrease in short-term investments, offset by net cash used in operations of $44.6 million. The fiscal
2007 decrease of $3.1 million in restricted cash was primarily due to a reduction in our obligation on operating leases, which reduced the cash held against those leases.



The net cash used in operating activities of $46.1 million was due primarily to our $30.6 million net loss for fiscal 2007 and $19.6
million impact of the sale of our subsidiary in France, partially offset by $25.8 million of non-cash charges. Changes in working capital during fiscal 2007 used $21.8 million of cash.



Net cash provided by investing activities during fiscal 2007 was $9.3
million, comprising a $3.1 million decrease in restricted cash and $9.8 million representing the net change in short-term investments, offset by capital purchases of $2.4 million.



Net cash provided by financing activities was $21.5 million during fiscal 2007, primarily the result of our March 2007
equity offering, and proceeds from the issuance of common stock under our employee stock option plans and employee stock purchase plan. These net proceeds were partially offset by payments on short-term debt, long-term debt and capital lease
obligations.



Our contractual obligations at June 30, 2007
were as follows (in thousands):



|                                   |  |                                       |        |           |   |           |  |               |       |       |   |     |  |   |       
|---------------------------------- |  | ------------------------------------- | ------ | --------- | - | --------- |  | ------------- | ----- | ----- | - | --- |  | - | ------
|                                   |  | Contractual Obligations Due by Period
|                                   |  | Less than 1 year                      |        | 1-3 years |   | 4-5 years |  | After 5 years |       | Total
|Capital lease obligations          |  | $                                     | 12     |           | $ | 22        |  | $             | 2     |       | $ |    |  | $ | 36    
|Operating leases                   |  |                                       | 4,809  |           |   | 8,696     |  |               | 2,984 |       |   | 77  |  |   | 16,566
|Pension                            |  |                                       |       |           |   |          |  |               |      |       |   | 185 |  |   | 185   
|Severance                          |  |                                       | 241    |           |   |          |  |               |      |       |   |    |  |   | 241   
|Unconditional purchase obligations |  |                                       | 31,252 |           |   |          |  |               |      |       |   |    |  |   | 31,252
|                                   |  |                                       |        |           |   |           |  |               |       |       |   |     |  |   |       
|                                   |  | $                                     | 36,314 |           | $ | 8,718     |  | $             | 2,986 |       | $ | 262 |  | $ | 48,280
|                                   |  |                                       |        |           |   |           |  |               |       |       |   |     |  |   |       



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We have unconditional purchase obligations to certain of our suppliers and contract manufacturers that
support our ability to manufacture our products. As of June 30, 2007, we had approximately $31.3 million of unconditional purchase obligations, none of which is included on our balance sheet in accounts payable.



Under operating leases and capital leases described in the table above, we
have included total future minimum rent expense under non-cancelable leases for both current and abandoned facilities and equipment leases. We have included in the balance sheet $2.8 million and $8.3 million in current and long-term restructuring
accruals, respectively, for the abandoned facilities as of June 30, 2007.



Recent Accounting Pronouncements



In June
2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. This Interpretation is effective for our fiscal year beginning July 1,2007. We are currently evaluating the impact of the adoption of FIN 48 on our
consolidated balance sheet and statement of operations.



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 (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The adoption of SAB 108 did not
have a material impact on our consolidated balance sheet and statement of operations for fiscal 2007.



In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (Statement 157). Statement 157 defines fair
value, establishes a framework for measuring fair value and expands fair value measurement disclosures. Statement 157 is effective for our fiscal year beginning July 1, 2008. We are currently evaluating the impact of the adoption of Statement
157 on our consolidated balance sheet and statement of operations.



In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (Statement 159), which allows an
entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an
entity elects to fair value will be recognized in earnings. Statement 159 also establishes additional disclosure requirements. Statement 159 is effective for our fiscal year beginning July 1, 2008, with early adoption permitted provided that
the entity also adopts Statement 157. We are currently evaluating the impact of the adoption of Statement 159 on our consolidated balance sheet and statement of operations.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Interest Rate Risk



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



We place our investments with
high quality credit issuers in short-term and long-term securities and maturities can range from overnight to 36 months. The average maturity of the portfolio will not exceed 18



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months. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We do not have any
derivative financial instruments. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.



The following table summarizes average interest rate and fair market value of the short-term securities and restricted cash and investments held by Avanex
(in thousands), which were classified as available-for-sale at June 30, 2007 and June 30, 2006:



|                             |  |               |        |   |               |   |        |  
|---------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | -
|                             |  | June 30, 2007 |        |   | June 30, 2006 |  
|Amortized cost               |  | $             | 32,575 |   |               | $ | 45,210 |  
|Fair market value            |  |               | 32,562 |   |               |   | 45,372 |  
|Average annual interest rate |  |               | 5.09   | % |               |   | 3.09   | %



Exchange Rate Risk



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



We
have operations in the United States, China, Thailand, France, and Italy. Accordingly, we have sales and expenses that are denominated in currencies other than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar and the
currencies in which we do business could cause foreign currency translation gains or losses that we would recognize in the period incurred. A 10% fluctuation in the dollar at June 30, 2007 would have led to an additional profit of approximately
$0.7 million (dollar strengthening), or an additional loss of approximately $0.7 million (dollar weakening) on our net dollar position in outstanding assets and liabilities. We cannot predict the effect of exchange rate fluctuations on our future
operating results because of the variability of currency exposure and the potential volatility of currency exchange rates. It has not been our recent practice to engage in the hedging of foreign currency transactions to mitigate for foreign currency
risk, and currently, we do not hedge our exposure to translation gains and losses related to foreign currency net asset exposures.



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



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                               |  |     
|------------------------------------------------------------------------------ |  | ----
|Consolidated Financial Statements:                                             |  | Page
|                                                                               | 
|Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |  | 42  
|                                                                               | 
|Consolidated Balance Sheets                                                    |  | 43  
|                                                                               | 
|Consolidated Statements of Operations                                          |  | 44  
|                                                                               | 
|Consolidated Statements of Stockholders Equity and Comprehensive Loss         |  | 45  
|                                                                               | 
|Consolidated Statements of Cash Flows                                          |  | 46  
|                                                                               | 
|Notes to Consolidated Financial Statements                                     |  | 47  
|                                                                               | 
|Financial Statement Schedule:                                                  |  |     
|                                                                               | 
|Schedule IIValuation and Qualifying Accounts                                  |  | 83  



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REPORT OF DELOITTE & TOUCHE LLP

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of

Avanex Corporation:



We have audited the accompanying consolidated balance sheets of Avanex Corporation and subsidiaries (the Company) as of June 30, 2007 and
2006, and the related consolidated statements of operations, stockholders equity and comprehensive loss, and cash flows for each of the three years in the period ended June 30, 2007. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and
financial statement 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 consolidated financial statements present fairly, in all material respects, the financial position of Avanex Corporation and
subsidiaries as of June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, 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.



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, 2007, 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 4, 2007 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 because of a material weakness.



As discussed in Note 10 to the consolidated financial statements, on June 30, 2007, the Company changed its method of
accounting for defined benefit pension and other postretirement plans upon the adoption of Financial Accounting Standards Board (FASB) Statement No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R). In addition, as discussed in Note 1 to the consolidated financial statements, the Company adopted FASB Statement No. 123(R), Share-Based
Payment, effective July 1, 2005, based on the modified prospective application transition method.



/s/    DELOITTE & TOUCHE LLP



San Jose, California

September 4, 2007



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AVANEX CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                                                           |  | June 30, |         
|                                                                                                                                                                                                                                                           |  | 2007     |          |   | 2006 |  
|Assets                                                                                                                                                                                                                                                     |  |          |          |   |      |   |          |  
|Current assets:                                                                                                                                                                                                                                            |  |          |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                  |  | $        | 14,837   |   |      | $ | 28,963   |  
|Restricted cash and investments                                                                                                                                                                                                                            |  |          | 3,620    |   |      |   | 6,676    |  
|Short-term investments                                                                                                                                                                                                                                     |  |          | 28,942   |   |      |   | 38,696   |  
|Accounts receivable                                                                                                                                                                                                                                        |  |          | 33,764   |   |      |   | 26,768   |  
|Inventories                                                                                                                                                                                                                                                |  |          | 15,188   |   |      |   | 18,417   |  
|Due from related party                                                                                                                                                                                                                                     |  |          | 14,381   |   |      |   | 10,404   |  
|Other current assets                                                                                                                                                                                                                                       |  |          | 5,716    |   |      |   | 15,473   |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Total current assets                                                                                                                                                                                                                                       |  |          | 116,448  |   |      |   | 145,397  |  
|Property and equipment, net                                                                                                                                                                                                                                |  |          | 5,900    |   |      |   | 5,668    |  
|Intangibles, net                                                                                                                                                                                                                                           |  |          | 559      |   |      |   | 3,246    |  
|Goodwill                                                                                                                                                                                                                                                   |  |          | 9,408    |   |      |   | 9,408    |  
|Deposits and other assets                                                                                                                                                                                                                                  |  |          | 2,685    |   |      |   | 1,839    |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Total assets                                                                                                                                                                                                                                               |  | $        | 135,000  |   |      | $ | 165,558  |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Liabilities and Stockholders' Equity                                                                                                                                                                                                                       |  |          |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                                                                                                       |  |          |          |   |      |   |          |  
|Accounts payable                                                                                                                                                                                                                                           |  | $        | 32,549   |   |      | $ | 38,276   |  
|Accrued compensation                                                                                                                                                                                                                                       |  |          | 6,091    |   |      |   | 6,872    |  
|Accrued warranty                                                                                                                                                                                                                                           |  |          | 873      |   |      |   | 1,799    |  
|Due to related party                                                                                                                                                                                                                                       |  |          | 2,144    |   |      |   | 4,475    |  
|Other accrued expenses and deferred revenue                                                                                                                                                                                                                |  |          | 8,796    |   |      |   | 4,467    |  
|Current portion of long-term obligations                                                                                                                                                                                                                   |  |          | 9        |   |      |   | 823      |  
|Current portion of accrued restructuring                                                                                                                                                                                                                   |  |          | 2,837    |   |      |   | 6,321    |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                                                                                  |  |          | 53,299   |   |      |   | 63,033   |  
|Long-term liabilities:                                                                                                                                                                                                                                     |  |          |          |   |      |   |          |  
|Accrued restructuring                                                                                                                                                                                                                                      |  |          | 8,269    |   |      |   | 13,252   |  
|Convertible notes                                                                                                                                                                                                                                          |  |          |         |   |      |   | 4,569    |  
|Other long-term obligations                                                                                                                                                                                                                                |  |          | 1,350    |   |      |   | 11,366   |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Total liabilities                                                                                                                                                                                                                                          |  |          | 62,918   |   |      |   | 92,220   |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Stockholders equity:                                                                                                                                                                                                                                      |  |          |          |   |      |   |          |  
|Common stock, $0.001 par value, 450,000,000 and 300,000,000 shares authorized at June 30, 2007 and 2006, respectively; 226,184,325 and
204,361,846 shares outstanding (net of 157,656 and 160,749 treasury shares) at June 30, 2007 and 2006, respectively |  |          | 226      |   |      |   | 204      |  
|Additional paid-in capital                                                                                                                                                                                                                                 |  |          | 775,901  |   |      |   | 742,951  |  
|Accumulated other comprehensive income                                                                                                                                                                                                                     |  |          | 1,064    |   |      |   | 4,687    |  
|Accumulated deficit                                                                                                                                                                                                                                        |  |          | (705,109 | ) |      |   | (674,504 | )
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                                                                                                                 |  |          | 72,082   |   |      |   | 73,338   |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                 |  | $        | 135,000  |   |      | $ | 165,558  |  
|                                                                                                                                                                                                                                                           |  |          |          |   |      |   |          |  



See accompanying notes.



43



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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, |        
|                                                                                                |  | 2007                |         |   | 2006 |   |         | 2005 | 
|Net revenue:                                                                                    |  |                     |         |   |      |   |         |      |  |   |          |  
|Third parties                                                                                   |  | $                   | 151,380 |   |      | $ | 119,054 |      |  | $ | 105,568  |  
|Related parties                                                                                 |  |                     | 61,375  |   |      |   | 43,890  |      |  |   | 55,127   |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Total net revenue                                                                               |  |                     | 212,755 |   |      |   | 162,944 |      |  |   | 160,695  |  
|Cost of revenue:                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Cost of revenue except for purchases from related parties                                       |  |                     | 174,059 |   |      |   | 151,758 |      |  |   | 155,056  |  
|Purchases from related parties                                                                  |  |                     | 491     |   |      |   | 2,726   |      |  |   | 10,202   |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Total cost of revenue                                                                           |  |                     | 174,550 |   |      |   | 154,484 |      |  |   | 165,258  |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Gross profit (loss)                                                                             |  |                     | 38,205  |   |      |   | 8,460   |      |  |   | (4,563   | )
|Operating expenses:                                                                             |  |                     |         |   |      |   |         |      |  |   |          |  
|Research and development                                                                        |  |                     | 25,231  |   |      |   | 23,471  |      |  |   | 33,124   |  
|Sales and marketing                                                                             |  |                     | 15,261  |   |      |   | 13,236  |      |  |   | 16,803   |  
|General and administrative:                                                                     |  |                     |         |   |      |   |         |      |  |   |          |  
|Third parties                                                                                   |  |                     | 22,663  |   |      |   | 15,701  |      |  |   | 11,867   |  
|Related parties                                                                                 |  |                     | 615     |   |      |   | 951     |      |  |   | 5,891    |  
|Amortization of intangibles                                                                     |  |                     | 2,703   |   |      |   | 5,448   |      |  |   | 5,723    |  
|Restructuring                                                                                   |  |                     | 1,511   |   |      |   | 1,912   |      |  |   | 29,272   |  
|Gain on disposal of property and equipment                                                      |  |                     | (527    | ) |      |   | (5,064  | )    |  |   | (1,850   | )
|Loss on sale of subsidiary                                                                      |  |                     | 3,216   |   |      |   |         |      |  |   |          |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Total operating expenses                                                                        |  |                     | 70,673  |   |      |   | 55,655  |      |  |   | 100,830  |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Loss from operations                                                                            |  |                     | (32,468 | ) |      |   | (47,195 | )    |  |   | (105,393 | )
|Interest and other income                                                                       |  |                     | 2,292   |   |      |   | 2,787   |      |  |   | 3,607    |  
|Interest and other expense                                                                      |  |                     | 35      |   |      |   | (10,284 | )    |  |   | (6,585   | )
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Loss before income taxes                                                                        |  | $                   | (30,141 | ) |      | $ | (54,692 | )    |  | $ | (108,371 | )
|Provision for income taxes                                                                      |  |                     | (464    | ) |      |   |        |      |  |   |         |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Net loss                                                                                        |  | $                   | (30,605 | ) |      | $ | (54,692 | )    |  | $ | (108,371 | )
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Basic and diluted net loss per common share                                                     |  | $                   | (0.14   | ) |      | $ | (0.34   | )    |  | $ | (0.75    | )
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Weighted-average number of shares used in computing basic and diluted net loss per common share |  |                     | 212,952 |   |      |   | 163,242 |      |  |   | 144,253  |  
|                                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  





See accompanying notes.



44



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##### Table of Contents

AVANEX CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS

(In thousands, except share data)



|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | --- | -------------------------- | - | ------- | --------------------------- |  | - | ------------------- | - |  | --------------------------------------------- | -------- | - | -------------------------- | - | ------ | - |  | - | -------- | -
|                                                                                                               |  | Common Stock |     | Additional Paid-in Capital |   |         | Deferred Stock Compensation |  |   | Accumulated Deficit |   |  | Accumulated Other Comprehensive Income (Loss) |          |   | Total Stockholders Equity |  
|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   |  
|Issuance of 355,459 shares of common stock upon exercise of stock options                                      |  |              |    |                            |   | 363     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 363      |  
|Issuance of 2,843,426 shares of common stock in connection with restricted stock units                         |  |              | 3   |                            |   |        |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 3        |  
|Issuance of 1,239,671 shares of common stock upon exercise of warrants                                         |  |              | 1   |                            |   | 1,399   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 1,400    |  
|Issuance of 427,355 shares of common stock in connection with employee stock purchase plan                     |  |              | 1   |                            |   | 366     |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 367      |  
|Issuance of 6,161,512 shares of common stock in connection with conversion of 8% senior convertible notes      |  |              | 6   |                            |   | 4,980   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 4,986    |  
|Issuance of 10,795,056 shares of common stock, net of issuance costs of $1,267                                 |  |              | 11  |                            |   | 18,733  |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 18,744   |  
|Stock-based compensation                                                                                       |  |              |    |                            |   | 7,109   |                             |  |   |                    |   |  |                                               |         |   |                            |   |       |   |  |   | 7,109    |  
|Comprehensive loss:                                                                                            |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Unrealized gain on investments                                                                                 |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |         |   |                            |   | 10     |   |  |   | 10       |  
|Cumulative translation adjustment                                                                              |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |          |   |                            |   | (3,968 | ) |  |   | (3,968   | )
|Net actuarial gain                                                                                             |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |         |   |                            |   | 335    |   |  |   | 335      |  
|Net loss                                                                                                       |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               | (30,605  | ) |                            |   |       |   |  |   | (30,605  | )
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Comprehensive loss                                                                                             |  |              |    |                            |   |        |                             |  |   |                    |   |  |                                               |          |   |                            |   |        |   |  |   | (34,228  | )
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  
|Balance at June 30, 2007                                                                                       |  | $            | 226 |                            | $ | 775,901 |                             |  | $ |                    |   |  | $                                             | (705,109 | ) |                            | $ | 1,064  |   |  | $ | 72,082   |  
|                                                                                                               |  |              |     |                            |   |         |                             |  |   |                     |   |  |                                               |          |   |                            |   |        |   |  |   |          |  



See accompanying
notes.



45



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##### Table of Contents

AVANEX CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                      |  | For the Year Ended June 30, |         
|                                                                                      |  | 2007                        |          |   | 2006 |   |          | 2005 | 
|Operating Activities:                                                                 |  |                             |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                              |  | $                           | (30,605  | ) |      | $ | (54,692  | )    |  | $ | (108,371 | )
|Adjustments to reconcile net loss to net cash used in operating activities:           |  |                             |          |   |      |   |          |      |  |   |          |  
|(Gain) loss on disposal of property and equipment                                     |  |                             | (767     | ) |      |   | (5,064   | )    |  |   | (2,226   | )
|Depreciation and amortization                                                         |  |                             | 2,360    |   |      |   | 5,565    |      |  |   | 9,012    |  
|Amortization of intangibles                                                           |  |                             | 2,698    |   |      |   | 5,448    |      |  |   | 5,723    |  
|Impairment of investment                                                              |  |                             |         |   |      |   |         |      |  |   | 4,400    |  
|Gain on investment in subsidiary                                                      |  |                             | (223     | ) |      |   |         |      |  |   |         |  
|Prepaid amortization                                                                  |  |                             |         |   |      |   |         |      |  |   | 322      |  
|Stock-based compensation                                                              |  |                             | 7,109    |   |      |   | 4,452    |      |  |   | 365      |  
|(Reversal of) provision for doubtful accounts and sales returns                       |  |                             | 1,194    |   |      |   | (2,538   | )    |  |   | 663      |  
|Cash paid for sale of subsidiary, net of liabilities assumed                          |  |                             | (19,557  | ) |      |   |         |      |  |   |         |  
|Loss in connection with convertible notes modification                                |  |                             |         |   |      |   | 4,525    |      |  |   |         |  
|Non-cash gain on derivatives                                                          |  |                             |         |   |      |   |         |      |  |   | (740     | )
|Non-cash interest expense                                                             |  |                             | 424      |   |      |   | 2,160    |      |  |   |         |  
|Write-down of excess and obsolete inventory                                           |  |                             | 13,034   |   |      |   | 12,790   |      |  |   | 8,234    |  
|Changes in operating assets and liabilities:                                          |  |                             |          |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                                   |  |                             | (7,646   | ) |      |   | (10,727  | )    |  |   | (9,714   | )
|Inventories                                                                           |  |                             | (11,739  | ) |      |   | 5,488    |      |  |   | (4,982   | )
|Other current assets                                                                  |  |                             | 8,813    |   |      |   | 16,828   |      |  |   | 529      |  
|Other assets                                                                          |  |                             | 331      |   |      |   | (53      | )    |  |   | (1,147   | )
|Due to/from related parties                                                           |  |                             | (10,595  | ) |      |   | 10,364   |      |  |   | (1,818   | )
|Accounts payable                                                                      |  |                             | (1,685   | ) |      |   | 8,127    |      |  |   | 1,743    |  
|Accrued compensation                                                                  |  |                             | 3,312    |   |      |   | (2,912   | )    |  |   | (418     | )
|Accrued restructuring                                                                 |  |                             | (3,462   | ) |      |   | (26,787  | )    |  |   | 6,654    |  
|Accrued warranty                                                                      |  |                             | (1,006   | ) |      |   | (3,521   | )    |  |   | (857     | )
|Other accrued expenses and deferred revenues                                          |  |                             | 1,892    |   |      |   | (12,053  | )    |  |   | 1,141    |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                                 |  |                             | (46,118  | ) |      |   | (42,600  | )    |  |   | (91,487  | )
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Investing Activities:                                                                 |  |                             |          |   |      |   |          |      |  |   |          |  
|Purchases of investments                                                              |  |                             | (418,704 | ) |      |   | (123,005 | )    |  |   | (41,996  | )
|Maturities of investments                                                             |  |                             | 428,468  |   |      |   | 123,699  |      |  |   | 125,837  |  
|Decrease (increase) in restricted cash                                                |  |                             | 3,085    |   |      |   | 1,489    |      |  |   | (8,165   | )
|Investment in third parties                                                           |  |                             | (1,250   | ) |      |   |         |      |  |   |         |  
|Purchases of property and equipment                                                   |  |                             | (2,403   | ) |      |   | (2,508   | )    |  |   | (882     | )
|Proceeds from sale of property and equipment                                          |  |                             | 106      |   |      |   | 4,824    |      |  |   | 4,782    |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Net cash provided by investing activities                                             |  |                             | 9,302    |   |      |   | 4,499    |      |  |   | 79,576   |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Financing Activities:                                                                 |  |                             |          |   |      |   |          |      |  |   |          |  
|Proceeds from issuance of capital lease obligations                                   |  |                             | 637      |   |      |   |         |      |  |   |         |  
|Payments on capital lease obligations                                                 |  |                             |         |   |      |   | (2,268   | )    |  |   | (4,563   | )
|Payments in connection with convertible notes modification                            |  |                             |         |   |      |   | (4,075   | )    |  |   |         |  
|Proceeds from short-term borrowings                                                   |  |                             |         |   |      |   |         |      |  |   | 31,219   |  
|Payments on short-term borrowings                                                     |  |                             |         |   |      |   |         |      |  |   | (34,942  | )
|Borrowings under financing arrangements                                               |  |                             |         |   |      |   |         |      |  |   | 24,466   |  
|Proceeds from issuance of common stock                                                |  |                             | 20,869   |   |      |   | 47,181   |      |  |   | 1,402    |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                             |  |                             | 21,506   |   |      |   | 40,838   |      |  |   | 17,582   |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate changes on cash                                               |  |                             | 1,184    |   |      |   | (585     | )    |  |   | (497     | )
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Net increase in cash and cash equivalents                                             |  |                             | (14,126  | ) |      |   | 2,152    |      |  |   | 5,174    |  
|Cash and cash equivalents at beginning of period                                      |  |                             | 28,963   |   |      |   | 26,811   |      |  |   | 21,637   |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                            |  | $                           | 14,837   |   |      | $ | 28,963   |      |  | $ | 26,811   |  
|                                                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Supplemental Information:                                                             |  |                             |          |   |      |   |          |      |  |   |          |  
|Cash paid during the period for:                                                      |  |                             |          |   |      |   |          |      |  |   |          |  
|Interest expense                                                                      |  | $                           | 36       |   |      | $ | 164      |      |  | $ | 849      |  
|Non-cash investing and financing activities:                                          |  |                             |          |   |      |   |          |      |  |   |          |  
|Property and equipment acquired under capital lease                                   |  | $                           |         |   |      | $ |         |      |  | $ | 2,815    |  
|Issuance of common stock upon acquisitions                                            |  | $                           |         |   |      | $ |         |      |  | $ |         |  
|Issuance and modifications of warrants                                                |  | $                           |         |   |      | $ | 686      |      |  | $ | 3,602    |  
|Conversion of senior convertible notes into common stock                              |  | $                           | 4,994    |   |      | $ | 23,121   |      |  | $ |         |  
|Investment in equity securities in exchange for equipment                             |  | $                           |         |   |      | $ | 658      |      |  | $ |         |  
|Reduction of pension liability in connection with sale of subsidiary                  |  | $                           | 2,122    |   |      | $ |         |      |  | $ |         |  
|Pension liability recognized in accumulated other comprehensive income                |  | $                           | 335      |   |      | $ |         |      |  | $ |         |  
|Net issuance of restricted stock awards (restricted stock and restricted stock units) |  | $                           | 4,124    |   |      | $ | 2,812    |      |  | $ |         |  



See accompanying notes.





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##### Table of Contents

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.



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 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



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##### Table of Contents

AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2007, 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 an 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 2007 and
2006. 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 may be required to record additional inventory write-downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold resulting in lower cost of sales and higher income from
operations than expected in that period.



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).



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 is 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, 2007.



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 Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be recoverable, the Company recognizes such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. We also periodically reassess
the estimated remaining useful lives of our long lived assets. As of June 30, 2007, we determined there was no impairment of long-lived assets.



Restructuring Costs



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



Pension Benefits



For defined benefit pension plans, liabilities and prepaid expenses are
determined using the Projected Unit Credit Method (with projected final salary), and recognizing, actuarial gains and losses in excess of more than 10% of the present value of the defined benefit obligation or 10% of the fair value of any plan
assets, over the expected average remaining working lives of the employees participating in the plan.



The Company adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of
FASB Statements No. 87, 88, 106, and 132(R) in fiscal 2007.



Contingency Accruals



The Company evaluates
contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, Accounting for Contingencies. If the potential loss from any claim or legal proceedings is



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



SFAS No. 130 Reporting Comprehensive Income (FAS 130) requires that all items required to be recognized under accounting standards as components of comprehensive income, including
unrealized gains and losses on available-for-sale securities, net actuarial gain, 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, 2007, 2006 and 2005 resulted in losses of $4.0 million and $1.3 million and a gain of $0.8
million, respectively. For the years ended June 30, 2007, 2006 and 2005, there were unrealized gains (losses) on investments of $10,000, $0.5 million and ($0.5) million, respectively. Pension actuarial gain recognized for the year ended June
30, 2007 was $0.3 million. Comprehensive loss was $34.2 million, $55.5 million and $108.1 million for the years ended June 30, 2007, 2006 and 2005, respectively.



Revenue Recognition



The Companys revenue recognition policy complies with United States Securities and Exchange Commission (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 an 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



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



products under warranty. Specific warranty terms and conditions vary by customer and region in which the Company does business, however, the warranty period
is generally one year.



Stock-Based Compensation



The Company grants stock options and stock purchase rights for a fixed
number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant.



We adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), effective July 1, 2005. SFAS 123(R) requires the
recognition of the fair value of stock compensation in net income. We recognize the stock compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. Prior to July 1, 2005, we
followed Accounting Principles Board (APB) Opinion No. 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 Opinion No. 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 Opinion No. 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 year ended June 30, 2005, the Company accounted for stock option grants and stock purchase rights to employees and directors in
accordance with 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 compensation is amortized over the vesting period, generally a maximum of four years.



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. 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.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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:



|                               |  |                           |   |  |                             |  
|------------------------------ |  | ------------------------- | - |  | --------------------------- | -
|                               |  | Year Ended June 30, 2005  |  
|                               |  | Employee StockOption Plan |   |  | Employee StockPurchase Plan |  
|Risk-free interest rate        |  | 2.8                       | % |  | 3.0                         | %
|Weighted-average expected life |  | 3.3 years                 |   |  | 0.5 years                   |  
|Volatility                     |  | 1.04                      |   |  | 0.76                        |  
|Dividend yield                 |  |                          |   |  |                            |  



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



|                                                                                                         |  |                         |          |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | -
|                                                                                                         |  | Year EndedJune 30, 2005 |         
|Net Loss:                                                                                                |  |                         |          |  
|As reported                                                                                              |  | $                       | (108,371 | )
|Stock-based employee compensation expense included in reported net loss                                  |  |                         | 366      |  
|Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                         | (26,136  | )
|                                                                                                         |  |                         |          |  
|Pro forma net loss                                                                                       |  | $                       | (134,141 | )
|                                                                                                         |  |                         |          |  
|                                                                                                         | 
|Basic and diluted net loss per common share:                                                             |  |                         |          |  
|As reported                                                                                              |  | $                       | (0.75    | )
|                                                                                                         |  |                         |          |  
|Pro forma                                                                                                |  | $                       | (0.93    | )
|                                                                                                         |  |                         |          |  



Research and Development Costs



Research and development costs are expensed as incurred.



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.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recent Accounting Pronouncements



In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This Interpretation is effective for our
fiscal year beginning July 1, 2007. We are currently evaluating the impact of the adoption of FIN 48 on our consolidated balance sheet and statement of operations.



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 (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality assessment. The adoption of SAB 108 did not have a material impact on our consolidated balance sheet and statement of operations for fiscal 2007.



In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. Statement 157 is effective for our fiscal year beginning July 1,
2008. We are currently evaluating the impact of the adoption of Statement 157 on our consolidated balance sheet and statement of operations.



In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115 (Statement 159), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an
instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. Statement 159 also establishes additional disclosure requirements. Statement 159 is
effective for our fiscal year beginning July 1, 2008, with early adoption permitted provided that the entity also adopts Statement 157. We are currently evaluating the impact of the adoption of Statement 159 on our consolidated balance
sheet and statement of operations.



Note 2. Disposition



On March 1, 2007, the Company entered into a Share Purchase Agreement
with Global Research Company, a société à responsibilité limitée incorporated under the laws of France (GRC), and Mr. Didier Sauvage, an individual and former employee of the Company (together with
GRC, the Purchasers), pursuant to which the Company would sell ninety percent (90%) of the share capital and voting rights of its wholly owned subsidiary, Avanex France (Avanex France), a société anonyme
incorporated under the laws of France, which owned the Companys semiconductor fabs and associated product lines located in Nozay, France, to the Purchasers for the nominal amount of 1.00. The sale closed on April 16, 2007. The
Purchasers changed the name of Avanex France to 3S Photonics following the closing.



The sale involved the divestiture of the Companys laser, terrestrial and submarine pumps and Fiber Bragg Grating (FBG) product lines. The Company
will continue to operate its optical interfaces (OIF) business and optical fiber amplifiers and raman amplifiers (OAX) business, which have been transferred to a new wholly owned subsidiary of the Company in France prior to the Closing.



This sale resulted in a loss to the Company of $3.2 million primarily as a
result of the approximately $24.9 million cash paid, transaction expenses incurred of approximately $1.0 million, and transfer of approximately



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$4.3 million of assets, partially offset by approximately $15.9 million of liabilities written-off, the assumption of approximately $6.7 million of
liabilities by 3S Photonics, write-off of cumulative translation gain related to Nozay of approximately $3.3 million, and a reduction of the pension obligation of approximately $1.1 million related to the sale.



Subsequent to year-end, the Company and 3S Photonics amended a distribution
agreement to permit 3S Photonics to terminate the arrangement early in exchange for fixed payments to the Company over the remaining 18-month period. The gain, if any, from early termination will be recognized at the time of termination of the
distribution arrangement.



Note 3. Restructuring



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



|                             |  |          |        |   |      |   |        |  
|---------------------------- |  | -------- | ------ | - | ---- | - | ------ | -
|                             |  | June 30, |       
|                             |  | 2007     |        |   | 2006 |  
|Acquisition-related accruals |  | $        |       |   |      | $ | 3,433  |  
|Other                        |  |          | 11,106 |   |      |   | 16,140 |  
|                             |  |          |        |   |      |   |        |  
|Total restructuring accruals |  |          | 11,106 |   |      |   | 19,573 |  
|Less current portion         |  |          | (2,837 | ) |      |   | (6,321 | )
|                             |  |          |        |   |      |   |        |  
|Non-current portion          |  | $        | 8,269  |   |      | $ | 13,252 |  
|                             |  |          |        |   |      |   |        |  



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):



|                                                                           |  |          |        |   |      |   |        |  
|-------------------------------------------------------------------------- |  | -------- | ------ | - | ---- | - | ------ | -
|                                                                           |  | June 30, |       
|                                                                           |  | 2007     |        |   | 2006 |  
|Accrued restructuring related to acquisitions, beginning balance           |  | $        | 3,433  |   |      | $ | 4,804  |  
|Additions                                                                  |  |          |       |   |      |   | 911    |  
|Recovery                                                                   |  |          |       |   |      |   | (312   | )
|Cash and payments to participate and to third parties assuming liabilities |  |          | (3,433 | ) |      |   | (1,970 | )
|                                                                           |  |          |        |   |      |   |        |  
|Accrued restructuring related to acquisitions, ending balance              |  | $        |       |   |      | $ | 3,433  |  
|                                                                           |  |          |        |   |      |   |        |  



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



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.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During fiscal 2006, the Company approved a work force reduction of 41 employees due to the
re-alignment of our work force as a result of the transfer of most of our manufacturing operations to third-party contract manufacturers. The reduction in force was completed in October 2006. The costs associated with this restructuring consisted
primarily of severance costs of $1.7 million.



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.



The following table summarizes changes in accrued restructuring for fiscal 2007 and 2006, excluding accruals related to the
acquisitions noted above (in thousands):



|                                        |  |                                  |        |                                      |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|--------------------------------------- |  | -------------------------------- | ------ | ------------------------------------ | - | ------------------------------- |  | - | -------------------------- | - |  | -------------------------------- | ------ | - |  | - | ------
|                                        |  | AccruedLiability atJune 30, 2006 |        | AdditionalAccrualsDuring Fiscal 2007 |   | Cash PaymentsDuring Fiscal 2007 |  |   | Recovery DuringFiscal 2007 |   |  | AccruedLiability atJune 30, 2007
|Workforce reduction, fiscal 2004        |  | $                                | 542    |                                      | $ |                                |  | $ | (542                       | ) |  | $                                |       |   |  | $ |      
|Workforce reduction, fiscal 2005        |  |                                  | 2,828  |                                      |   | 320                             |  |   | (3,135                     | ) |  |                                  | (2     | ) |  |   | 11    
|Workforce reduction, fiscal 2006        |  |                                  | 62     |                                      |   |                                |  |   | (60                        | ) |  |                                  | (2     | ) |  |   |      
|Abandonment of excess leased facilities |  |                                  | 12,708 |                                      |   | 1,278                           |  |   | (2,803                     | ) |  |                                  | (88    | ) |  |   | 11,095
|                                        |  |                                  |        |                                      |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|Total                                   |  | $                                | 16,140 |                                      | $ | 1,598                           |  | $ | (6,540                     | ) |  | $                                | (92    | ) |  | $ | 11,106
|                                        |  |                                  |        |                                      |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       
|                                        |  |                                  |        |                                      |  
|                                        |  | AccruedLiability atJune 30, 2005 |        | AdditionalAccrualsDuring Fiscal 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 |                                      | $ | 4,391                           |  | $ | (26,460                    | ) |  | $                                | (3,164 | ) |  | $ | 16,140
|                                        |  |                                  |        |                                      |   |                                 |  |   |                            |   |  |                                  |        |   |  |   |       



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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):



|                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                |  | Year Ended June 30, |        
|                                                                                |  | 2007                |         |   | 2006 |   |         | 2005 | 
|Net loss                                                                        |  | $                   | (30,605 | ) |      | $ | (54,692 | )    |  | $ | (108,371 | )
|Basic and diluted weighted-average number of shares of common stock outstanding |  |                     | 212,952 |   |      |   | 163,242 |      |  |   | 144,253  |  
|                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  
|Basic and diluted net loss per common share                                     |  | $                   | (0.14   | ) |      | $ | (0.34   | )    |  | $ | (0.75    | )
|                                                                                |  |                     |         |   |      |   |         |      |  |   |          |  



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,
|                                                           |  | 2007                |  | 2006       |  | 2005      
|Employee stock options                                     |  | 13,312,450          |  | 12,688,341 |  | 19,651,000
|Employee restricted stock units                            |  | 4,206,895           |  | 4,066,002  |  |          
|8% convertible notes                                       |  |                    |  | 6,161,511  |  | 28,925,620
|Warrants attached to 8% convertible notes                  |  | 7,938,018           |  | 8,677,689  |  | 8,677,689 
|Warrants granted to landlord                               |  | 60,000              |  | 60,000     |  | 60,000    
|Warrants attached to March 2006 equity securities offering |  | 7,339,727           |  | 7,222,500  |  |          
|Warrants attached to March 2007 equity securities offering |  | 2,698,764           |  |           |  |          
|                                                           |  |                     |  |            |  |           
|                                                           |  | 35,555,854          |  | 38,876,043 |  | 57,314,309
|                                                           |  |                     |  |            |  |           



Note 5. Consolidated Balance Sheet
Detail



Cash, Cash Equivalents, and Short-term Investments



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



56



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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 available-for-sale securities, aggregated by security type.



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



|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|--------------------------------------------------------------------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|                                                                                              |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|June 30, 2007                                                                                 |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Cash                                                                                          |  | $             | 14,661 |                      | $ |                      |  | $ |                   |   |  | $ | 14,661
|Cash EquivalentsMoney Market Funds                                                           |  |               | 176    |                      |   |                      |  |   |                   |   |  |   | 176   
|Restricted cash and investments Certificates of Deposit and United States Government Agencies |  |               | 3,620  |                      |   |                      |  |   |                   |   |  |   | 3,620 
|Short-term Investments                                                                        |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Certificates of Deposit                                                                       |  |               | 11     |                      |   |                      |  |   |                   |   |  |   | 11    
|Commercial Paper                                                                              |  |               | 17,060 |                      |   |                      |  |   | (1                 | ) |  |   | 17,059
|United States Government Agencies                                                             |  |               | 4,019  |                      |   |                      |  |   | (5                 | ) |  |   | 4,014 
|Corporate Notes                                                                               |  |               | 3,272  |                      |   | 1                     |  |   |                   |   |  |   | 3,273 
|Corporate Bonds                                                                               |  |               | 2,580  |                      |   |                      |  |   | (9                 | ) |  |   | 2,571 
|Foreign Debt Securities                                                                       |  |               | 2,013  |                      |   | 1                     |  |   |                    |   |  |   | 2,014 
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Subtotal, short-term investments                                                              |  |               | 28,955 |                      |   | 2                     |  |   | (15                | ) |  |   | 28,942
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Total cash, cash equivalents, and short-term investments                                      |  | $             | 47,412 |                      | $ | 2                     |  | $ | (15                | ) |  | $ | 47,399
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|June 30, 2006                                                                                 |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Cash                                                                                          |  | $             | 19,270 |                      | $ |                      |  | $ |                   |   |  | $ | 19,270
|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                                                                        |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|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, cash equivalents, and short-term investments                                      |  | $             | 74,172 |                      | $ | 163                   |  | $ |                   |   |  | $ | 74,335
|                                                                                              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       



Inventory



Inventories consist of the following (in thousands):



|                |  |          |        |      |   |       
|--------------- |  | -------- | ------ | ---- | - | ------
|                |  | June 30,
|                |  | 2007     |        | 2006
|Raw materials   |  | $        | 4,781  |      | $ | 6,114 
|Work-in-process |  |          | 591    |      |   | 974   
|Finished goods  |  |          | 9,816  |      |   | 11,329
|                |  |          |        |      |   |       
|                |  | $        | 15,188 |      | $ | 18,417
|                |  |          |        |      |   |       



In fiscal 2007, the
Company recorded charges to cost of revenue of $12.9 million for excess and obsolete inventory. The write-off was primarily due to lower demand for certain products and lower expected usage of



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



previously purchased inventory. 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.



The Company sold inventory previously written-off with original cost totaling $1.2 million in fiscal 2007, $0.2 million in fiscal 2006 and $1.1 million in fiscal 2005. 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, |        
|                                          |  | 2007     |         |   | 2006 |  
|Computer hardware and software            |  | $        | 9,217   |   |      | $ | 8,538   |  
|Production and engineering equipment      |  |          | 34,537  |   |      |   | 33,025  |  
|Office equipment, furniture and fixtures  |  |          | 971     |   |      |   | 827     |  
|Leasehold improvements                    |  |          | 1,791   |   |      |   | 1,518   |  
|                                          |  |          |         |   |      |   |         |  
|Total acquisition cost                    |  |          | 46,516  |   |      |   | 43,908  |  
|Accumulated depreciation and amortization |  |          | (40,616 | ) |      |   | (38,240 | )
|                                          |  |          |         |   |      |   |         |  
|Net book value                            |  | $        | 5,900   |   |      | $ | 5,668   |  
|                                          |  |          |         |   |      |   |         |  



Other Current Assets



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



|                                                  |  |          |       |      |   |       
|------------------------------------------------- |  | -------- | ----- | ---- | - | ------
|                                                  |  | June 30,
|                                                  |  | 2007     |       | 2006
|VAT receivable and research tax credit receivable |  | $        | 1,213 |      | $ | 1,504 
|Prepaid insurance                                 |  |          | 493   |      |   |      
|Prepaid rent                                      |  |          | 10    |      |   | 231   
|Advance billings by contract manufacturers        |  |          | 3,302 |      |   | 11,526
|Prepaid expenses and other assets                 |  |          | 698   |      |   | 2,212 
|                                                  |  |          |       |      |   |       
|                                                  |  | $        | 5,716 |      | $ | 15,473
|                                                  |  |          |       |      |   |       



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.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Changes in the Companys product warranty accrual for fiscal 2007 and fiscal 2006 are as follows
(in thousands):



|                                                       |  |                      |        |   |      |   |        |  
|------------------------------------------------------ |  | -------------------- | ------ | - | ---- | - | ------ | -
|                                                       |  | Years Ended June 30, |       
|                                                       |  | 2007                 |        |   | 2006 |  
|Balance at beginning of year                           |  | $                    | 1,799  |   |      | $ | 5,268  |  
|Accrual for sales during the year                      |  |                      | 1,334  |   |      |   | 1,826  |  
|Cost of warranty repair                                |  |                      | (906   | ) |      |   | (877   | )
|Change in estimate and expiration for prior provisions |  |                      | (1,354 | ) |      |   | (4,418 | )
|                                                       |  |                      |        |   |      |   |        |  
|Balance at end of year                                 |  | $                    | 873    |   |      | $ | 1,799  |  
|                                                       |  |                      |        |   |      |   |        |  



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.



Other Accrued Expenses and Deferred Revenue



Other accrued expenses and deferred revenue consist of the following (in thousands):



|                                        |  |          |       |      |   |      
|--------------------------------------- |  | -------- | ----- | ---- | - | -----
|                                        |  | June 30,
|                                        |  | 2007     |       | 2006
|Amounts accrued under escrow agreement  |  | $        | 2,700 |      |   |     
|Professional services                   |  |          | 1,899 |      | $ | 1,668
|Other accruals                          |  |          | 1,196 |      |   | 942  
|Contingent liability                    |  |          | 981   |      |   | 465  
|Taxessales, refunds and other taxes    |  |          | 843   |      |   | 667  
|Deferred revenue                        |  |          | 508   |      |   | 270  
|Building deposits owed to third parties |  |          | 439   |      |   | 455  
|Severance                               |  |          | 230   |      |   |     
|                                        |  |          |       |      |   |      
|Total                                   |  | $        | 8,796 |      | $ | 4,467
|                                        |  |          |       |      |   |      



Note 6. Goodwill



SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142) prescribes a two-step process for impairment testing of goodwill. The first step screens for impairment, while the second step, measures the impairment, if any. SFAS 142 requires impairment testing based on reporting units. 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, 2007 and 2006. Goodwill at June 30, 2007 and 2006 was $9.4 million.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 7. Other Intangibles



The following table reflects the carrying amount of intangible assets at June 30, 2007 and June 30, 2006 (in
thousands):



|                     |  |                                  |  |                                |       |                             |   |        |                                |  |                             |       |  |                                |        |   |  |   |    
|-------------------- |  | -------------------------------- |  | ------------------------------ | ----- | --------------------------- | - | ------ | ------------------------------ |  | --------------------------- | ----- |  | ------------------------------ | ------ | - |  | - | ---
|                     |  | Weighted-averageLife, inQuarters |  | NetCarryingAmount,June 30,2005 |       | Less Fiscal2006Amortization |   |        | NetCarryingAmount,June 30,2006 |  | Less Fiscal2007Amortization |       |  | NetCarryingAmount,June 30,2007
|Purchased technology |  | 21                               |  | $                              | 7,628 |                             | $ | (4,594 | )                              |  | $                           | 3,034 |  | $                              | (2,475 | ) |  | $ | 559
|Supply agreement     |  | 15                               |  |                                | 677   |                             |   | (541   | )                              |  |                             | 136   |  |                                | (136   | ) |  |   |   
|Other                |  | 15                               |  |                                | 381   |                             |   | (305   | )                              |  |                             | 76    |  |                                | (76    | ) |  |   |   
|                     |  |                                  |  |                                |       |                             |   |        |                                |  |                             |       |  |                                |        |   |  |   |    
|                     |  |                                  |  | $                              | 8,686 |                             | $ | (5,440 | )                              |  | $                           | 3,246 |  | $                              | (2,687 | ) |  | $ | 559
|                     |  |                                  |  |                                |       |                             |   |        |                                |  |                             |       |  |                                |        |   |  |   |    



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



|            |  |                       |    
|----------- |  | --------------------- | ---
|            |  | Amount to beAmortized
|Fiscal Year |  |                       |    
|2008        |  | $                     | 559



Note 8. Related Party Transactions



One of the Companys directors was a senior vice
president of MCI at June 30, 2005 and ceased to be an employee shortly thereafter. MCI accounted for less than 1% of our net revenue for the years ended June 30, 2007, 2006, and 2005, 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 in connection with the acquisitions of certain business of Alcatel and Corning. As of June 30, 2007, Alcatel and Corning owned shares representing 13% and zero percent,
respectively, of the outstanding shares of Avanex common stock. As of June 30, 2006, Alcatel and Corning owned shares representing approximately 14% and zero percent, 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,
|                                                                                                                                                  |  | 2007*               |        | 2006** |   | 2005  
|Related party transactions                                                                                                                        |  |                     |        |        |   |        |  |   |       
|Sales to related parties                                                                                                                          |  | $                   | 61,375 |        | $ | 43,890 |  | $ | 55,127
|Purchases from/services provided to related parties in cost of revenue                                                                            |  |                     | 491    |        |   | 2,726  |  |   | 10,202
|Administrative and transitional services purchased from/provided to related parties; fiscal 2007 and 2006 amounts include facilities rent
credits |  |                     | 615    |        |   | 951    |  |   | 5,891 
|Royalty income                                                                                                                                    |  |                     |       |        |   | 190    |  |   | 483   

---

|* | On November 30, 2006, the merger of Alcatel and Lucent was completed and the combined company was named Alcatel Lucent. As a result, we have included both Alcatel
and Lucent transactions in the related party disclosure beginning December 1, 2006.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|** | On December 31, 2005, Corning no longer owned shares in Avanex. As a result, we have only included transactions with Corning in the related party disclosure for the fiscal year
of 2005 and 2006.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                                                                     |  |             |        |      |   |        |  |   |       
|------------------------------------------------------------------------------------ |  | ----------- | ------ | ---- | - | ------ |  | - | ------
|                                                                                     |  | At June 30,
|                                                                                     |  | 2007*       |        | 2006 |   | 2005  
|Due from related parties                                                             |  |             |        |      |   |        |  |   |       
|Total Receivables                                                                    |  | $           | 14,381 |      | $ | 10,404 |  | $ | 15,357
|Receivables originating at date of acquisition of related parties, included in above |  |             |       |      |   |       |  | $ | 1,710 
|Due to related parties                                                               |  | $           | 2,144  |      | $ | 4,475  |  | $ | 1,549 

---

|* | On November 30, 2006, the merger of Alcatel and Lucent was completed and the combined company was named Alcatel Lucent. As a result, we have included both Alcatel
and Lucent transactions in the related party disclosure beginning December 1, 2006.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Receivables due from related parties originating at the date of acquisition are amounts owed by Alcatel contractually payable to the Company subsequent to
the original transaction.



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 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, 2007 are as follows (in thousands):



|                             |  |                      |        |                                                  |   |         |                  |  |   |               |   |  |   |      
|---------------------------- |  | -------------------- | ------ | ------------------------------------------------ | - | ------- | ---------------- |  | - | ------------- | - |  | - | -----
|                             |  | Total CashObligation |        | Amount Included inAccrued RestructuringLiability |   |         | SubleasePayments |  |   | FutureExpense
|Years ending June 30,        |  |                      |        |                                                  |   |         |                  |  |   |               |   |  |   |      
|2008                         |  | $                    | 5,806  |                                                  | $ | (2,837  | )                |  | $ | (998          | ) |  | $ | 1,971
|2009                         |  |                      | 5,523  |                                                  |   | (2,976  | )                |  |   | (676          | ) |  | $ | 1,871
|2010                         |  |                      | 4,360  |                                                  |   | (2,969  | )                |  |   | (511          | ) |  | $ | 880  
|2011                         |  |                      | 2,985  |                                                  |   | (2,324  | )                |  |   | (79           | ) |  | $ | 582  
|2012                         |  |                      | 78     |                                                  |   |        |                  |  |   |              |   |  | $ | 78   
|Remaining years              |  |                      | 78     |                                                  |   |        |                  |  |   |              |   |  | $ | 78   
|                             |  |                      |        |                                                  |   |         |                  |  |   |               |   |  |   |      
|Total minimum lease payments |  | $                    | 18,830 |                                                  | $ | (11,106 | )                |  | $ | (2,264        | ) |  | $ | 5,460
|                             |  |                      |        |                                                  |   |         |                  |  |   |               |   |  |   |      



Amounts shown in the
above table are net of sublease income. The Companys rental expense under operating leases was $2.5 million, $7.3 million and $7.5 million for the years ended June 30, 2007, 2006 and 2005, respectively.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including Avanex, was submitted to the Court for approval.
On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the
coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement
based upon a stipulation among the parties to the settlement. Plaintiffs have filed amended master allegations and amended complaints in the six focus cases. It is uncertain whether there will be any revised or future settlement. If a settlement
does not occur, and litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert
managements attention and resources, which could seriously harm our business, financial condition, results of operations or cash flow in a particular period.



In March 2007, the Company sold its subsidiary in France. Pursuant to the provisions of French bankruptcy law, in the event
that Avanex France, now 3S Photonics, declares bankruptcy after such sale, we may be held liable, as manager de facto of 3S Photonics for the payment of all or part of the liabilities of 3S Photonics, should it appear that we
committed mismanagement, which would have solely or partially led to the bankruptcy of 3S Photonics, and these liabilities could be significant. Such liability, if incurred, could have a material adverse effect on our business, results of
operations, and financial condition. In addition, we agreed to indemnify the buyers of Avanex France generally for a period of up to two years in an amount generally not exceeding 5 million for breaches of certain representations, warranties
and covenants relating to the condition of the business prior to, and at the time of sale, and approximately 2 million for other liabilities. As of June 30, 2007, the Company had accrued $2.7 million under Other Accrued Expenses for an escrow
account related to the sale.



Note 10. Pension Benefit Plan



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



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



obligation) was actuarially determined. The Company has not funded any of the benefit obligation as of June 30, 2007 and 2006.



Adoption of SFAS No. 158



SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R), requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability on its statement of financial position using prospective application. SFAS No. 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through comprehensive
income.



The Company adopted SFAS No. 158 in fiscal 2007. Upon
adoption, the Company recorded an adjustment of $0.3 million to the ending balance of accumulated other comprehensive income for pension benefit plan.



The following table provides the incremental effect of applying SFAS No. 158 on the Consolidated Balance Sheets as of June 30, 2007 for the pension
plan:



|                                              |  |                                 |        |                              |   |      |                                |  |   |       
|--------------------------------------------- |  | ------------------------------- | ------ | ---------------------------- | - | ---- | ------------------------------ |  | - | ------
|                                              |  | BeforeApplicationof SFASNo. 158 |        | AdjustmentsDue toSFASNo. 158 |   |      | AfterApplicationof SFASNo. 158
|                                              |  | (In thousands)                 
|Pension liability                             |  | $                               | 560    |                              | $ | (335 | )                              |  | $ | 225   
|Total liabilities                             |  | $                               | 63,253 |                              | $ | (335 | )                              |  | $ | 62,918
|Accumulated other comprehensive income (loss) |  | $                               | 729    |                              | $ | 335  |                                |  | $ | 1,064 
|Total shareholders equity                    |  | $                               | 71,747 |                              | $ | 335  |                                |  | $ | 72,082



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pension Benefit Plan



The following table provides information about changes in the benefit obligation and amounts recognized on the Consolidated Balance Sheets
and in accumulated other comprehensive income:



|                                                                           |  |                     |       |   |                     |   |        |  
|-------------------------------------------------------------------------- |  | ------------------- | ----- | - | ------------------- | - | ------ | -
|                                                                           |  | PensionBenefits2007 |       |   | PensionBenefits2006 |  
|                                                                           |  | (In thousands)      |      
|Change in benefit obligation:                                              |  |                     |       |   |                     |   |        |  
|Beginning balance                                                          |  | $                   | 1,062 |   |                     | $ | 2,871  |  
|Service cost                                                               |  |                     | 69    |   |                     |   | 163    |  
|Interest cost                                                              |  |                     | 51    |   |                     |   | 103    |  
|Actuarial loss (gain)                                                      |  |                     | (9    | ) |                     |   | (2,075 | )
|Curtailment/settlement                                                     |  |                     | (998  | ) |                     |   |       |  
|Exchange rate changes                                                      |  |                     | 50    |   |                     |   |       |  
|                                                                           |  |                     |       |   |                     |   |        |  
|Ending balance                                                             |  | $                   | 225   |   |                     | $ | 1,062  |  
|                                                                           |  |                     |       |   |                     |   |        |  
|                                                                           |  |                    
|Amounts recognized on the consolidated balance sheets consist of:          |  |                     |       |   |                     |   |        |  
|Other long term obligations                                                |  | $                   | 225   |   |                     | $ | 2,682  |  
|Accumulated other comprehensive income                                     |  |                     | 335   |   |                     |   |       |  
|                                                                           |  |                     |       |   |                     |   |        |  
|Net amount recognized                                                      |  | $                   | 560   |   |                     | $ | 2,682  |  
|                                                                           |  |                     |       |   |                     |   |        |  
|                                                                           |  |                    
|Amounts recognized in accumulated other comprehensive income consisted of: |  |                     |       |   |                     |   |        |  
|Net actuarial gain                                                         |  | $                   | 335   |   |                     | $ | *      |  
|                                                                           |  |                     |       |   |                     |   |        |  
|Net amount recognized                                                      |  | $                   | 335   |   |                     | $ | *      |  
|                                                                           |  |                     |       |   |                     |   |        |  



---

|* | With the adoption of SFAS No. 158 at June 30, 2007, certain information for 2007 was not previously applicable.
|- | ---------------------------------------------------------------------------------------------------------------



Components of net periodic benefit cost for pension benefits were as follows:



|                                              |  |                |        |   |      |   |     |  
|--------------------------------------------- |  | -------------- | ------ | - | ---- | - | --- | -
|                                              |  | 2007           |        |   | 2006 |  
|                                              |  | (In thousands) |       
|Pension benefit:                              |  |                |        |   |      |   |     |  
|Service cost                                  |  | $              | 69     |   |      | $ | 163 |  
|Interest cost                                 |  |                | 51     |   |      |   | 103 |  
|Settlement associated with sale of subsidiary |  |                | (998   | ) |      |   |    |  
|Effect of settlement on actuarial gain        |  |                | (1,371 | ) |      |   |    |  
|Amortization of unrecognized gain             |  |                |       |   |      |   | (21 | )
|                                              |  |                |        |   |      |   |     |  
|Net periodic benefit (gain) cost              |  | $              | (2,249 | ) |      | $ | 245 |  
|                                              |  |                |        |   |      |   |     |  



The estimated net
actuarial gain for the pension plan that will be amortized from accumulated other comprehensive income in fiscal 2008 will be approximately $31,000.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Contributions and Estimated Future Benefit Payments



To date, the Company has made no contribution to its pension plan. The
Company does not have significant statutory or contractual funding requirements for the qualified defined benefit plan.



The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



|            |  |                |    
|----------- |  | -------------- | ---
|            |  | Pension       
|            |  | Benefit       
|            |  | (In thousands)
|Year        |  |                |    
|2008        |  | $              |   
|2009        |  |                |   
|2010        |  |                |   
|2011        |  |                |   
|2012        |  |                |   
|2013  2017 |  |                | 185
|            |  |                |    
|Total       |  | $              | 185
|            |  |                |    



Weighted Average Assumptions
Used



Weighted average assumptions used to determine
benefit obligations at June 30, 2007 and June 30, 2006 were as follows:



|                                         |  |                  |   |  |      |  
|---------------------------------------- |  | ---------------- | - |  | ---- | -
|                                         |  | Pension Benefits |  
|                                         |  | 2007             |   |  | 2006 |  
|Discount rate                            |  | 4.65             | % |  | 4.09 | %
|Rate of compensation increase            |  | 2.5              | % |  | 2.5  | %
|Expected residual active life (in years) |  | 9.3              |   |  | 12.0 |  



Assumed discount rates
are used in measurements of the projected, accumulated and vested benefit obligations and the service and interest cost components of net periodic pension cost. Management makes estimates of discount rates to reflect the rates at which the pension
benefits could be effectively settled. In making those estimates, management evaluates rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits.



Note 11. Financing Arrangements



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



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 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 and 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.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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-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 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 2006, holders of
$29.5 million of the outstanding Amended and Restated Notes converted to common stock. At June 30, 2006, the notes balance was $5.5 million at face value, and $4.6 million net of unaccreted discount.



During fiscal 2007, holders of the remaining $5.5 million of the Amended and
Restated Notes converted to common stock. Accordingly, as of June 30, 2007, the Company does not have any outstanding Notes.



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



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2007, the Company had minimal capital lease
obligations.



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 provided 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. However, with the sale of our subsidiary in France, this liability ceased to exist as of June 30, 2007.



Capital Lease Obligations



Payments due under capital lease agreements for equipment as of June 30, 2007 are as follows (in thousands):



|                                            |  |                       |    |  
|------------------------------------------- |  | --------------------- | -- | -
|                                            |  | Total Cash Obligation |   
|Year ending June 30, 2008                   |  | $                     | 12 |  
|Less: Amounts representing interest         |  |                       | (3 | )
|                                            |  |                       |    |  
|Present value of net minimum lease payments |  | $                     | 9  |  
|                                            |  |                       |    |  



Note 12. Stockholders Equity



Securities Purchase Agreements



On March 6, 2006, the Company entered into a Securities Purchase
Agreement with certain buyers who were parties to the agreement for the sale of 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. In connection with the Companys March 1, 2007 financing, the holders of such warrants received an antidilution adjustment pursuant to the terms of such warrants resulting in up to 117,221 additional shares being issued upon the
exercise of such warrants and the reduction of the exercise price of the warrants from $2.73 per share to $2.68 per share. The sale of common stock and issuance of the warrants was made pursuant to an effective registration statement on Form S-3.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The net proceeds from the sale of the shares of common stock were $44.7 million, after deducting a
placement fee and the Companys offering expenses. In addition, if the warrants issued to the Investors are exercised in full for cash, the Company will receive an additional $18.5 million in net proceeds.



On March 1, 2007, the Company entered into a Securities Purchase
Agreement with an accredited institutional investor, for the sale of 10,795,056 shares of common stock of Avanex at a price per share of $1.8527 for an aggregate purchase price of $20 million. The financing closed on March 1, 2007. In
connection with the financing and pursuant to the Agreement, the investor received a warrant to purchase up to an additional 2,698,764 shares of common stock. The warrant is exercisable at an exercise price of $2.1452 per share and for a term
starting March 31, 2007 and ending March 1, 2011.



Shares Reserved



Common stock reserved for future issuance is as follows:



|                                          |  |              
|----------------------------------------- |  | -------------
|                                          |  | June 30, 2007
|Stock Option:                             |  |              
|Options outstanding                       |  | 13,312,450   
|Restricted stock units outstanding        |  | 4,206,895    
|Reserved for future grants                |  | 17,319,865   
|Employee stock purchase plan              |  | 2,353,272    
|Warrants                                  |  | 18,036,509   
|                                          |  |              
|Total shares reserved for future issuance |  | 55,228,991   
|                                          |  |              



Note 13. Stock-based Compensation



Stock Option and Stock Rights Plans



The Company adopted the 1998 Stock Plan, which has been amended (the
Option Plan), under which officers, employees, directors, and consultants may be granted options to purchase shares of the Companys common stock. The Option Plan permits options to be granted at an exercise price of not less than
the fair value on the date of grant as determined by the Board of Directors. Options are generally granted with ten-year terms and four-year vesting periods.



The authorized shares under the Option Plan automatically increase each July 1 by an amount equal to the lesser of (i) 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 16,208,251 shares of the Companys common stock have been reserved for future issuance under
the Option Plan as of June 30, 2007.



The Option Plan also
permits the Company to grant restricted stock units to employees. During fiscal 2007, the Company granted restricted stock units to employees that vest over periods of two to four years.



In January 2000, the Company adopted the 1999 Director Option Plan, which has been amended (the Director Plan).
Non-employee directors are entitled to participate in the Director Plan. The Director Plan generally provides for an automatic initial grant of an option to purchase 80,000 shares of Avanex common stock to each non-employee director on the date when
a person first becomes a non-employee director. Each initial option grant will vest as to 25% of the shares subject to the option on each anniversary of its date of grant. After each initial option grant, each non-employee director will
automatically be granted an option to purchase 20,000



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



shares Avanex common stock each year on the date of the Companys annual stockholders meeting. These options will vest and become fully
exercisable on the anniversary of the date of grant. Option grants generally have a term of 10 years. The exercise price of all options will be the fair market value per share of Avanex common stock on the date of grant. After the initial grant,
each non-employee director will automatically be granted 10,000 Restricted Stock Units each year on the date of the Companys annual stockholders meeting. The Restricted Stock Unit grants will fully vest and become 100% payable on the
anniversary of the date of grant.



The Director Plan also
provides for automatic annual increases each July 1, by an amount equal to the lesser of (i) 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 1.2 million shares of the Companys common stock have been reserved for future issuance under the Director Plan as of June 30, 2007.



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.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fair ValueFair value of the Companys stock options granted to employees for the
years ended June 30, 2007 and 2006 was estimated using the following weighted-average assumptions:



|                            |  |                    |      |   |      |   |      |  
|--------------------------- |  | ------------------ | ---- | - | ---- | - | ---- | -
|                            |  | Year EndedJune 30, |     
|                            |  | 2007               |      |   | 2006 |  
|Option Plan Shares:         |  |                    |      |   |      |   |      |  
|Expected term (in years)    |  |                    | 6.25 |   |      |   | 6.25 |  
|Volatility                  |  |                    | 77   | % |      |   | 80   | %
|Expected dividend           |  |                    | 0    | % |      |   | 0    | %
|Risk-free interest rate     |  |                    | 4.70 | % |      |   | 4.63 | %
|Weighted-average fair value |  | $                  | 1.24 |   |      | $ | 1.72 |  
|                            |  |                   
|ESPP Shares:                |  |                    |      |   |      |   |      |  
|Expected term (in years)    |  |                    | 1.00 |   |      |   | 1.00 |  
|Volatility                  |  |                    | 79.0 | % |      |   | 79.5 | %
|Expected dividend           |  |                    | 0    | % |      |   | 0    | %
|Risk-free interest rate     |  |                    | 4.93 | % |      |   | 4.31 | %
|Weighted-average fair value |  | $                  | 0.94 |   |      | $ | 1.93 |  



Stock Compensation Expense



Under the provisions of SFAS 123(R), we recorded $7.1 million
and $4.5 million of stock compensation expense in our consolidated statement of operations for the years ended June 30, 2007 and 2006, respectively.



At June 30, 2007, 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 $14.3 million, net of estimated forfeitures of $3.8 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 3.1 years and will be adjusted for subsequent
changes in estimated forfeitures.



The amortization of stock
compensation under SFAS 123(R) for the years ended June 30, 2007 and 2006 is based on the single-option approach.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 in Years |     | 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                |  | (8,070,743      | ) |  | $                             | 5.07 |                                                   |     |                                      |   |      
|                                             |  |                 |   |  |                               |      |                                                   |     |                                      |   |      
|Outstanding at July 1, 2006                  |  | 12,688,341      |   |  | $                             | 4.83 |                                                   | 7.6 |                                      | $ | 1,986
|Granted                                      |  | 3,423,000       |   |  | $                             | 1.72 |                                                   |     |                                      |   |      
|Exercised                                    |  | (355,459        | ) |  | $                             | 1.03 |                                                   |     |                                      |   |      
|Forfeitures and cancellations                |  | (2,443,432      | ) |  | $                             | 4.56 |                                                   |     |                                      |   |      
|                                             |  |                 |   |  |                               |      |                                                   |     |                                      |   |      
|Outstanding at June 30, 2007                 |  | 13,312,450      |   |  | $                             | 4.20 |                                                   | 6.6 |                                      | $ | 1,889
|                                             |  |                 |   |  |                               |      |                                                   |     |                                      |   |      
|Vested and expected to vest at June 30, 2007 |  | 11,887,273      |   |  | $                             | 4.50 |                                                   | 6.3 |                                      | $ | 1,569
|                                             |  |                 |   |  |                               |      |                                                   |     |                                      |   |      
|Exercisable at June 30, 2007                 |  | 8,372,025       |   |  | $                             | 5.65 |                                                   | 5.3 |                                      | $ | 890  
|                                             |  |                 |   |  |                               |      |                                                   |     |                                      |   |      



|                         |  |                                                   |  |                                             |  |                                 |        |                                        |           |                                 |   |       
|------------------------ |  | ------------------------------------------------- |  | ------------------------------------------- |  | ------------------------------- | ------ | -------------------------------------- | --------- | ------------------------------- | - | ------
|Range of Exercise Prices |  | Number of Options Outstanding As of June 30, 2007 |  | Average Remaining Contractual Term in Years |  | Weighted Average Exercise Price |        | Number Exercisable As of June 30, 2007 |           | Weighted Average Exercise Price
|$    0.39  $    1.06    |  | 1,511,762                                         |  | 6.77                                        |  | $                               | 0.95   |                                        | 901,562   |                                 | $ | 0.92  
|$    1.07  $    1.59    |  | 766,092                                           |  | 8.55                                        |  | $                               | 1.38   |                                        | 174,648   |                                 | $ | 1.25  
|$    1.64  $    1.64    |  | 1,550,000                                         |  | 9.33                                        |  | $                               | 1.64   |                                        | 0         |                                 | $ |      
|$    1.70  $    1.98    |  | 1,418,350                                         |  | 8.08                                        |  | $                               | 1.81   |                                        | 240,793   |                                 | $ | 1.94  
|$    2.06  $    2.19    |  | 1,594,884                                         |  | 7.24                                        |  | $                               | 2.17   |                                        | 1,045,592 |                                 | $ | 2.19  
|$    2.33  $    2.88    |  | 1,504,470                                         |  | 7.39                                        |  | $                               | 2.65   |                                        | 1,119,416 |                                 | $ | 2.62  
|$    2.95  $    3.95    |  | 2,049,509                                         |  | 6.02                                        |  | $                               | 3.61   |                                        | 1,972,631 |                                 | $ | 3.63  
|$    4.00  $    4.90    |  | 2,018,638                                         |  | 3.26                                        |  | $                               | 4.62   |                                        | 2,018,638 |                                 | $ | 4.62  
|$    4.99  $115.81      |  | 866,745                                           |  | 3.58                                        |  | $                               | 22.68  |                                        | 866,745   |                                 | $ | 22.68 
|$139.25  $139.25        |  | 32,000                                            |  | 2.10                                        |  | $                               | 138.25 |                                        | 32,000    |                                 | $ | 139.25
|                         |  |                                                   |  |                                             |  |                                 |        |                                        |           |                                 |   |       
|                         |  | 13,312,450                                        |  | 6.57                                        |  | $                               | 4.20   |                                        | 8,372,025 |                                 | $ | 5.65  
|                         |  |                                                   |  |                                             |  |                                 |        |                                        |           |                                 |   |       



The aggregate
intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Companys common stock for the 4.5 million options that were in-the-money at June 30, 2007. During the
years ended June 30, 2007 and 2006, the aggregate intrinsic value of options exercised under the Companys stock option plans was $338,000 and $915,000, respectively. Intrinsic value was determined as of the date of option exercise.



Under the Option Plan, the Company may also grant share
purchase rights either alone, in addition to, or in tandem with other awards granted under the Option Plan and/or cash awards granted outside the Option Plan. Exercise of these share purchase rights are made pursuant to restricted stock purchase
agreements containing provisions established by the Board of Directors. These provisions may give the Company the right to repurchase



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, 2007 and 2005. As of June 30, 2007, 2006 and
2005, no shares were subject to repurchase.



The
weighted-average fair value of stock options granted during fiscal 2007, 2006 and 2005 were $1.24, $1.47 and $1.84, respectively.



For the year ended June 30, 2005, the Company recorded amortization (recovery) of deferred stock compensation of $243,000. 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 by executive officers) were subject to the acceleration. The weighted average exercise price of the options subject to the
acceleration was $3.56.



Restricted Stock Unit Activity



The Company issues new shares of common stock upon the vesting of restricted
stock units. The following is a summary of option activity for Avanexs stock option plans since our adoption of SFAS 123(R):



|                                             |  |                 |   |  |                               |       |                                                   |     |                                      |   |      
|-------------------------------------------- |  | --------------- | - |  | ----------------------------- | ----- | ------------------------------------------------- | --- | ------------------------------------ | - | -----
|                                             |  | Number ofShares |   |  | Weighted-averageExercisePrice |       | Weighted-averageRemainingContractualTerm in Years |     | AggregateIntrinsicValue, inthousands
|Outstanding at July 1, 2005                  |  |                |   |  |                               |       |                                                   |     |                                      |   |      
|Awarded                                      |  | 5,899,956       |   |  | $                             | 0.001 |                                                   |     |                                      |   |      
|Released                                     |  | (1,130,487      | ) |  | $                             | 0.001 |                                                   |     |                                      |   |      
|Forfeitures and cancellations                |  | (703,467        | ) |  | $                             | 0.001 |                                                   |     |                                      |   |      
|                                             |  |                 |   |  |                               |       |                                                   |     |                                      |   |      
|Outstanding at July 1, 2006                  |  | 4,066,002       |   |  | $                             | 0.001 |                                                   | 2.5 |                                      | $ | 7,154
|Awarded                                      |  | 3,206,662       |   |  | $                             | 0.001 |                                                   |     |                                      |   |      
|Released                                     |  | (2,281,967      | ) |  | $                             | 0.001 |                                                   |     |                                      |   |      
|Forfeitures and cancellations                |  | (783,802        | ) |  | $                             | 0.001 |                                                   |     |                                      |   |      
|                                             |  |                 |   |  |                               |       |                                                   |     |                                      |   |      
|Outstanding at June 30, 2007                 |  | 4,206,895       |   |  | $                             | 0.001 |                                                   | 1.3 |                                      | $ | 7,575
|                                             |  |                 |   |  |                               |       |                                                   |     |                                      |   |      
|Vested and expected to vest at June 30, 2007 |  | 3,303,782       |   |  | $                             | 0.001 |                                                   | 1.2 |                                      | $ | 5,944
|                                             |  |                 |   |  |                               |       |                                                   |     |                                      |   |      



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 4.2 million of outstanding restricted stock shares at June 30, 2007, all of which were
in-the-money. During the years ended June 30, 2007 and 2006, the aggregate intrinsic value of restricted stock units vested under the Companys stock option plans was $4.1 million and $2.8 million, respectively. Intrinsic value was
determined as of the date of restricted stock unit release.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



1999 Employee Stock Purchase Plan (ESPP)



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 2,353,272 shares of the Companys common stock have been reserved for future issuance under the Stock Purchase Plan as of June 30, 2007.



Employee Stock Purchase Plan Information



In connection with our ESPP, the following shares were issued during the years ended June 30, 2007, 2006 and 2005:



|                                |  |                     |         |      |   |         |  |   |        
|------------------------------- |  | ------------------- | ------- | ---- | - | ------- |  | - | -------
|                                |  | Year Ended June 30,
|                                |  | 2007                |         | 2006 |   | 2005   
|Number of shares issued         |  |                     | 427,355 |      |   | 588,431 |  |   | 986,123
|Weighted-average purchase price |  | $                   | 0.86    |      | $ | 0.80    |  | $ | 1.22   



During the years ended
June 30, 2007 and 2006, the aggregate intrinsic value of options exercised under the Companys ESPP was $326,000 and $143,000, 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 June 30, |        
|         |  | 2007                |         |   | 2006 |   |         | 2005 | 
|Domestic |  | $                   | (22,282 | ) |      | $ | (46,678 | )    |  | $ | (48,531  | )
|Foreign  |  |                     | (7,931  | ) |      |   | (8,012  | )    |  |   | (59,840  | )
|         |  |                     |         |   |      |   |         |      |  |   |          |  
|Total    |  | $                   | (30,213 | ) |      | $ | (54,690 | )    |  | $ | (108,371 | )
|         |  |                     |         |   |      |   |         |      |  |   |          |  



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The reconciliation of income tax expenses (benefit) at the statutory federal income tax rate of 34%
to net income tax benefit included in the statement of operations for the years ended June 30, 2007 and 2006 are as follows (in thousands):



|                                           |  |                     |         |   |      |   |         |      |  |   |         |  
|------------------------------------------ |  | ------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                           |  | Year Ended June 30, |        
|                                           |  | 2007                |         |   | 2006 |   |         | 2005 | 
|U.S. Fed taxes (benefit) at statutory rate |  | $                   | (10,272 | ) |      | $ | (18,595 | )    |  | $ | (36,846 | )
|Foreign Loss not Benefited                 |  |                     | 2,544   |   |      |   | 2,712   |      |  |   | 18,912  |  
|PY income TrueupVA                        |  |                     | 96      |   |      |   | 12,426  |      |  |   |        |  
|Expiring NOLs                             |  |                     | 215     |   |      |   |        |      |  |   |        |  
|R&D credit                                 |  |                     |        |   |      |   |        |      |  |   | (524    | )
|Change in valuation allowance              |  |                     | 7,947   |   |      |   | 2,868   |      |  |   | 19,891  |  
|Other                                      |  |                     | (65     | ) |      |   | 589     |      |  |   | (1,433  | )
|                                           |  |                     |         |   |      |   |         |      |  |   |         |  
|TOTAL                                      |  | $                   | 465     |   |      | $ |        |      |  | $ |        |  
|                                           |  |                     |         |   |      |   |         |      |  |   |         |  



Deferred tax assets
and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows (in thousands):



|                          |  |          |          |   |      |   |          |      |  |   |          |  
|------------------------- |  | -------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                          |  | June 30, |         
|                          |  | 2007     |          |   | 2006 |   |          | 2005 | 
|Deferred Tax Assets:      |  |          |          |   |      |   |          |      |  |   |          |  
|NOLs                     |  | $        | 94,252   |   |      | $ | 153,194  |      |  | $ | 148,960  |  
|Tax credit carryforwards  |  |          | 5,646    |   |      |   | 5,076    |      |  |   | 5,047    |  
|Inventory Reserves        |  |          | 10,515   |   |      |   | 9,993    |      |  |   | 8,715    |  
|Restructuring charges     |  |          | 4,029    |   |      |   | 4,845    |      |  |   | 7,080    |  
|Other                     |  |          | 9,490    |   |      |   | 5,965    |      |  |   | 6,852    |  
|Intangibles               |  |          | 2,332    |   |      |   | 822      |      |  |   | (445     | )
|                          |  |          |          |   |      |   |          |      |  |   |          |  
|Total Deferred Tax Assets |  |          | 126,264  |   |      |   | 179,895  |      |  |   | 176,209  |  
|Valuation Allowance       |  |          | (126,264 | ) |      |   | (179,895 | )    |  |   | (176,209 | )
|                          |  |          |          |   |      |   |          |      |  |   |          |  
|Net Deferred Tax Assets   |  | $        |         |   |      | $ |         |      |  | $ |         |  
|                          |  |          |          |   |      |   |          |      |  |   |          |  



Realization of
deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance (decreased) increased by
($53.6) million and $3.7 million during June 30, 2007 and June 30, 2006, respectively.



As of June 30, 2007, the Company had net operating loss carry forwards for federal income tax purposes of approximately $298.9 million which expire
in the years 2012 through 2027 and federal research and development tax credits of approximately $5.7 million. The Company also had state net operating loss carry forwards of approximately $136.7 million, which expire in the years 2008 through 2016
and state research and development tax credits of approximately $6.9 million.



Utilization of the net operating losses may be subject to substantial annual limitation due to federal and state ownership limitations. The annual limitation could result in the expiration of the net operating losses
before utilization.



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company sold a 90% interest in Avanex France, its subsidiary in France, during fiscal 2007. As of
June 30, 2006, Avanex France had $192 million of net operating losses, with a full valuation allowance. As a result of this transaction, the company wrote-off Avanex Frances net operating losses from its deferred tax assets. As a result of
this write-off, the valuation allowance decreased by $64 million as the $192 million was tax effected at a tax rate of 33.33%.



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, |  
|          |  | 2007                     |   |  | 2006                                    |   |  | 2005 |   |  | 2007 |   |  | 2006 |  
|Company A |  | 29                       | % |  | 27                                      | % |  | 34   | % |  | 24   | % |  | 28   | %
|Company B |  | 17                       | % |  | *                                       |   |  | *    |   |  | 10   | % |  | *    |  
|Company C |  | *                        |   |  | 11                                      | % |  | *    |   |  | *    |   |  | *    |  
|          |  |                          |   |  |                                         |   |  |      |   |  |      |   |  |      |  
|          |  | 46                       | % |  | 38                                      | % |  | 34   | % |  | 34   | % |  | 28   | %
|          |  |                          |   |  |                                         |   |  |      |   |  |      |   |  |      |  

| | 
| | 

* less than 10%



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



|         |  |                     |         |      |   |         |  |   |        
|-------- |  | ------------------- | ------- | ---- | - | ------- |  | - | -------
|         |  | Year Ended June 30,
|         |  | 2007                |         | 2006 |   | 2005   
|Americas |  | $                   | 95,189  |      | $ | 75,889  |  | $ | 61,973 
|Europe   |  |                     | 84,126  |      |   | 67,151  |  |   | 63,947 
|Asia-Pac |  |                     | 33,440  |      |   | 19,904  |  |   | 34,775 
|         |  |                     |         |      |   |         |  |   |        
|Total    |  | $                   | 212,755 |      | $ | 162,944 |  | $ | 160,695
|         |  |                     |         |      |   |         |  |   |        



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AVANEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|         |  |                    |       |      |   |      
|-------- |  | ------------------ | ----- | ---- | - | -----
|         |  | Year EndedJune 30,
|         |  | 2007               |       | 2006
|U.S.     |  | $                  | 3,949 |      | $ | 3,888
|Non-U.S. |  |                    | 1,951 |      |   | 1,780
|         |  |                    |       |      |   |      
|         |  | $                  | 5,900 |      | $ | 5,668
|         |  |                    |       |      |   |      



Note 16. Subsequent Event



On July 2, 2007, the Company entered into an Asset
Purchase and Sale Agreement (the Agreement) with Essex Corporation (Essex), a subsidiary of Northrop Grumman Space and Mission Systems Corporation. Pursuant to the Agreement, the Company acquired the assets relating to the
MSA 300-pin transponder and XFP transceiver businesses of the Commercial Communication Products Division of Essex, in exchange for $2.0 million in cash (the Transaction). The Agreement contains representations, warranties, covenants and
indemnification provisions typical for a transaction of this kind. The Transaction closed on July 2, 2007.



Note 17. Quarterly Financial Data (Unaudited)



|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------- | - | ------- | ------------- |  | - | ------------- | - |  | ------------- | ------- | - | ------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Jun. 30, 2007                        |         |   | Mar. 31, 2007 |   |         | Dec. 31, 2006 |  |   | Sep. 30, 2006 |   |  | Jun. 30, 2006 |         |   | Mar. 31, 2006 |   |         | Dec. 31, 2005 |  |   | Sep. 30, 2005 |  
|                                                  |  | (In thousands except per share data) |        
|                                                  |  | (Unaudited)                          |        
|Consolidated Statement of Operations Data:        |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Net revenue                                       |  | $                                    | 51,098  |   |               | $ | 55,143  |               |  | $ | 55,623        |   |  | $             | 50,891  |   |               | $ | 45,458  |               |  | $ | 40,128        |   |  | $ | 36,125  |   |  | $ | 41,233  |  
|Cost of revenue                                   |  |                                      | 38,999  |   |               |   | 44,845  |               |  |   | 45,127        |   |  |               | 45,579  |   |               |   | 43,685  |               |  |   | 38,485        |   |  |   | 33,207  |   |  |   | 39,107  |  
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Gross loss                                        |  |                                      | 12,099  |   |               |   | 10,298  |               |  |   | 10,496        |   |  |               | 5,312   |   |               |   | 1,773   |               |  |   | 1,643         |   |  |   | 2,918   |   |  |   | 2,126   |  
|Operating expenses:                               |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Research and development                          |  |                                      | 7,511   |   |               |   | 6,263   |               |  |   | 5,832         |   |  |               | 5,625   |   |               |   | 5,703   |               |  |   | 5,189         |   |  |   | 5,452   |   |  |   | 7,127   |  
|Sales and marketing                               |  |                                      | 3,779   |   |               |   | 4,043   |               |  |   | 3,891         |   |  |               | 3,548   |   |               |   | 3,677   |               |  |   | 2,988         |   |  |   | 2,783   |   |  |   | 3,788   |  
|General and administrative                        |  |                                      | 3,469   |   |               |   | 5,083   |               |  |   | 9,075         |   |  |               | 5,651   |   |               |   | 3,346   |               |  |   | 4,191         |   |  |   | 3,841   |   |  |   | 5,274   |  
|Amortization of intangibles                       |  |                                      | 664     |   |               |   | 531     |               |  |   | 656           |   |  |               | 852     |   |               |   | 912     |               |  |   | 1,386         |   |  |   | 1,385   |   |  |   | 1,765   |  
|Restructuring costs (recovery)                    |  |                                      | (17     | ) |               |   | 1,155   |               |  |   | 436           |   |  |               | (63     | ) |               |   | (1,225  | )             |  |   | 155           |   |  |   | 2,942   |   |  |   | 40      |  
|(Gain)/loss on disposal of property and equipment |  |                                      | (484    | ) |               |   | 5       |               |  |   | (28           | ) |  |               | (20     | ) |               |   | (1,810  | )             |  |   | (2,486        | ) |  |   | (775    | ) |  |   | 7       |  
|Loss on sale of subsidiary                        |  |                                      | 3,216   |   |               |   |        |               |  |   |              |   |  |               |        |   |               |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Total operating expenses                          |  |                                      | 18,138  |   |               |   | 17,080  |               |  |   | 19,862        |   |  |               | 15,593  |   |               |   | 10,603  |               |  |   | 11,423        |   |  |   | 15,628  |   |  |   | 18,001  |  
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Loss from operations                              |  |                                      | (6,039  | ) |               |   | (6,782  | )             |  |   | (9,366        | ) |  |               | (10,281 | ) |               |   | (8,830  | )             |  |   | (9,780        | ) |  |   | (12,710 | ) |  |   | (15,875 | )
|Interest and other (expense) income, net          |  |                                      | 818     |   |               |   | 129     |               |  |   | 813           |   |  |               | 567     |   |               |   | (229    | )             |  |   | (387          | ) |  |   | (5,833  | ) |  |   | (1,048  | )
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Loss before income taxes                          |  |                                      | (5,221  | ) |               |   | (6,653  | )             |  |   | (8,553        | ) |  |               | (9,714  | ) |               |   | (9,059  | )             |  |   | (10,167       | ) |  |   | (18,543 | ) |  |   | (16,923 | )
|Provision for income taxes                        |  |                                      | (464    | ) |               |   |        |               |  |   |              |   |  |               |        |   |               |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Net loss                                          |  | $                                    | (5,685  | ) |               | $ | (6,653  | )             |  | $ | (8,553        | ) |  | $             | (9,714  | ) |               | $ | (9,059  | )             |  | $ | (10,167       | ) |  | $ | (18,543 | ) |  | $ | (16,923 | )
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share       |  | $                                    | (0.03   | ) |               | $ | (0.03   | )             |  | $ | (0.04         | ) |  | $             | (0.05   | ) |               | $ | (0.04   | )             |  | $ | (0.06         | ) |  | $ | (0.13   | ) |  | $ | (0.12   | )
|                                                  |  |                                      |         |   |               |   |         |               |  |   |               |   |  |               |         |   |               |   |         |               |  |   |               |   |  |   |         |   |  |   |         |  
|Basic and diluted shares outstanding              |  |                                      | 225,668 |   |               |   | 214,034 |               |  |   | 206,873       |   |  |               | 205,389 |   |               |   | 204,040 |               |  |   | 158,246       |   |  |   | 145,501 |   |  |   | 145,182 |  



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



Not applicable.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of Disclosure Controls and Procedures



Management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2007. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures were not effective as of June 30, 2007 because of the material weakness discussed below.



Managements Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed 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 in the United States (U.S. GAAP). Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Our management, including our principal executive officer and principal
financial officer, assessed the effectiveness of our internal control over financial reporting as of June 30, 2007. In making this assessment, management used the criteria set forth inInternal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Managements assessment identified the following material weakness 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:



Controls over judgmental and complex processes and transactions were inadequate resulting in insufficient control over financial reporting.



Because of the weakness described above, managements assessment is a conclusion that, as of June 30, 2007, our internal control over
financial reporting was not effective based on the COSO criteria. Deloitte & Touche LLP, an independent registered public accounting firm, audited managements assessment of the effectiveness of our internal control over financial
reporting. Deloitte & Touche LLP issued an audit report thereon, which is included herein.



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Our management is treating the outstanding material weakness, as well as the control environment,
seriously and intends to implement the following actions to remediate the deficiencies:



Evaluation of and revision as needed, of calculations used in the preparation of accounts receivable, warranty, and excess and obsolete
inventory reserves that fully consider the impact of changing trends in our revenues, outstanding AR balances and excess and obsolete inventory movement, and increased supervision and review over other judgmental and complex processes and
transactions.



These actions are part of an overall program
that management is implementing during the fiscal year ending June 30, 2008.



Changes in Internal Control over Financial Reporting During the Fiscal Quarter Ended June 30, 2007



During the fiscal quarter ended June 30, 2007, there were no changes in our internal control over financial reporting that have materially affected, or
are reasonable likely to materially affect, our internal control over financial reporting, other than the weakness noted above.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



Not applicable.



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REPORT OF DELOITTE & TOUCHE LLP

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of

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, 2007, because of the effect of the material weakness 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 accounting principles generally accepted in the United States of America
(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 deficiency, or combination of deficiencies in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in managements
assessment: controls over judgmental and complex processes and transactions were inadequate and led to a lack of control over the Companys closing and reporting process. This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended June 30,



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2007, of the Company and this report does not affect our report on such 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, 2007, 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 weakness 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, 2007, 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, 2007 of the Company and our report dated September 4, 2007 expressed an unqualified
opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the change in the Companys method of accounting for defined benefit pension and other postretirement plans upon the adoption
of Financial Accounting Standards Board (FASB) Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R)as described in Note 10 to the consolidated financial statements.



/s/    DELOITTE & TOUCHE LLP



San Jose,
California

September 4, 2007



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PART III.



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------



The information required by this Item concerning our directors, compliance with Section 16 of the Securities and Exchange Act of 1934, our code of
ethics that applies to our principal executive officer, principal financial officer and principal accounting officer and our Audit Committee is incorporated by reference to the information set forth in the sections entitled Proposal
OneElection of Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance in our Proxy Statement for our 2007 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission not later than 120 days after the end of our fiscal year (the Proxy Statement). Information regarding the Registrants executive officers is set forth at the end of Part I of this Annual Report on Form 10-K under
the caption Executive Officers of the Registrant.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



Information required by this Item is incorporated by reference to the information set forth under the caption Executive Compensation in the
Proxy Statement.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



Information required by this Item is incorporated by reference to the information set forth under the sections entitled
Security Ownership of Beneficial Owners and Management and Equity Compensation Plan Information in the Proxy Statement.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|-------- | ------------------------------------------------------------------------



Information required by this Item is incorporated by reference to the information set forth under the caption Certain
Relationships and Related Transactions and Corporate Governance in the Proxy Statement.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



The information required by this Item is incorporated by reference to the section entitled Ratification of Appointment of Independent Registered
Public Accounting FirmAccounting Fees in the Proxy Statement.



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PART IV



|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|-------- | ---------------------------------------



(a) The following documents are filed as part of this Report:



1.Financial Statements:    See Index to Consolidated Financial Statements under Part II, Item 8 of
this Annual Report on Form 10-K.



2.Financial Statement Schedule:    The following financial statement schedule of Avanex, Inc., for the fiscal years ended June 30, 2007, 2006 and 2005, is filed as part of this Report and should be read
in conjunction with the Consolidated Financial Statements of Avanex, Inc.



Schedule II    Valuation and Qualifying Accounts



Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.



3.Exhibits:    See Item 15(b) below. We have filed, or incorporated into this Annual Report by reference, the exhibits listed on the accompanying Exhibits Index immediately
following the signature page of this Form 10-K.



(b) Exhibits:



We have filed, or incorporated into this Annual Report by
reference, the exhibits listed on the accompanying Exhibits Index immediately following the signature page of this Form 10-K.



(c) Financial Statement Schedules: See Item 15(a), above.



|ITEM 15(A)(2) | FINANCIAL STATEMENT SCHEDULE II
|------------- | -------------------------------



Schedule IIValuation and Qualifying Accounts



|                                |  |                              |           |                               |   |            |                |  |                        |        |  |   |          
|------------------------------- |  | ---------------------------- | --------- | ----------------------------- | - | ---------- | -------------- |  | ---------------------- | ------ |  | - | ---------
|                                |  | Balance at Beginning of Year |           | Charged to Costs and Expenses |   |            | Deductions (1) |  | Balance at End of Year
|                                |  | (amounts in thousands)      
|Allowance for doubtful accounts |  |                              |           |                               |   |            |                |  |                        |        |  |   |          
|Year ended June 30, 2005        |  | $                            | 1,483,000 |                               | $ | 573,000    |                |  | $                      | 64,000 |  | $ | 1,992,000
|Year ended June 30, 2006        |  | $                            | 1,992,000 |                               | $ | (1,992,000 | )              |  | $                      |       |  | $ |         
|Year ended June 30, 2007        |  | $                            |          |                               | $ |           |                |  | $                      |       |  | $ |         

---

|(1) | Deductions represent uncollectible accounts written off, net of recoveries.
|--- | ---------------------------------------------------------------------------



All other schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.



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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 Annual Report on Form 10-K 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:  September 6, 2007



POWER OF ATTORNEY



KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jo S. Major, Jr. and Marla Sanchez, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and
stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.



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 andChairman of the Board of Directors(principal executive officer) |  | September 6, 2007
|                                          |  |                                                                                                      
|/S/    MARLA SANCHEZMarla Sanchez         |  | Senior Vice President and ChiefFinancial Officer (principalfinancial officer)                         |  | September 6, 2007
|                                          |  |                                                                                                      
|/S/    VINTON CERFVinton Cerf             |  | Director                                                                                              |  | September 6, 2007
|                                          |  |                                                                                                      
|/S/    GREG DOUGHERTYGreg Dougherty       |  | Director                                                                                              |  | September 6, 2007
|                                          |  |                                                                                                      
|/S/    JOEL A. SMITH
IIIJoel A. Smith III |  | Director                                                                                              |  | September 6, 2007
|                                          |  |                                                                                                      
|/S/    SUSAN WANGSusan Wang               |  | Director                                                                                              |  | September 6, 2007







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##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                                                          
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                              
|2.1            |  | Share Purchase Agreement, dated February 28, 2007, by and among Avanex Corporation, Global Research Company and Mr. Didier Sauvage (incorporated herein by reference toExhibit
2.1 ofAvanexs CurrentReport onForm 8-K,filed onMarch 2, 2007).                                                                           
|               | 
|2.2            |  | Asset Purchase and Sale Agreement, dated July 2, 2007, between the Registrant and Essex Corporation (filed herewith).                                                                                                                                                                                                    
|               | 
|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            |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation (which is incorporated herein by reference to Exhibit 3.3 to the Registrants Registration Statement
on Form S-3 filed on March 30, 2007).                                                                                             
|               | 
|3.4            |  | 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 9, 2006).                                                                                                                                                         
|               | 
|4.1            |  | Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.                                                                                                                                                                                                                                                                     
|               | 
|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 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 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 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 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 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 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).                                                                                                                                                  
|               | 
|4.9            |  | Description of Amendment of 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).                                                                                                                                 
|               | 
|4.10           |  | Form of Warrant(which is incorporated herein by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed March 7, 2006).                                                                                                                                                                            



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                    
|4.11           |  | Description of Amendment to Warrants (which is incorporated herein by reference to Exhibit 1.01 to the Registrants Current Report on Form 8-K filed on November 9,
2006).                                                                                     
|               | 
|4.12           |  | Warrant to Purchase Common Stock, dated March 1, 2007(which is incorporated herein by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on March 2,
2007).                                                                         
|               | 
|4.13           |  | Registration Rights Agreement, dated 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).                           
|               | 
|4.14           |  | Registration Rights Agreement, dated March 1, 2007(which is incorporated herein by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K filed on March 2,
2007).                                                                            
|               | 
|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).                                                                                     
|               | 
|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 10.1 to the Registrants Current Report on Form 8-K, filed on November 9,
2006).                                                                                   
|               | 
|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).                            



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                       
|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 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 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).                             
|               | 
|10.19*         |  | Offer of Employment between Marla Sanchez and the Registrant dated October 25, 2006(which is incorporated herein by reference to Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q filed on February 7, 2007).                       
|               | 
|10.20*         |  | Offer of Employment between Patrick Edsell and the Registrant dated January 19, 2007(filed herewith).                                                                                                                                             
|               | 
|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 (which is incorporated herein by reference to Exhibit 10.23 to the Registrants Annual Report on
Form 10-K filed on September 28, 2006).                      
|               | 
|10.24*         |  | Form of Restricted Stock Unit Agreement Under 1999 Director Option Plan (which is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K,
filed on November 16, 2006).                                   
|               | 
|10.25*         |  | Form of Restricted Stock Unit Agreement Under 1999 Director Option Plan (which is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K,
filed on November 16, 2006).                                   
|               | 
|10.26*         |  | Description of Fiscal 2007 Employee Bonus Program(which is incorporated herein by reference to Item 1.01 of the Registrants Current Report on Form 8-K filed on February 22,
2007).                                                              
|               | 
|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).                                                                           



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                            
|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 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         |  | Intellectual Property Rights Agreement between Corning Incorporated and Avanex Corporation Relating to Photonics dated 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).                                         
|               | 
|10.33          |  | Intellectual Property License Agreement between Alcatel and Avanex Corporation dated 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).                                                                            
|               | 
|10.34         |  | Supply Agreement between Alcatel and Avanex Corporation dated 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).                                                                                                  
|               | 
|10.35          |  | 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).                                                                                                     
|               | 
|10.36          |  | 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).                                                                                   
|               | 
|10.37         |  | Frame Purchase Agreement for Opto Electronic Components between Avanex Corporation and Alcatel dated 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).                                                           
|               | 
|10.38          |  | Securities Purchase Agreement dated 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).                                                                                              
|               | 
|10.39          |  | Form of Amendment Agreement, dated 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).                                                                                  
|               | 
|10.40          |  | Securities Purchase Agreement, dated 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).                                                                            
|               | 
|10.41         |  | Volume Supply Agreement, dated May 6, 2004, 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).                                                                                              



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                               
|10.42          |  | Securities Purchase Agreement, dated March 1, 2007, between the Registrant and the investor named therein(which is incorporated herein by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on March 2, 2007).
|               | 
|21.1           |  | List of subsidiaries of the Registrant(filed herewith).                                                                                                                                                                                   
|               | 
|23.1           |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm(filed herewith).                                                                                                                                          
|               | 
|24.1           |  | Power of Attorney(See signature page).                                                                                                                                                                                                    
|               | 
|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.
|- | ----------------------------------------------------------------------------------------------------------------------

|* | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------