AVANEX CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

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

For the transition period from to

Commission file number 000-29175

AVANEX CORPORATION

(Exact name of Registrant as Specified in its Charter)


Delaware		94-3285348


(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

40919 Encyclopedia Circle
Fremont, California 94538

(Address of Principal Executive Offices including Zip Code)

(510) 897-4188

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [X] NO [ ]

There were 128,083,657 shares of the Company’s Common Stock, par value $.001 per share, outstanding on October 28, 2003.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

AVANEX CORPORATION
FORM 10-Q
TABLE OF CONTENTS


		Page No.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2003 and June 30, 2003		3
	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and 2002		4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			44
Item 2. Changes in Securities and Use of Proceeds			44
Item 3. Defaults Upon Senior Securities			45
Item 4. Submission of Matters to a Vote of Security Holders			45
Item 5. Other Information			45
Item 6. Exhibits and Reports on Form 8-K			46
Signatures			48
Certifications

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AVANEX CORPORATION

Condensed Consolidated Balance Sheets
(In thousands)


			September 30,			June 30,
			2003			2003

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	38,214		$	10,639
	Short-term investments			123,120			76,952
	Accounts receivable, net			15,988			2,614
	Inventories			31,079			3,613
	Other current assets			21,520			1,070

		Total current assets		229,921			94,888
Long-term investments				58,434			47,063
Property and equipment, net				30,359			5,455
Intangibles, net				17,217			—
Goodwill				7,664			—
Other assets				10,178			7,209

		Total assets	$	353,773		$	154,615

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	1,848		$	3,141
	Accounts payable			22,727			5,647
	Accrued compensation and related expenses			11,748			2,279
	Other accrued expenses			22,843			5,816
	Warranty			8,270			2,707
	Current portion of long-term obligations			5,737			4,190
	Current portion of restructuring costs			61,866			6,400

		Total current liabilities		135,039			30,180
Restructuring costs				24,528			26,055
Other obligations				13,404			2,118

		Total liabilities		172,971			58,353

Commitments and contingencies
Stockholders’ equity:
	Common stock			128			69
	Additional paid-in capital			592,998			484,028
	Deferred compensation			(1,128	)		(828	)
	Cumulative translation adjustment			3,723			—
	Accumulated deficit			(414,919	)		(387,007	)

		Total stockholders’ equity		180,802			96,262

		Total liabilities and stockholders’ equity	$	353,773		$	154,615

See accompanying notes.

AVANEX CORPORATION

Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)


			Three Months Ended
			September 30,

			2003			2002

Net revenue			$	18,112		$	5,215
Cost of revenue				27,195			10,602
Stock compensation expense				16			17

Gross profit (loss)				(9,099	)		(5,404	)
Operating expenses:
	Research and development			8,520			5,820
	Sales and marketing			5,033			1,314
	General and administrative			5,297			1,716
	Stock compensation expense (1)			327			1,908
	Amortization of intangibles			726			120
	Restructuring charges (recovery)			(155	)		12,745
	Merger costs			—			4,126

		Total operating expenses		19,748			27,749

Loss from operations				(28,847	)		(33,153	)
Interest and other income				1,245			1,138
Interest and other expense				(310	)		(504	)

Loss before cumulative effect of an accounting change				(27,912	)		(32,519	)
Cumulative effect of an accounting change to adopt SFAS 142				—			(37,500	)

Net loss			$	(27,912	)	$	(70,019	)

Loss per share before cumulative effect of an accounting change			$	(0.26	)	$	(0.48	)
Cumulative per share effect of an accounting change to adopt SFAS 142				—			(0.56	)

Basic and diluted net loss per common share			$	(0.26	)	$	(1.04	)

Weighted-average number of shares used in computing basic and diluted net loss per common share				107,716			67,629

(1) Below is the allocation of stock compensation expense:
		Research and development	$	119		$	1,035
		Sales and marketing		134			(99	)
		General and administrative		74			972

			$	327		$	1,908

See accompanying notes.

AVANEX CORPORATION

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


				Three Months Ended
				September 30,

				2003			2002

OPERATING ACTIVITIES:
Net Loss				$	(27,912	)	$	(70,019	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				3,420			2,733
	Amortization of intangibles				726			120
	Stock compensation expense				343			1,925
	Provision for excess inventory				—			3,672
	Provision for doubtful accounts				393			—
	Non-cash portion of restructuring charges				—			3,103
	Charge for merger costs				—			4,126
	Cumulative effect of an accounting change				—			37,500
	Changes in operating assets and liabilities:
		Accounts receivable			(5,717	)		1,869
		Inventories			80			86
		Other current assets			3,121			186
		Other assets			(1,214	)		30
		Accounts payable			1,801			2,163
		Accrued compensation and related expenses			2,994			(498	)
		Accrued restructuring			(16,607	)		8,151
		Warranty			(376	)		(476	)
		Other accrued expenses and deferred revenue			4,334			(1,400	)

			Net cash used in operating activities		(34,614	)		(6,729	)

INVESTING ACTIVITIES
Purchases of held-to maturity securities					(85,145	)		(27,993	)
Maturities of held-to maturity securities					24,500			34,144
Acquisitions, net of cash assumed					128,636			—
Purchases of property and equipment					(546	)		(131	)
Other assets					(7,034	)		(1,073	)

			Net cash provided by investing activities		60,411			4,947

FINANCING ACTIVITIES
Payments on long-term debt and capital lease obligations					(1,176	)		(1,191	)
Payments on short-term borrowings					(1,293	)		(6,035	)
Proceeds from issuance of common stock, net of repurchases					524			273

			Net cash used in financing activities		(1,945	)		(6,953	)

Effect of exchange rate changes on cash					3,723			—
Net increase (decrease) in cash and cash equivalents					27,575			(8,735	)
Cash and cash equivalents at beginning of period					10,639			29,739

Cash and cash equivalents at end of period				$	38,214		$	21,004

Supplemental disclosure of cash flow transactions
Issuance of common stock for acquisitions				$	107,862		$	—
Interest paid					253			365

See accompanying notes.

AVANEX CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2003, and for the three months ended September 30, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission, and include the accounts of Avanex Corporation and its wholly-owned subsidiaries (collectively “Avanex” or the “Company”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position at September 30, 2003, the consolidated operating results for the three months ended September 30, 2003 and 2002, and the consolidated cash flows for the three months ended September 30, 2003 and 2002. The consolidated results of operations for the three months ended September 30, 2003 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 30, 2004.

The condensed consolidated balance sheet at June 30, 2003 has been derived from the audited consolidated financial statements at that date, but does not include the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes for the year ended June 30, 2003.

An additional accounting policy has been adopted as a result of the acquisitions of the optical components business of Alcatel, Corning and Vitesse:

Foreign Currency Translation

Functional currency of our foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet dates. Revenues and expenses are translated using average exchange rates prevailing during the year. Any translation adjustments resulting from this process are included as a component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in the determination of net loss.

2. Acquisitions

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

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

The purchase price is as follows (in thousands):


	Alcatel		Corning Asset		Vitesse Asset
	Optronics		Purchase		Purchase

Value of securities issued	$	63,064	$	38,289	$	6,509
Transaction costs and expenses		6,533		3,967		225

Total purchase price	$	69,597	$	42,256	$	6,734

Under the purchase method of accounting, the total purchase price as shown in the table above is allocated to the net tangible and intangible assets based on their estimated fair values as of the date of the completion of the transaction. The preliminary purchase price allocation, which may change upon receipt of final valuations and completion of assessment and formulation of additional restructuring plans (see note 8) is as follows (in thousands):


		Alcatel			Corning Asset			Vitesse Asset
		Optronics			Purchase			Purchase

Cash, cash equivalents and short-term investments		$	108,613		$	20,023		$	—
Long-term investments			2,085			—			—
Accounts receivable			8,050			—			—
Inventories			14,169			11,646			1,731
Other current assets			10,320			500			—
Due from related party			12,578			3,533			—
Property and equipment			13,044			11,196			1,612
Accounts payable			(15,564	)		—			—
Accrued expenses			(21,520	)		(2,252	)		—
Restructuring			(67,220	)		(4,983	)		—
Warranty			(1,406	)		(4,533	)		—
Supply agreement			—			(5,457	)		—
Other long-term obligations			(3,185	)		—			—

	Net tangible assets		59,964			29,673			3,343
Intangible assets acquired — Core and developed technology			9,633			5,990			2,320
Goodwill			—			6,593			1,071

	Total purchase price	$	69,597		$	42,256		$	6,734

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

The Company acquired developed technology from Corning, which is comprised of products that are technologically feasible, primarily including amplifiers, dispersion compensation modules and modulators. Core technology and patents represent a combination of the optical components business of Corning processes, patents and trade secrets. The Company amortizes the developed technology on a straight-line basis over an estimated life of 3-4 years.

The Company acquired developed technology from Vitesse, which is comprised of products that are technologically feasible, primarily including transponders. Core technology and patents represent a combination of the optical components business of Corning processes, patents and trade secrets. The Company amortizes the developed technology on a straight-line basis over an estimated life of 3-4 years.

The Company allocated the purchase price of acquired companies and assets to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The Company engaged an independent third-party appraisal firm to assist it in determining the fair values of the assets acquired and the liabilities assumed. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, supply agreements, and acquired developed technologies and patents. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

The following table reflects intangible assets subject to amortization as of September 30, 2003 (in thousands):


	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount

Purchased technology	$	15,349	$	609	$	14,740
Supply agreement		1,624		90		1,534
Other		970		27		943

Totals	$	17,943	$	726	$	17,217

The estimated future amortization expense of purchased intangible assets from the Alcatel, Corning and Vitesse acquisitions as of September 30, 2003 is as follows (in thousands):


	Amount
Fiscal Year
2004 (remaining nine months)	$	3,529
2005		4,702
2006		4,702
2007		3,936
2008		348

Totals	$	17,217

Pro Forma Results of Operations

The following unaudited pro forma information presents a summary of our consolidated results of operations as if the Alcatel, Corning and Vitesse acquisitions had taken place at the beginning of each period presented (in thousands, except per share amounts):


	Three Months Ended
	September 30,

	2003			2002

Revenue	$	28,028		$	28,440
Net loss before cumulative effect of an accounting change	$	(38,432	)	$	(131,805	)
Net loss	$	(38,432	)	$	(169,305	)
Weighted average shares outstanding—basic and diluted		127,749		$	125,844
Loss per share before cumulative effect of an accounting change	$	(0.30	)	$	(1.05	)
Basic and diluted loss per share	$	(0.30	)	$	(1.35	)

The pro forma consolidated results of operations include adjustments to give effect to record the difference between the depreciation on the preliminary estimate of fair value of property and equipment and the historical amounts; to eliminate pre-acquisition amortization of intangibles and/or impairment charge and to reflect amortization of the preliminary estimate of fair value of inventory and the core development technology assets.

3. Pro Forma Disclosure of the Effect of Stock-Based Compensation

The Company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation.


	Three Months Ended
	September 30,

	2003			2002

Net loss, as reported	$	(27,912	)	$	(70,019	)
Stock-based employee compensation expense included in reported net loss		343			1,897
Total stock-based employee compensation expense determined under fair value based methods for all awards		(3,929	)		(5,660	)

	$	(31,498	)	$	(73,782	)

Pro forma net loss
Basic and diluted net loss per common share
As reported	$	(0.26	)	$	(1.04	)

Pro forma	$	(0.29	)	$	(1.09	)

4. Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Inventories consisted of the following (in thousands):


	September 30,		June 30,
	2003		2003

Raw materials	$	22,417	$	2,228
Work-in-process		2,958		845
Finished goods		5,704		540

	$	31,079	$	3,613

In the first quarter of fiscal 2004, the Company recorded no charge to cost of revenue for excess and obsolete inventory. In the first quarter of fiscal 2003, the Company recorded a charge to cost of revenue for excess and obsolete inventory of $3.7 million, which was due to $2.6 million of inventory that became obsolete due to a change in a customer’s product specification and $1.1 million due to excess inventory as a result of decreased demand for our products. Management did not believe it could sell or use this inventory in the future based on the then current forecasts of demand. Actual results may differ from such forecasts, which has been the experience in the past several quarters.

The Company sold inventory previously written-off with original cost totaling $0.6 million and $0.9 million in the first quarter of fiscal 2004 and first quarter of fiscal 2003, respectively, due to unforeseen demand for such inventory. As a result, cost of revenue associated with the sale of this inventory was zero. The selling price of the finished goods that included these components was similar to the selling price of products that did not include components that were written-off. These items were subsequently used and sold because customers ordered products (that included these components) in excess of the Company’s estimates.

The total cost of inventory written-off since inception is approximately $47.1 million, including receipts under previously accrued non-cancelable purchase obligations. Of this amount, items representing $10.2 million have been sold, items representing $1.6 million have been consumed in research and development activities, items representing $16.6 million have been discarded, and items representing $18.7 million are on hand. The ultimate disposition of the inventory items on hand will occur as the Company integrates its new acquisitions and transitions its manufacturing to third-party manufacturers in Asia.

5. Goodwill

In accordance with the adoption of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (SFAS 142), the Company performed the required two-step impairment tests of goodwill and indefinite-lived intangible assets as of July 1, 2002. In the first step of the analysis, the Company’s assets and liabilities, including existing goodwill and other intangible assets, were assigned to its identified reporting units to determine their carrying value. The Company believes it operates as one reporting unit. After comparing the carrying value of the reporting unit to its fair value, it was determined that the goodwill recorded was impaired. After the second step of comparing the implied fair value of the goodwill to its carrying value, the Company recognized a transitional impairment loss of $37.5 million in the first quarter of fiscal 2003. This loss was recognized as the cumulative effect of an accounting change.

The fair value of the reporting unit was determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment.

As required by SFAS 142, intangible assets that did not meet the criteria for recognition apart from goodwill were reclassified to goodwill. The Company reclassified $0.3 million of net assembled workforce to goodwill as of July 1, 2002.

The following table reflects the changes in the carrying amount of goodwill (including assembled workforce) (in thousands):


Balance at July 1, 2002	$	37,186
Workforce transferred to goodwill		314

Adjusted balance as July 1, 2002		37,500
Transitional impairment loss		(37,500	)

Balance at June 30, 2003		—
Goodwill arising in acquistions		7,664

Balance at September 30, 2003	$	7,664

6. Warranties

The Company accrues for the estimated cost to provide warranty services at the time revenue is recognized. The Company’s estimate of costs to service its warranty obligations is based on historical experience and expectation of future conditions. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, the Company’s warranty costs will increase resulting in decreases to gross profit.

Changes in the Company’s product warranty accrual for the quarter ended September 30, 2003 and the year ended June 30, 2003 are as follows (in thousands):


Balance at June 30, 2003	$	2,707
Acquired warranty obligations		5,939
Accrual for warranties issued during the period		968
Cost of warranty repair		(362	)
Accrual related to pre-existing warranties (including changes in estimates)		(982	)

Balance at September 30, 2003	$	8,270

Balance at June 30, 2002	$	3,842
Accrual for warranties issued during the period		733
Cost of warranty repair		(148	)
Accrual related to pre-existing warranties (including changes in estimates)		(1,720	)

Balance at June 30, 2003	$	2,707

7. Financing Arrangements

Short-Term Borrowing

In June 2003, the Company renewed a revolving line of credit from a financial institution, which allows maximum borrowings up to $15.0 million. This line of credit requires the Company to comply with specified covenants. At September 30, 2003 and June 30, 2003 the Company had borrowings of $1.8 million and $3.1 million, respectively, against this line. The agreement terminates on December 31, 2003, at which time all outstanding principal and interest are due. The line bears interest at prime plus 1.50% and, at September 30, 2003 the effective interest rate was 5.50%. The Company has pledged all of its assets as collateral for this line.

Long-term Obligations

In connection with the acquisition of the optical components business of Alcatel, the Company assumed additional long-term obligations, which were comprised of accrued pensions and retirement obligations totaling $4.2 million and capital lease obligations totaling $6.7 million as of September 30, 2003. In connection with the acquisition of the optical components business of Corning, the Company assumed $1.4 million of accrued pensions and retirement obligations.

8. Restructuring Charge

Fiscal 2004 Restructuring

In the first quarter of fiscal 2004, the Company acquired the optical components businesses of Alcatel and Corning. As part of the acquisitions, the Company assumed restructuring liabilities totaling $72.2 million relating to future workforce reductions and the costs of exiting duplicate facilities, which was included in the purchase price of the optical components businesses of Alcatel and Corning.

A summary of the accrued restructuring charges is as follows (in thousands):


		Restructuring					Restructuring
		Accrual on					Accrual at
		Acquisition		Cash			September 30,
		July 31, 2003		Payments			2003

Workforce Reduction		$	64,686	$	(17,045	)	$	47,641
Exit Costs			7,517		—			7,517

	Total	$	72,203	$	(17,045	)	$	55,158

Management continues to assess and formulate restructuring plans to exit certain additional activities and to terminate or relocate certain employees. These assessments are still in process and management expects to adopt further formal restructuring plans in fiscal 2004. Restructuring costs related to former Alcatel and Corning activities will be accrued by the Company as a liability in conjunction with recording the initial purchase of Alcatel and Corning in the first quarter of fiscal 2004, with no impact on results of operations. Restructuring costs related to former Avanex activities will be charged to operations.

Prior Years’ Restructuring

In the first quarter of fiscal 2003, the Company announced a restructuring program to downsize its workforce, primarily in its manufacturing operations. In addition, the Company announced the closing of its facility in Richardson, Texas and the integration of the functions in Richardson into its facility in Fremont, California. The Company also consolidated its facilities in Fremont. During the second quarter of fiscal 2003, the Company reassessed its initial estimate of probable costs and the sublease timeline associated with abandoning each of its excess leased facilities. The reassessment was prompted by a further decline in the real estate market in the cities where those facilities are located. After considering information provided to the Company by its real estate advisors, the Company concluded it was probable these facilities could not be subleased at rates originally contemplated nor could they be subleased in the timeframe originally planned. During the third quarter of fiscal 2003, the Company continued to restructure and downsize its workforce, primarily in its manufacturing operations. Additionally, the Company further consolidated its facilities in Fremont. In the fourth quarter of fiscal 2003, the Company continued to downsize its workforce, primarily in its manufacturing operations.

Workforce Reduction

The Company reduced its workforce by a total of 202 employees during fiscal 2003, primarily in its manufacturing operations. The Company recorded charges of $3.0 million for employee separations, which included termination benefits and related expenses.

Abandonment of Excess Equipment

The Company abandoned excess equipment and leasehold improvements and recorded charges of $3.5 million during fiscal 2003. The equipment was abandoned because it was no longer required to support expected operating levels and, given the downturn in its industry, the Company concluded it could not be sold.


										Restructuring
		Restructuring		Adjustment						Accrual at
		Accrual at		September 30,			Cash			September 30,
		June 30, 2003		2003			Payments			2003

Workforce Reduction		$	117		—		$	(63	)	$	54
Capital leases			1,530		—			(256	)		1,274
Abandonment of excess equipment			—		(133	)		133			—
Abandonment of excess leased facilities			30,808		—			(900	)		29,908

	Total	$	32,455	$	(133	)	$	(1,086	)	$	31,236

Amounts related to the abandonment of excess leased facilities will be paid as the payments are due through the remainder of the lease term through 2010. Capital lease payments are due over the term of the leases through the third quarter of fiscal 2005.

During the fourth quarter of fiscal 2001, the Company announced a restructuring program to realign resources in response to the changes in its industry and customer demand. As a result of the restructuring program, the Company recorded a restructuring charge of $22.6 million in the fourth quarter of fiscal 2001. During the third quarter of fiscal 2002, the Company reassessed its initial estimate of probable costs and the sublease timeline associated with abandoning excess leased facilities in Newark, California and Richardson, Texas. As a result, the Company recorded an additional charge of $17.2 million relating to these facilities in the third quarter of fiscal 2002.

A summary of the Company’s restructuring accruals is as follows (in thousands):


	September 30,		June 30,
	2003		2003

Total restructuring accruals	$	86,394	$	32,455
Less current portion		61,866		6,400

Long-term portion	$	24,528	$	26,055

9. Net Loss per Common Share

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


	Three Months Ended
	September 30,

	2003			2002

Loss before cumulative effect of an accounting change	$	(27,912	)	$	(32,519	)
Cumulative effect of an accounting change to adopt SFAS 142		—			(37,500	)

Net loss	$	(27,912	)	$	(70,019	)

Basic and diluted:
Weighted-average number of shares of common stock outstanding		107,835			69,509
Less: weighted-average number of shares subject to repurchase		(119	)		(1,880	)

Weighted-average number of shares used in computing basic and diluted net loss per common share		107,716			67,629

Loss per share before cumulative effect of an accounting change	$	(0.26	)	$	(0.48	)
Cumulative per share effect of an accounting change to adopt SFAS 142		—			(0.56	)

Basic and diluted net loss per common share	$	(0.26	)	$	(1.04	)

10. Related Party Transactions

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, the Company has accounts receivable from Alcatel of $11.5 million and from Corning of $3.0 million as of September 30, 2003.

The Company sells products and purchases raw materials and components from Alcatel and Corning in the regular course of business. Additionally, Alcatel and Corning provide administrative and other transitional services to the Company. Sales of products to Alcatel and Corning were $4.7 million and $0.3 million, respectively, during the period August 1, 2003 through September 30, 2003. Purchases of raw materials and components from Alcatel and Corning were $0.3 million and $5.6 million, respectively, during the period August 2, 2003 through September 30, 2003. As of September 30, 2003, the Company had paid $0.8 million to Alcatel for administrative and other transitional services. Accounts receivable due from Alcatel were $13.8 million and from Corning were $5.7 million at September 30, 2003. Accounts payable to Alcatel were $0.7 million and to Corning were $1.2 million at September 30, 2003.

11. Disclosures about Segments of an Enterprise

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131), 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 operates in one business segment which focuses on the development and commercialization of fiber optic based products. We have adopted a matrix management organizational structure whereby we manage our worldwide activities on a functional basis. The Company has provided enterprise wide disclosures.

Revenue by Geographical Area:


	Three Months Ended
	September 30,

	2003		2002

United States	$	8,396	$	4,652
Japan		1,038		—
Italy		4,528		369
Rest of the World		4,150		194

	$	18,112	$	5,215

Long-lived assets by country:


	Three Months Ended

	September 30,		June 30,

	2003		2003

United States	$	27,115	$	12,664
Europe		38,303		—

	$	65,418	$	12,664

Revenue by Component:


	Three Months Ended
	September 30,

	2003		2002

Actives	$	10,769	$	1,482
Passives		7,343		3,733

	$	18,112	$	5,215

Revenue and Percent of Accounts Receivable from Customers over 10% of Total Revenue:


	% Net Revenue						% Accounts Receivable
	For Three Months Ended
	September 30,						September 30,			June 30,

	2003			2002			2003			2003

Customer A		26	%		*			25	%		*
Customer B		20	%		19	%		*			*
Customer C		11	%		*			*			*
Customer D		*			17	%		*			21	%
Customer E		*			14	%		*			18	%
Customer F		*			*			*			17	%

TOTAL		57	%		50	%		25	%		56	%

* less than 10%

12. Comprehensive Income and (Loss)

Foreign currency translation adjustments for the quarter ended September 30, 2003 were gains of approximately $3.7 million resulting in a comprehensive net loss of $24.2 million. Prior to the quarter ended September 30, 2003, the Company did not have other comprehensive income and loss.

13. Litigation

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. A proposal has been made for the settlement and release of claims against the issuer defendants, including Avanex, which has been approved (subject to the conditions noted below) by a special committee of our Board of Directors. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. If the settlement does not occur, and litigation against Avanex continues, Avanex believes it has meritorious defenses and intends to defend the action vigorously. Nevertheless, an unfavorable result in litigation may result in substantial costs and may divert management’s attention and resources, which could seriously harm our business, financial condition, results of operations or cash flows.

High Hopes Enterprises and Hon Hai Precision Industry Co. Litigation

On May 31, 2002, High Hopes Enterprises Ltd. and Hon Hai Precision Industry Co., Ltd., filed an action in the Superior Court of California, County of Alameda, against the Company alleging breach of an oral contract, breach of the covenant of good faith and fair dealing, breach of implied contract, promissory estoppel, deceit by fraud and deceit by negligent misrepresentation. This action was settled in October 2003 with the mutual consent of both parties under terms of a confidentiality agreement.

14. Subsequent Event

On November 10, 2003, the Company entered into a securities purchase agreement pursuant to which the purchasers named therein purchased, in the aggregate, 6,815,555 shares of the Company’s common stock at a price of $4.63 per share for aggregate gross proceeds of approximately $31.5 million. Net proceeds from this transaction will amount to approximately $29.5 million after payment of fees to financial and legal advisors and other costs. In addition, the purchasers were issued rights which are exercisable for up to an additional 1,363,116 shares of the Company’s common stock at a price of $4.63 per share.

15. Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company adopted the provisions of FIN 46 effective July 1, 2003 and such adoption did not have a material impact on its consolidated financial statements.

In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. The Company adopted the provisions of SFAS 149 effective July 1, 2003 and such adoption did not have a material impact on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. The Company adopted the provisions of SFAS 150 effective July 1, 2003 and such adoption did not have a material impact on its consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding our 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 “Factors That May Affect Future Results”. The forward-looking statements are made as of the date of this Form 10-Q 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.

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this quarterly report and our audited consolidated financial statements and notes for the year ended June 30, 2003, included in our Form 10-K

filed with the SEC.

Acquisitions

In May 2003, we entered into a Share Acquisition and Asset Purchase Agreement with Alcatel and Corning Incorporated. Pursuant to the purchase agreement, in July 2003, we acquired all of the outstanding equity of Alcatel Optronics France SA, a subsidiary of Alcatel that operated the optical components business of Alcatel, and Alcatel assigned and licensed certain intellectual property rights to us. We also entered into a supply agreement with Alcatel whereby Alcatel agreed to purchase seventy percent (70%) of its requirements for certain qualified products from us for a period of three years, subject to certain requirements. In addition, we acquired certain assets of the optical components business of Corning, and Corning assigned and licensed certain intellectual property rights to us. As a result of these acquisitions we acquired approximately 1,117 employees and manufacturing operations located in Nozay, France; San Donato, Italy; Livingston, UK; and Erwin Park, New York. Pursuant to the purchase agreement, 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. The transactions were accounted for under the purchase method of accounting.

As a result of these acquisitions, we offer a substantially broader range of photonic processing solutions and technologies, including passive and active optics, optoelectronics integration and software and interface controls, demonstrating our continuing commitment to become the leading supplier of intelligent photonic solutions to telecommunications system integrators and carriers worldwide.

On August 28, 2003, we acquired certain assets of Vitesse Semiconductor Corporation’s Optical Systems Division located in San Jose, California. Pursuant to the agreement, we acquired substantially all of the assets of Vitesse’s Optical Systems Division in exchange for 1.4 million shares of our common stock with a value of $6.7 million. The transaction was accounted for under the purchase method of accounting. This acquisition will enhance our presence in transponders and expand our product offerings in subsystem products.

Subsequent Event

On November 10, 2003, we entered into a securities purchase agreement pursuant to which the purchasers named therein purchased, in the aggregate, 6,815,555 shares of the our common stock at a price of $4.63 per share for aggregate gross proceeds of approximately $31.5 million. Net proceeds from this transaction will amount to approximately $29.5 million after payment of fees to financial and legal advisors and other costs. In addition, the purchasers were issued rights which are exercisable for up to an additional 1,363,116 shares our common stock at a price of $4.63 per share.

Overview

We design, manufacture and market fiber optic-based products, which include a full range of solutions and technologies, including passive and active optics, optoelectronics integration and software and interface controls. We sell our products to communication service providers and optical system manufacturers. We were founded in October 1997, and began making volume shipments of our products during the quarter ended September 30, 1999.

We, like many of our peers in the communications equipment industry, have been adversely affected by the general economic downturn, and particularly by the significant reduction in telecommunications equipment spending. Our operating results may fluctuate significantly from quarter to quarter due to several factors. Our expense levels are based in part on our management’s expectations of future revenues. Although management has taken and will continue to take measures to reduce expense levels, if revenue in a particular period is less than anticipated, operating results will be affected adversely.

As a result of our acquisitions of the optical components businesses of Alcatel and Corning, we expect that our costs and operating expenses will significantly increase in fiscal 2004 as compared to the prior fiscal year. As a result, the combined operations of Avanex and the optical components businesses of Alcatel and Corning have substantially increased the rate at which Avanex will utilize its cash resources. We also anticipate that our revenue in fiscal 2004 will be significantly greater than our revenue in previous fiscal years due to these acquisitions.

As a part of the acquisitions we assumed restructuring liabilities totaling $72.2 million relating to

workforce reductions and the costs of exiting duplicate facilities. We continue to assess and formulate our restructuring plans to exit certain additional activities and to terminate or relocate certain employees. These assessments are still in process and we expect to adopt further formal restructuring plans in fiscal 2004. Restructuring costs related to former Alcatel and Corning activities will be accrued by us as a liability in conjunction with recording the initial purchase of Alcatel and Corning in the first quarter of fiscal 2004, with no impact on results of operations. Restructuring costs related to former Avanex activities will be charged to operations.

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

Our revenues in the first quarter of fiscal 2004 were principally derived from the sales of our product portfolio, which was significantly enhanced by the acquisitions of the optical component businesses of Alcatel and Corning, including our multiplexing, transmission and amplification products, which together accounted for 86% of net revenue for the quarter. Our revenues for the first quarter of fiscal 2003 were principally derived from sales of PowerFilter, PowerMux and PowerExchanger, which together accounted for 71% of net revenue.

We have substantially diversified our customer base, although a significant proportion of our sales are concentrated with a limited number of customers. We anticipate that our operating results for any given period will continue to depend on a small number of customers.

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

Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, 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 marketing, sales, customer service and application engineering support, allocated facilities, as well as costs associated with promotional and other marketing expenses.

General and Administrative Expenses. General and administrative expenses consist primarily of

salaries and related expenses for executive, finance, accounting, legal and human resources personnel, allocated facilities, recruiting expenses, professional fees and other corporate expenses.

Stock Compensation. In connection with the grant of stock options to employees prior to our initial public offering and certain grants subsequent to our initial public offering, we recorded deferred stock compensation representing the difference between the deemed value of our common stock for accounting purposes and the exercise price of these options at the date of grant. Moreover, in connection with the assumption of stock options previously granted to employees of companies we acquired, we recorded deferred compensation representing the difference between the fair market value of our common stock on the date of closing of each acquisition and the exercise price of options granted by those companies which we assumed. Deferred stock compensation is presented as a reduction of stockholders’ equity, with accelerated amortization recorded over the vesting period, which is typically three to five years. The amount of deferred stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited prior to vesting.

Amortization of Intangibles. A portion of the purchase price in a business combination is allocated to goodwill and intangibles. Goodwill and intangible assets with indefinite lives are not amortized but rather are subject to an annual impairment test. Intangible assets with definite lives are amortized over their estimated useful lives.

Reduction in Long-Lived Assets. Reduction of long-lived assets generally includes charges related to long-lived assets such as fixed assets and intangibles when the carrying value of those assets is not recoverable from estimated future cash flows.

Restructuring Charges. Restructuring charges generally include termination costs for employees and excess manufacturing equipment and facilities associated with formal restructuring plans.

Merger Costs. Merger costs generally includes costs incurred in connection with transactions that were not completed.

Interest and Other Income (Expense), Net. Interest and other income, net consists primarily of interest on our cash investments offset by interest expense associated with borrowings under our line of credit, capital lease obligations and equipment loans.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, 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 follows SEC Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements and Emerging Issues Task Force Abstract 00-21, Revenue Arrangements with Multiple Deliverables”. Specifically, we recognize product revenue when persuasive evidence of an arrangement exists, the product has been shipped, title has transferred, collectibility is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. We record a provision for estimated sales returns in the same period as the related revenues are recorded which is netted against revenue. These estimates are based on historical sales returns, other known factors and our return policy. If future sales returns differ from the historical data we use to calculate these estimates, changes to the provision may be required.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. 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. For all other customers, we record an allowance for doubtful accounts based on the length of time the receivables are past due. 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. This may be magnified due to the concentration of our sales to a limited number of customers.

Excess and Obsolete Inventory. We make inventory commitment and purchase decisions based upon sales forecasts. To mitigate component supply constraints that have existed in the past and to fill orders with non-standard configurations, we build inventory levels for certain items with long lead times and enter into short-term commitments for certain items. We write off 100% of the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. If we subsequently sell previously written-off inventory, we will recognize revenue with no related cost of sales. We define obsolete inventory as 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 our best estimate of future demand at the time, based upon information then available to us.

In estimating obsolete and excess inventory, we currently use a six-month to twelve-month demand forecast depending upon visibility of demand from our customers. Prior to this quarter, we used a three-month demand, as visibility to our customer’s demand was limited. We also consider: 1) parts and subassemblies that can be used in alternative finished products, 2) parts and subassemblies that are unlikely to be engineered out of our products, and 3) known design changes which would reduce our ability to use the inventory as planned. If either our demand forecast or estimate of future uses of inventory is inaccurate, we may need to make additional write-offs of inventory in future periods.

Impairment of Long-Lived Assets including Goodwill and Other Intangible Assets. We review long-lived assets other than goodwill and indefinite lived intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable, such as a significant industry downturn, significant decline in our market value or significant reductions in projected future cash flows. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. In assessing the recoverability of long-lived assets other than goodwill and indefinite lived intangible assets we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If circumstances arise that cause these estimates or their related assumptions to change in the future we may be required to record additional impairment charges for these assets.

We follow Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards (SFAS) 142 “Goodwill and Other Intangible Assets”. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment annually and between annual tests in certain circumstances

SFAS 142 requires that goodwill be tested for impairment at the reporting unit level utilizing a two-step methodology. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. We believe we operate as one reporting unit. If the fair value of the reporting unit exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment would then be measured in the second step.

The fair value of the reporting unit is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing, or otherwise exiting businesses, which could result in an impairment of goodwill.

Warranties. We accrue for the estimated cost to provide warranty services at the time revenue is recognized. 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.

Restructuring. We have recorded significant accruals in connection with our restructuring programs.

These accruals include estimates pertaining to employee separation costs and related abandonment of excess equipment and facilities. Actual costs may differ from these estimates or our estimates may change.

Purchase Accounting. We account for business combinations under the purchase method of accounting and accordingly, the acquired assets and liabilities assumed are recorded at their respective fair values. The recorded values of assets and liabilities are based on third-party and internal estimates and valuations. 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.

Contingencies. We are subject to proceedings, lawsuits and other claims related to our initial public offering and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each individual issue and consultation with legal counsel. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters, resulting in higher net loss.

Results of Operations

The results for the most recent quarter include two months of operating results from the business activities and assets acquired from Alcatel and Corning on July 31, 2003 and one month of operating results from the business activities and assets acquired from Vitesse on August 28, 2003.

Net Revenue

Net revenue for the quarter ended September 30, 2003 was $18.1 million, compared to $5.2 million for the quarter ended September 30, 2002. In the quarter ended September 30, 2003, three customers each accounted for greater than 10% of net revenue and combined accounted for 57% of net revenue. This compares to three customers that each accounted for greater than 10% of net revenue in the quarter ended September 30, 2002 and combined accounted for 61% of net revenue. The increase in net revenue resulting from our acquisitions of the optical components businesses of Alcatel, Corning and Vitesse was $12.0 million.

Cost of Revenue

Cost of revenue for the quarter ended September 30, 2003 was $27.2 million, compared to $10.6 million for the quarter ended September 30, 2002, an increase of $16.6 million. No provision for excess and obsolete inventory was recorded in the quarter ended September 30, 2003, as compared to a provision of $3.7 million for the same quarter in the prior fiscal year. In the quarter ended September 30, 2003, we sold inventory previously written-off with an original cost totaling $0.6 million due to unforeseen demand for such inventory, compared to $0.9 million in the quarter ended September 30, 2002. Cost of revenue associated with the sale of this inventory was zero. The selling price of the finished goods that include these components was similar to the selling price of products that did not include components that were written-off. The increase in cost of revenue resulting from our acquisitions of the optical components businesses of Alcatel, Corning and Vitesse was $19.4 million.

Our gross margin percentage improved to negative 50% for the quarter ended September 30, 2003 from a negative 104% for the quarter ended September 30, 2002. The improvement in gross margin percentage was primarily due to no increase in the provision required for excess and obsolete inventory partially offset by underutilized manufacturing capacity at all locations. Our gross margin percentage on net revenue resulting from our acquisitions of the optical components businesses of Alcatel, Corning and Vitesse was negative 62%. Our gross margins are and will be primarily affected by changes in manufacturing volume, mix of products sold, and changes in market prices. We expect cost of revenue, as a percentage of net revenue, to fluctuate from period to period. In addition, we expect continued pressure on our gross margin percentage as a result of underutilized manufacturing capacity and price competition.

Research and Development

Research and development expenses increased to $8.5 million for the quarter ended September 30, 2003 from $5.8 million for the quarter ended September 30, 2002. The increase was primarily attributable to $5.5 million of costs associated with increased headcount and facilities related expenses due to the acquisitions of the optical components business of Alcatel, Corning and Vitesse. As a percentage of

revenue, research and development expenses decreased to 47% in the quarter ended September 30, 2003 from 112% for the quarter ended September 30, 2002.

Sales and Marketing

Sales and marketing expenses increased to $5.0 million for the quarter ended September 30, 2003 from $1.3 million for the quarter ended September 30, 2002. The increase in sales and marketing expenses resulting from our acquisitions of the optical components businesses of Alcatel, Corning and Vitesse was $1.8 million. Tradeshow, marketing, headcount and facilities related expenses due to the acquisitions and a settlement with a distributor also contributed to the increase in sales and marketing expenses. As a percentage of revenue, sales and marketing expenses increased to 28% in the quarter ended September 30, 2003 from 25% for the quarter ended September 30, 2002.

General and Administrative

General and administrative expenses increased to $5.3 million for the quarter ended September 30, 2003 from $1.7 million for the quarter ended September 30, 2002. The increase in general and administrative expenses resulting from our acquisitions of the optical components businesses of Alcatel, Corning and Vitesse was $1.9 million. Costs associated with increased headcount and facilities related costs due to the acquisitions and payments related to settlement of claims, partially offset by government grants at some of our foreign locations also contributed to the increase in general and administrative expenses. As a percentage of revenue, general and administrative expenses decreased to 29% in the quarter ended September 30, 2003 from 33% for the quarter ended September 30, 2002.

Stock Compensation

Stock compensation expense decreased to $0.3 million for the quarter ended September 30, 2003 from $1.9 million for the quarter ended September 30, 2002. From inception through September 30, 2003, we have expensed a total of $102.2 million of stock compensation, leaving an unamortized balance of $1.1 million on our September 30, 2003 unaudited condensed consolidated balance sheet. The decrease in stock compensation expense was primarily attributable to the decreased amortization of deferred stock compensation recognized for the intrinsic value of the unvested options assumed in acquisitions. Additionally, the decrease was due to the absence of amortized stock compensation relating to former executive officers that left the Company during the quarter ended December 31, 2002 prior to their options vesting.

Amortization of Intangibles

Amortization of intangibles for the quarter ended September 30, 2003 increased to $0.7 million compared to $0.1 million for the quarter ended September 30, 2002 due to the amortization of the intangibles assumed due to the recent acquisitions. The intangible balance on our condensed consolidated balance sheet as of September 30, 2003 was $17.2 million.

Restructuring Charge

Fiscal 2004 Restructuring

In the first quarter of fiscal 2004, we acquired the optical components businesses of Alcatel and Corning. As part of the acquisitions, we assumed restructuring liabilities totaling $72.2 million relating to future workforce reductions and the costs of exiting duplicate facilities, which was included in the purchase price of the optical components businesses of Alcatel and Corning.

We continue to assess and formulate restructuring plans to exit certain additional activities and to terminate or relocate certain employees. These assessments are still in process and we expect to adopt further formal restructuring plans in fiscal 2004. Restructuring costs related to former Alcatel and Corning activities will be accrued by us as a liability in conjunction with recording the initial purchase of Alcatel and Corning in the first quarter of fiscal 2004, with no impact on results of operations. Restructuring costs related to former Avanex activities will be charged to operations.

Prior Years’ Restructuring

In the first quarter of fiscal 2003, we announced a restructuring program to downsize our workforce, primarily in manufacturing. In addition, we announced the closing of our facility in Richardson, Texas and the integration of the functions in Richardson into our facility in Fremont, California. During the second

quarter of fiscal 2003, we reassessed our initial estimate of probable costs and the sublease timeline associated with abandoning excess leased facilities. The reassessment was prompted by a further decline in the real estate market in the cities where those facilities are located. After considering information provided to us by our real estate advisors, we concluded it was probable these facilities could not be subleased at rates originally contemplated nor could they be subleased in the timeframe originally planned. During the third quarter of fiscal 2003, we continued to restructure and downsize our workforce, primarily in manufacturing. Additionally, we further consolidated our facilities in Fremont. In the fourth quarter of fiscal 2003 we continued to downsize our workforce, primarily in manufacturing.

Workforce Reduction

We reduced our workforce by a total of 202 employees during the fiscal 2003, primarily in its manufacturing operations. We recorded a charge of $3.0 million for employee separations, which included termination benefits and related expenses.

Abandonment of Excess Equipment

We abandoned excess equipment and leasehold improvements and recorded a charge of $3.5 million during fiscal 2003. The equipment was abandoned because it was no longer required to support expected operating levels and, given the downturn in our industry, we concluded it could not be sold.

Abandonment of Excess Leased Facilities

The Company is attempting to sublease approximately 85,600 square feet at our Fremont, California facility, as well as the remaining portion of the facilities leased at our Richardson, Texas facility. In September 2002, we engaged real estate advisors to sublease the vacated space within these two buildings. Given the current real estate market conditions, we do not expect to be able to sublease these buildings before December 2004. We recorded charges of $11.8 million during fiscal 2003 related to these excess facilities.

Remaining cash expenditures relating to workforce reduction will be paid through the second quarter of fiscal 2004. Amounts related to the abandonment of excess leased facilities are expected to be paid as the lease payments are due through the remainder of the lease terms ending in 2010.

During the fourth quarter of fiscal 2001, we announced a restructuring program to realign resources in response to the changes in our industry and customer demand. As a result of the restructuring program, we recorded a restructuring charge of $22.6 million in the fourth quarter of fiscal 2001. During the third quarter of fiscal 2002, we reassessed our initial estimate of probable costs and the sublease timeline associated with abandoning excess leased facilities in Newark, California and Richardson, Texas. As a result, we recorded an additional charge of $17.2 million relating to these facilities in the third quarter of fiscal 2002.

Merger Costs

On March 18, 2002, we entered into an Agreement and Plan of Reorganization with Oplink Communications pursuant to which we intended to acquire all of the outstanding capital stock of Oplink. The merger was subject to the approval of our stockholders and the stockholders of Oplink. While our stockholders approved the issuance of our common stock in connection with the merger, the stockholders of Oplink failed to approve the merger on August 15, 2002. We expensed $4.1 million in related merger costs in the first quarter of fiscal 2003.

Interest and Other Income (Expense), Net

Interest and other income, net was $0.9 million for the quarter ended September 30, 2003 and $0.6 million for the comparable quarter ended September 30, 2002. The increase in interest and other income, net was primarily due to an increase in our cash and cash equivalents and investment balances due to the cash assumed in acquisitions.

Cumulative Effect of an Accounting Change to Adopt SFAS 142

In accordance with the adoption of SFAS 142, “Goodwill and Other Intangible Assets”, we performed the required two-step impairment tests of goodwill and indefinite-lived intangible assets as of July 1, 2002. In the first step of the analysis, our assets and liabilities, including existing goodwill and other intangible assets, were assigned to our identified reporting units to determine their carrying value. We believe we

operate as one reporting unit. After comparing the carrying value of the reporting unit to its fair value, it was determined that the goodwill recorded was impaired. After the second step of comparing the implied fair value of the goodwill to its carrying value, we recognized a transitional impairment loss of $37.5 million in the first quarter of fiscal 2003. This loss was recognized as the cumulative effect of an accounting change. The impairment loss had no income tax effect.

As required by SFAS 142, intangible assets that did not meet the criteria for recognition apart from goodwill were reclassified to goodwill. We reclassified $0.3 million of net assembled workforce to goodwill as of July 1, 2002.

Liquidity and Capital Resources

Prior to our initial public offering, we financed our operations primarily through private sales of approximately $30.4 million of convertible preferred stock. We have also financed our operations through bank borrowings as well as through equipment lease financing. In February 2000, we received net proceeds of approximately $238 million from the initial public offering of our common stock and a concurrent sale of stock to corporate investors.

In connection with the acquisitions of the optical components business of Alcatel and Corning on July 31, 2003, Corning and Alcatel contributed cash, cash equivalents and short-term investments of $128.6 million and we assumed liabilities of $129.7 million.

As of September 30, 2003, we had cash and cash equivalents and short-term investments of $161.3 million and long-term investment holdings of $58.4 million.

Net cash used in operating activities was $34.6 million in the quarter ended September 30, 2003, primarily reflecting a loss from operations, a decrease in accrued restructuring and warranty, an increase in other assets, offset by a decrease in accounts receivable and an increase in other accrued expenses and accounts payable and accrued compensation and related expenses. Our use of cash was offset by non-cash charges related to depreciation and amortization of intangibles. Net cash used in operating activities was $6.7 million for the comparable period of fiscal 2003, primarily reflecting a loss from operations, decrease in other accrued expenses and deferred revenue offset by a decrease in accounts receivable and an increase in accounts payable. Our use of cash was offset by non-cash charges related to the provision for excess inventory, depreciation and amortization, stock compensation expense, restructuring charges, merger expenses and cumulative effect of an accounting change.

Cash provided by investing activities was $60.4 million for the quarter ended September 30, 2003. Cash provided by investing activities was primarily the result of the cash acquired due to the acquisitions of the optical components businesses of Alcatel and Corning and maturities of investment securities offset by purchases of investment securities, other assets and property and equipment. Cash provided by investing activities was $4.9 million for the comparable period of fiscal 2003, principally due to maturities of investment securities, net of purchases of held-to-maturities securities, offset by costs incurred related to the proposed Oplink merger.

Cash used in financing activities was $1.9 million for the quarter ended September 30, 2003, primarily due to payments on long-term debts and capital lease obligations and short-term borrowings partially offset by proceeds from issuance of common stock. Cash used in financing activities was $7.0 million for the comparable period of fiscal 2003, primarily as a result of payments on long-term debt and capital lease obligations and payments on short-term borrowings.

Our principal source of liquidity as of September 30, 2003 consisted of $219.8 million in cash; cash equivalents, short-term and long-term investments. Additionally, we have a revolving line of credit from a financial institution, which allows maximum borrowings up to $15.0 million, of which $1.8 million was drawn down at September 30, 2003. The line of credit requires us to comply with specified covenants. The Company was in compliance with all the covenants at September 30, 2003. The agreement terminates on December 31, 2003, at which time all outstanding principal and interest are due. The credit line bears interest at the prime rate plus 1.50%. At September 30, 2003 the effective interest rate was 5.50%. The Company has pledged all of its assets as collateral for this line. We believe that if we are unable to renew the line of credit, it will not have a significant impact on our liquidity.

As of November 1, 2003 our cash, cash equivalents short-term and long-term investments were approximately $197.7 million. We estimate that our combined operations initially will generate negative

operating cash flow at a rate of at least $25 million per quarter. Additionally, we estimate that we will use in excess of $60 million of our cash resources over the first three quarters of fiscal 2004 to pay costs related to the acquisitions and to complete restructuring actions intended to reduce the cost and improve the efficiency of our post-acquisition business operations. We believe, but can give no assurance, that our negative operating cash flow can be reduced significantly after three quarters of combined operations through a combination of restructuring, other cost reduction measures and moderate revenue growth.

From time to time, we may also consider the acquisition of, or evaluate investments in, products and businesses complementary to our business. Any acquisition or investment may require additional capital. Although we believe that our current cash and cash equivalents, short-term and long-term investment balance will be sufficient to fund our operations for at least 12 months, we cannot assure you that we will not seek additional funds through public or private equity or debt financing or from other sources within this time frame or that additional funding, if needed, will be available on terms acceptable to us, or at all.

Our contractual obligations and commitments have been summarized in the tables below (in thousands):


		Contractual Obligations
		Due by Period

				Less than						After 5
		Total		1 year		1-3 years		4-5 years		years

Long-term debt		$	1,010	$	1,010	$	—	$	—	$	—
Capital lease obligations			14,238		6,511		5,467		2,060		200
Operating leases			55,849		8,312		17,163		15,577		14,797
Unconditional purchase obligations			14,512		14,512		—		—		—

	Total contractual cash obligations	$	85,609	$	30,345	$	22,630	$	17,637	$	14,997


		Other Commercial Commitments
		Commitment Expiration Per Period

		Total
		Amounts		Less than						After 5
		Committed		1 year		1-3 years		4-5 years		years

Line of credit		$	1,848	$	1,848	$	—	$	—	$	—
Standby letters of credit			3,965		3,965		—		—		—

	Total commercial commitments	$	5,813	$	5,813	$	—	$	—	$	—

We have unconditional purchase obligations to certain of our suppliers that support our ability to manufacture our products. As of September 30, 2003, we had approximately $14.5 million of purchase obligations, of which $0.3 million is included on our balance sheet in accounts payable and $2.9 million is included in other accrued expenses.

Under operating leases we have included total future minimum rent expense under non-cancelable leases for both current and abandoned facilities. We have included in the balance sheet $5.5 million and $24.4 million in current and long-term restructuring accruals for the abandoned facilities as of September 30, 2003.

Recently Issued Accounting Pronouncements

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 sets out criteria for when revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. We adopted the provisions of EITF 00-21 effective July 1, 2003 and such adoption did not have a material impact on our consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the

primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We believe that the adoption of this standard will have no material impact on our financial statements.

In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30,2003. We adopted the provisions of SFAS 149 effective July 1, 2003 and such adoption did not have a material impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. We adopted the provisions of SFAS 150 effective July 1, 2003 and such adoption did not have a material impact on our consolidated financial statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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 for use in infrastructure projects. In the past few years, there has been a significant reduction in spending for infrastructure projects in the telecommunications industry. Certain large telecommunications companies who were customers or potential customers of ours have suffered severe business setbacks and face uncertain futures. There is currently a perception that an oversupply of communications bandwidth exists. This perceived oversupply, coupled with the current economic downturn, may lead to continued reductions in telecommunications infrastructure spending, and our customers may continue to cancel, defer or significantly reduce their orders for our products. Reduced infrastructure spending 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 reduce their infrastructure spending, our revenues may be adversely affected.

We have a history of losses, and such losses are likely to continue if we are unable to increase our revenues and 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 the foreseeable future. As of September 30, 2003, we had an accumulated deficit of $415 million. Also, for the quarter

ended September 30, 2003, we had negative operating cash flow, and we may continue to incur negative operating cash flow in future periods.

Due to insufficient cash generated from operations, we have funded our operations primarily through the sale of equity securities, bank borrowings and equipment lease financings. Although we implemented cost reduction programs in fiscal 2003, we continue to have significant fixed expenses, and we expect to continue to incur considerable manufacturing, sales and marketing, product development and administrative expenses. In addition, we completed our acquisitions of the optical components businesses of Alcatel and Corning in July 2003. The costs and operating expenses of the combined company will be significantly greater than the costs and operating expenses of Avanex as a stand-alone company. As a result, the combined operations of Avanex and the optical components businesses of Alcatel and Corning will substantially increase the rate at which Avanex will utilize its cash resources. If we fail to generate higher revenues and increase our gross margins while containing our costs and operating expenses, our financial position will be harmed significantly. Our revenues may not grow in the future, and we may never generate sufficient revenues to achieve profitability.

Difficulties in integrating our acquisitions of the optical components businesses of Alcatel and Corning could adversely impact our business.

We completed the acquisitions of the optical components businesses of Alcatel and Corning in July 2003. These acquisitions are the largest acquisitions we have completed, and the complex process of integrating these businesses has required, and will continue to require, significant resources. Integrating the businesses acquired from Alcatel and Corning has been and will continue to be time consuming, expensive and disruptive to our business. This integration process has resulted in the diversion of management and financial resources from our core business objectives. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of the acquired businesses could harm our business, results of operations and cash flows. We may not realize the benefits we anticipate from these acquisitions because of the following significant challenges:

• expected synergistic benefits from the acquisitions, such as lower costs, may not be realized or may be realized more slowly than anticipated, particularly with regard to costs associated with a reduction in headcount and facilities;

• potentially incompatible cultural differences between the businesses;

• incorporating technology and products acquired from Alcatel and Corning into our current and future product lines;

• generating market demand for an expanded product line;

• integrating products acquired from Alcatel and Corning with our business;

• geographic dispersion of operations;

• integrating Alcatel’s and Corning’s technical teams with our engineering organization;

• some of Alcatel’s and Corning’s suppliers, distributors, customers and licensors are our competitors or work with our competitors, and as a result may terminate their business relationships with us; and

• our inability to retain previous customers or employees of Alcatel and Corning.

As a result of the acquisitions of the optical components businesses of Alcatel and Corning, we acquired approximately 1,117 employees from Alcatel and Corning, primarily located in New York, the United Kingdom, France and Italy. Prior to these acquisitions, most of our employees had been based at or near our headquarters in Fremont, California. As a result, we will face challenges inherent in efficiently

managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. The inability to successfully manage the substantially larger and geographically diverse organization, or any significant delay in achieving successful management, could have a material adverse effect on us and, as a result, on the market price of our common stock.

We have incurred and expect to continue to incur significant costs and commit significant management time integrating the operations, technology, development programs, products, information systems, customers and personnel of the businesses acquired from Alcatel and Corning. These costs have been and will likely continue to be substantial and include costs for:

• converting, integrating and upgrading information systems, including the extremely complex and time-consuming integration of data from Alcatel and Corning’s incompatible enterprise resource planning systems with our system;

• integrating and reorganizing operations, including combining teams, facilities and processes in various functional areas;

• identifying duplicative or redundant resources and facilities, developing plans for resource consolidation and implementing those plans;

• professionals and consultants involved in completing the integration process;

• vacating, subleasing and closing facilities;

• employee relocation, redeployment or severance costs;

• integrating technology and products; and

• our financial advisor, legal, accounting and financial printing fees.

In addition to the significant costs associated with converting and integrating Alcatel’s and Corning’s information systems, there are other significant risks associated with this process. For example, while migrating Alcatel or Corning data to our information system, we could lose such data or such data may be inaccessible to us during the lengthy integration process. In addition, we may need to upgrade our information systems, which could be costly and further divert management’s attention.

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, including, without limitation, the following:

• the current economic downturn 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;

• our ability to control expenses, particularly in light of the current economic downturn;

• 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, and particularly to limit excess capacity commensurate with the volatile demand levels for our products;

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

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

• the mix of our products sold;

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

• 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 processor 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 or later quarter;

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

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

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

Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for one quarter 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.

We rely on a limited number of customers for a substantial portion of our revenue, and any decrease in revenues from, or loss of, one or more of these customers without a corresponding increase in revenues from other customers would harm our operating results.

To date we have depended upon a small number of customers for a substantial portion of our revenue. Three customers accounted for an aggregate of 57% of our net revenue in the quarter ended September 30, 2003. 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 these orders. In addition, any negative developments in the business of existing customers could result in significantly decreased sales to these customers, which could seriously harm our revenues and results of operations. For example, MCI (formerly WorldCom) accounted for approximately 16% of our net revenue for the year ended June 30, 2002 and was not a customer in the year ended June 30, 2003 and the quarter ended September 30, 2003. MCI has experienced significant business and financial difficulties. While we do not expect MCI to be a significant customer in future periods and do not expect the business and financial difficulties of MCI to have a significant impact on our business or financial condition, the business and financial difficulties of MCI or other customers could result in the loss of future revenues for our products. We have experienced, and in the future we may experience, losses as a result of the inability to collect accounts receivable, as well as the loss of ongoing business from customers experiencing financial difficulties. If our customers fail to meet their payment obligations, we could experience reduced cash flows and losses in excess of amounts reserved. Because of our reliance on a limited number of customers, any decrease in revenues from, or loss of, one or more of these customers without a corresponding increase in revenues from other customers would harm our operating results.

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

We are in the photonic processor 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 photonic processor industry, and our business in particular, are unproven. As a result of our limited operating history, we have limited financial data that you can use to evaluate our business. You must consider our prospects in light of the risks, expenses and challenges we might encounter because we are in a new and rapidly evolving industry.

Our customers are under no obligation to buy significant quantities of our products, and may cancel or delay purchases with minimal 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 penalty and with little or no advance notice. Further, certain of our customers have a tendency to purchase our products near the end of a fiscal quarter. Cancellation or delays of such orders may cause us to fail to achieve that quarter’s financial and operating goals. Decreases in purchases, cancellations of purchase orders, or deferrals of purchases may significantly harm our business, particularly if they are not anticipated.

We may face risks related to a concentration of research and development efforts on a limited number of key industry standards and technologies.

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.

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.

We currently offer products in seven solution categories: Multiplexing, Transmission, Amplification, Dispersion Management, Switching and Routing, Monitoring, and Network Managed Subsystems. 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; and

• unanticipated engineering complexities.

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 you 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 operating results would suffer. Further, we cannot assure you 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.

The vigorous competition in the optical components industry has led to the continued erosion of sales prices, and the failure to develop new products that are less susceptible to price competition may adversely affect our business.

Competition in the optical components industry has contributed to substantial price-driven competition. As a result, sales prices for specific products have tended to decrease 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, overcapacity and the current economic and industry downturn in the telecommunications industry have increased pricing pressures in fiscal 2003 and the first quarter of fiscal 2004. Pricing pressures are expected to continue for the foreseeable future, which may adversely affect our operating results.

We expect competition in our industry to increase, and if we are unable to compete successfully our revenues could decline further and harm our operating results.

We believe that our principal competitors in the optical systems and components industry include Bookham Technology, DiCon Fiberoptics, Finisar, Fujitsu, Hitachi Cable, Hitachi Opnext, JDS Uniphase,

NEC, Oplink Communications, Triquint Semiconductor and WaveSplitter Technologies. We may also face competition from companies that choose to 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. For example, three of our historical competitors, JDS Uniphase, SDL, and E-Tek Dynamics have merged over the past several years to become a single, more formidable competitor. This merged company has announced its intention to offer more integrated products that could make our products less competitive.

Some existing customers and potential customers are also our competitors. These customers may develop or acquire additional competitive products or technologies in the future, which may cause them to reduce or cease their purchases from us. 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. 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.

Delays, disruptions or quality control problems in manufacturing could result in delays in shipments of products to customers and adversely affect our business.

We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our third party manufacturers, and, as a result, product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our business. Furthermore, even if we are able to timely deliver products to our customers, we may be unable to recognize revenue based on our 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. Because the majority of our manufacturing costs are relatively fixed, manufacturing yields are critical to our results of operations. Lower than expected manufacturing yields could delay product shipments and further impair our gross margins. We may need to develop new manufacturing processes and techniques that will involve higher levels of automation 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.

If we are unable to accurately forecast component and material requirements, our results of operations will be adversely affected.

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, the inventory write-offs taken in the years ended June 30, 2003, and June 30, 2002 were primarily the result of our inability to anticipate the sudden decrease in demand for our products. Cumulatively, we have recorded

$47.1 million of inventory write-offs since our inception. 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 inventory write-offs. 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 results of operations.

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 facility, and we have passed subsequent reviews as well. 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.

All of the sites acquired as a result of the acquisitions of the optical components businesses of Alcatel and Corning are currently certified to ISO 9001.

We may lose orders and customers if we are unable to commit to deliver sufficient quantities of our products to satisfy customers’ needs.

Communications service providers and optical systems manufacturers 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. If we cannot deliver sufficient quantities of our products, we may lose business, which could adversely impact our business, financial condition, and results of operations.

Our dependence on independent manufacturers may result in product delivery delays and may harm our operations.

We rely on a small number of outsourced manufacturers to manufacture a portion of our subassemblies. We intend to develop further our relationships with these manufacturers so that they will eventually manufacture many of our high volume key components and subassemblies, and possibly a substantial portion of our finished products, in the future. The qualification of these independent manufacturers under quality assurance standards is an expensive and time-consuming process. Our independent manufacturers have a limited history of manufacturing optical subcomponents, and have no history of manufacturing our products on a turnkey basis. Any interruption in the operations of these manufacturers, or any deficiency in the quality or quantity of the subcomponents or products built for us by these manufacturers, could impede our ability to meet our scheduled product deliveries to our customers. As a result, we may lose existing or potential customers.

We have limited experience in working with outsourced manufacturers, and do not have contracts in place with many of these manufacturers. As a result, we may not be able to effectively manage our relationships with these manufacturers. If we cannot effectively manage our manufacturing relationships, or if these manufacturers fail to deliver components in a timely manner, we could experience significant

delays in product deliveries, which may have an adverse effect on our business and results of operations. Increased reliance on outsourced manufacturing, and the ultimate disposition of our manufacturing capacity in the future, may result in impairment charges relating to our long-lived assets in future periods, which would have an adverse impact on our business, financial condition and results of operations.

If we do not improve our gross margin our financial condition and results of operations will be adversely impacted.

Our ability to achieve profitability depends on our ability to control costs and expenses in relation to sales and to increase our gross margin. During the fiscal quarter ended September 30, 2003, our gross margin percentage was negative 50%. Because the majority of our manufacturing costs are relatively fixed, our inability to maintain appropriate manufacturing capacity in relation to our sales negatively impacts our gross margin. In addition, over our limited operating history, the average selling prices of our products have decreased, and we expect this trend to continue. Future price decreases may be due to a number of factors, including competitive pricing pressures, rapid technological change and sales discounts. Therefore, to maintain or improve our gross margin, we must develop and introduce new products and product enhancements on a timely basis and reduce our costs of production. Moreover, as our average selling prices decline, we must increase our unit sales volume, or introduce new products, to maintain or increase our revenues. If our average selling prices decline more rapidly than our costs of production, our gross margin will decline, which could adversely impact our business, financial condition and results of operations. If we are unable to generate positive gross margins in the future, our cash flows from operations will be negatively impacted and we would be unable to achieve profitability.

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

We depend on key personnel to manage our business effectively, and if we are unable to hire and retain 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. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly engineering, sales or marketing personnel, may seriously harm our business, financial condition and results of operations. None of our officers or key employees has an employment agreement for a specific term, and these employees may terminate their employment at any time. For example, four of our executive officers left Avanex in the second quarter of fiscal 2003. We do not have #gkey person#h 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.

While we have expanded our international operations as a result of the acquisitions of the optical components businesses of Alcatel and Corning, we face risks that could prevent us from successfully manufacturing, marketing and distributing our products internationally.

As a result of the acquisitions of the optical components businesses of Alcatel and Corning, 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. This expansion has required and will continue to require significant management attention and financial resources to successfully develop direct and indirect international sales and support channels. We may not be able to maintain international market demand for our products. We currently have little or no experience in manufacturing, marketing and distributing our products internationally. 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 remote foreign operations;

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

• 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, particularly with respect to intellectual

property, license requirements, employment matters and environmental requirements;

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

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

• political and economic instability, terrorism and war.

Historically our international revenues and expenses have been denominated predominantly in U.S. dollars; however, as a result of the acquisitions of the optical components businesses of Alcatel and Corning, a portion of our international revenues and expenses will be denominated in foreign currencies in the future. 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, financial condition and results of operations.

Our business and future operating results may be adversely affected by events 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 slowdown, 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.

We may incur costs and experience disruptions complying with environmental regulations and other regulations.

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

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, and sometimes longer. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products and our manufacturing processes before purchasing our products. While our customers are evaluating our products before they place an order with us, we may incur substantial sales and marketing and research and development expenses, expend significant management efforts, increase manufacturing capacity and order long-lead-time supplies. 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 or write off excess inventory. Even if we receive an order, if we are required to add additional manufacturing capacity in order to service the customer’s requirements, such manufacturing capacity may be underutilized in a subsequent quarter, especially if an order is delayed or cancelled. Either situation could cause our results of operations to be below the expectations of investors and public market analysts, which could, in turn, cause the price of our common stock to decline.

We will lose significant sales and may not be successful if our customers do not qualify our products to be designed into their products and systems.

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

If carriers for new telecommunications systems deployments do not select our systems-level customers, our shipments and revenues will be reduced.

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.

If the Internet does not continue to expand as a widespread communication and commerce media, demand for our products may decline further.

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.

If the communications industry does not achieve a widespread transition to optical networks, our business may not succeed.

The market for our products is relatively new and evolving. Future demand for our products is uncertain 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 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. 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 revenues or in losses from levels expected by securities analysts;

• activities of short sellers and risk arbitrageurs;

• future sales of our common stock; and

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

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. As long as we continue to depend on a limited customer base and a limited number of products, there is substantial risk that our quarterly results will fluctuate. Furthermore, if our stockholders sell substantial amounts of our common stock in the public market during a short period of time, our stock price may decline significantly.

Subject to certain restrictions on transfer which apply for a period of two years following the completion of our acquisitions of the optical components businesses of Alcatel and Corning, Alcatel or Corning may sell substantial amounts of our common stock in the public market which 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 particular, during the quarter ending December 31, 2004, Alcatel will be permitted to sell a greater number of shares of our common stock than it will be permitted to sell during other quarters during this two-year period.

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

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

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, software, 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. 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. Our intellectual property also consists of trade secrets, which require 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 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.

If necessary licenses of third-party technology become unavailable or very expensive, we may be unable to develop new products and product enhancements, which could prevent us from operating our current business.

From time to time we may be required to license technology from third parties 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 to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards, or of greater cost, either of which could prevent us from operating our business. For example, Alcatel currently holds patent cross licenses with various third parties that may be applicable to the optical components business we acquired from Alcatel. We cannot guarantee that we will be able to obtain these patent licenses from these third parties, or that we will be able to obtain these licenses on favorable terms. If we are not able to obtain licenses from these third parties, then we may be subject to litigation to defend against infringement claims from these third parties. In addition, we license certain proprietary technology from Fujitsu related to its proprietary virtually imaged phased array technology, which is critical to our PowerShaper VIPA product. The license agreement expires, unless earlier terminated, when the latest issued patent covered by the agreement expires. Currently, the latest expiring United States patent covered by the agreement will expire on June 18, 2018. The license agreement is also subject to termination upon the acquisition of more than a 50% interest in us by certain major communications system suppliers. Thus, if we are acquired by any of these specified companies, we will lose this license. The existence of this license termination provision may have an anti-takeover effect in that it would discourage those specified companies from acquiring us.

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

We may become a party to litigation in the future to protect our intellectual property or we may be subject to litigation to defend against infringement claims of others. These claims and any resulting lawsuit, 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 against intellectual property claims asserted against them.

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

Acquisitions and investments may adversely affect our business.

We regularly review acquisition and investment prospects that would complement our existing product offerings, augment our market coverage, secure supplies of critical materials or enhance our technological capabilities. For example, in July 2003, we acquired the optical components businesses of Alcatel and Corning, and in August 2003 we acquired certain assets of the optical systems division of Vitesse. Acquisitions or investments 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;

• amortization expenses related to intangible assets; and

• large one-time write-offs.

For example, as a result of our acquisitions of Holographix and LambdaFlex, we recorded in the first quarter of fiscal 2003 a transitional goodwill impairment charge for all of our goodwill of $37.5 million, in accordance with Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets.” Further, as a result of our disposal of certain property, equipment and intellectual property rights, we recorded in the second quarter of fiscal 2003 a reduction in long-lived assets of $1.5 million, in accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Also, in March 2002, we entered into an Agreement and Plan of Reorganization with Oplink Communications, pursuant to which we intended to acquire all of the outstanding capital stock of Oplink. The merger was subject to the approval of our stockholders and the stockholders of Oplink. While our stockholders approved the issuance of Avanex common stock in connection with the merger, the stockholders of Oplink failed to approve the merger in August 2002. We expensed $4.1 million in related merger expenses during the first quarter of fiscal 2003.

Furthermore, acquisitions involve numerous operational risks, including:

• difficulties integrating operations, personnel, technologies, products and the information systems of the acquired 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.

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 and Corning own shares of Avanex common stock representing 28% and 17%, respectively, of the outstanding shares of Avanex common stock. Pursuant to the stockholders#f agreement entered into by Avanex, Alcatel and Corning, Alcatel and Corning are generally required to vote on all matters as recommended by the board of directors of Avanex, except, in the case of Alcatel, for proposals relating to certain acquisition transactions between Avanex and certain competitors of Alcatel. The concentration of ownership of our shares of common stock, combined with the voting requirements contained in the stockholders#f 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Currently, we do not utilize derivative financial instruments to hedge such risks.

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 with maturities ranging from overnight to 36 months. The average maturity of the portfolio will not exceed 18 months. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We do not have any derivative financial instruments. Accordingly, we do not believe that our investment have significant exposure to interest rate risk.

We have one equipment loan with a fixed rate of interest of 9.406% with remaining principal and interest payments of $0.8 million from September 30, 2003.

The following table summarizes the expected maturity, average interest rate and fair market value of the short-term and long-term securities held by the Company (in thousands):

As of September 30, 2003:


	Periods Ending
	September 30,						Total		Fair
							Amortized		Market
	2004			2005			Cost		Value

Held-to-maturity securities	$	123,120		$	58,434		$	181,554	$	181,588
Average interest rate		3.0	%		2.4	%

As of June 30, 2003:


	Years Ending
	June 30,						Total		Fair
							Amortized		Market
	2004			2005			Cost		Value

Held-to-maturity securities	$	76,952		$	47,063		$	124,015	$	124,340
Average interest rate		2.2	%		2.2	%

Exchange Rate Risk

We have operations in the United States, France, Italy and the United Kingdom. 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. 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.

We attempt to minimize our currency exposure risk through working capital management and by maintaining a euro-denominated, highly liquid investment account to fund operations in France and Italy. At September 30, 2003, the balance in our euro-denominated investment account was $70.5 million. We do not hedge our exposure to translation gains and losses related to foreign currency net asset exposures.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management evaluated, with the participation of our Chief Executive Officer, our Chief Financial Officer and our Chief Governance Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer, our Chief Financial Officer and our Chief Governance Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

IPO Class Action Lawsuit

High Hopes Enterprises and Hon Hai Precision Industry Co. Litigation

On May 31, 2002, High Hopes Enterprises Ltd. and Hon Hai Precision Industry Co., Ltd., filed an action in the Superior Court of California, County of Alameda, against us alleging breach of an oral contract, breach of the covenant of good faith and fair dealing, breach of implied contract, promissory estoppel, deceit by fraud and deceit by negligent misrepresentation. This action was settled in October 2003 with the mutual consent of both parties under terms of a confidentiality agreement.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our Registration Statement on Form S-1 (File No. 333-92097) was declared effective on February 3, 2000 and we commenced our IPO on February 4, 2000. In the IPO, we sold an aggregate of 6,900,000 shares of common stock (including 900,000 shares sold in connection with the exercise of the underwriters’ over-allotment option) at $36.00 per share. The sale of the shares of common stock generated aggregate gross proceeds of approximately $248.4 million for the Company. The aggregate net proceeds were approximately $228.2 million, after deducting underwriting discounts and commissions of approximately $17.4 million and directly paying expenses of the offering of approximately $2.8 million. Of the net proceeds, as of September 30, 2003, we have used approximately $130.0 million for general corporate purposes, including working capital and capital expenditures. Additionally, the Company received cash contributed from acquisitions of $128.6 million. See Note 2 to “Notes to Condensed Consolidated Financial Statements”. Additionally, approximately $29.1 million of the proceeds were used to repay short-term borrowings, long-term debt and capital lease obligations.

On July 31, 2003, we issued 35,369,834 shares of our common stock in connection with the acquisition of all the outstanding equity of Alcatel Optronics France SA, a subsidiary of Alcatel and 21,474,542 shares of our common stock in connection with the acquisition of certain assets of the optical components business of Corning. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On August 28, 2003, we issued 1,371,430 shares of our common stock in connection with the acquisition of certain assets of Vitesse Semiconductor Corporation’s Optical Systems Division located in San Jose, California. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On November 10, 2003, we entered into a securities purchase agreement pursuant to which the purchasers named therein purchased, in the aggregate, 6,815,555 shares of the our common stock at a price of $4.63 per share for aggregate gross proceeds of approximately $31.5 million. Net proceeds from this transaction will amount to approximately $29.5 million after payment of fees to our financial and legal advisors and other costs. In addition, the purchasers were issued rights which are exercisable for up to an additional 1,363,116 shares our common stock at a price of $4.63 per share. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

The Company held a Special Meeting of the Stockholders on July 25, 2003 (the “Special Meeting”). Both matters voted on were approved. The results were as follows:

PROPOSAL I

The proposal to approve the issuance of Avanex common stock in connection with the acquisition of all of the outstanding equity of Alcatel Optronics France SA, a subsidiary of Alcatel that operates the optical components division of Alcatel, pursuant to the Share Acquisition and Asset Purchase Agreement, dated as of May 12, 2003, between Avanex Corporation, Alcatel and Corning Incorporated was approved.


For	Against		Abstained

41,440,829		226,940		101,842

PROPOSAL II

The proposal to approve the issuance of Avanex common stock in connection with the purchase of certain assets of the photonic technologies business of Corning Incorporated pursuant to the purchase agreement was approved.


For	Against		Abstained

41,471,526		213,991		84,093

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits:


10.1		Stockholders’ Agreement between Avanex Corporation, Alcatel and Corning Incorporation dated as of July 31, 2003.

10.2		Intellectual Property Rights Agreement between Corning Incorporated and Avanex Corporation Relating to Photonics dated as of July 31, 2003.*

10.3		Agreement of Sublease between Corning Property Management Corporation and Avanex Corporation dated as of July 31, 2003.*

10.4		Consent and Assignment and Assumption of Lease Agreement between Pirelli S.p.A, Corning Incorporated, Corning O.T.I. S.r.L., and Avanex Corporation dated as of July 31, 2003.

10.5		Lease Agreement between Pirelli S.p.A, and Avanex Corporation as successor in interest to Corning O.T.I. S.r.L. effective as of January 1, 2003.

10.6		Intellectual Property License Agreement between Alcatel and Avanex Corporation dated as of July 31, 2003.

10.7		Supply Agreement between Alcatel and Avanex Corporation dated as of July 31, 2003.*

10.8		Frame Purchase Agreement for Opto Electronic Components between Avanex Corporation and Alcatel dated as of July 31, 2003.*

10.9		Commercial Lease between Société Immobiliére Villarceaux-Nozay and Avanex France dated as of August 1, 2003.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*		Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.

(b) Reports on Form 8-K:

(i) On September 26, 2003, the Registrant filed a current report on Form 8-K regarding the acquisition of all of the outstanding equity of Alcatel Optronics France SA and its purchase of certain assets of the photonic technologies business of Corning Incorporated. The following financial statements were filed as exhibits to this current report:


99.1		Unaudited Pro Forma Condensed Combined Financial Information of Avanex Corporation, the Optronics Division of Alcatel and the Optical Components Business of Corning as of June 30, 2003 and for the year then ended.

99.2		Optronics Division Audited Combined Financial Statements as of December 31, 2002, 2001 and 2000 and for each of the years then ended.

99.3		Optronics Division Unaudited Interim Combined Financial Statements as of June 30, 2003 and December 31, 2002 and for the six month periods ended June 30, 2003 and 2002.

99.4		Optical Components Business of Corning Unaudited Interim Financial Statements as of June 30, 2003 and for the six month periods ended June 30, 2003 and 2002 and Audited Financial Statements as of December 31, 2002 and 2001 and for each of the years in the


		three year period ended December 31, 2002.

(ii) On August 15, 2003, the Registrant filed a current report on Form 8-K reporting the completion of the acquisition Alcatel Optronics France and its purchase of certain assets of the photonic technologies business of Corning Incorporated.

(iii) On August 8, 2003, the Registrant filed a current report on Form 8-K furnishing the transcript of its conference call relating to its results for the fourth quarter and fiscal year ended June 30, 2003.

(iv) On August 5, 2003, the Registrant filed a current report on Form 8-K furnishing its press release regarding its financial results for the fourth quarter and fiscal year ended June 30, 2003.

SIGNATURES

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


		AVANEX CORPORATION (Registrant)

		By:		/s/ Bruce Pollock


		Bruce Pollock

		Senior Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

		Date: November 14, 2003

EXHIBIT INDEX


10.1		Stockholders’ Agreement between Avanex Corporation, Alcatel and Corning Incorporation dated as of July 31, 2003.


10.2		Intellectual Property Rights Agreement between Corning Incorporated and Avanex Corporation Relating to Photonics dated as of July 31, 2003.*

10.3		Agreement of Sublease between Corning Property Management Corporation and Avanex Corporation dated as of July 31, 2003.*

10.4		Consent and Assignment and Assumption of Lease Agreement between Pirelli S.p.A, Corning Incorporated, Corning O.T.I. S.r.L., and Avanex Corporation dated as of July 31, 2003.

10.5		Lease Agreement between Pirelli S.p.A, and Avanex Corporation as successor in interest to Corning O.T.I. S.r.L. effective as of January 1, 2003.

10.6		Intellectual Property License Agreement between Alcatel and Avanex Corporation dated as of July 31, 2003.

10.7		Supply Agreement between Alcatel and Avanex Corporation dated as of July 31, 2003.*

10.8		Frame Purchase Agreement for Opto Electronic Components between Avanex Corporation and Alcatel dated as of July 31, 2003.*

10.9		Commercial Lease between Société Immobiliére Villarceaux-Nozay and Avanex France dated as of August 1, 2003.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*		Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.

	•		expected synergistic benefits from the acquisitions, such as lower costs, may not be realized or may be realized more slowly than anticipated, particularly with regard to costs associated with a reduction in headcount and facilities;

	•		potentially incompatible cultural differences between the businesses;

	•		incorporating technology and products acquired from Alcatel and Corning into our current and future product lines;

	•		generating market demand for an expanded product line;

	•		integrating products acquired from Alcatel and Corning with our business;

	•		geographic dispersion of operations;

	•		integrating Alcatel’s and Corning’s technical teams with our engineering organization;

	•		some of Alcatel’s and Corning’s suppliers, distributors, customers and licensors are our competitors or work with our competitors, and as a result may terminate their business relationships with us; and

	•		our inability to retain previous customers or employees of Alcatel and Corning.

	•		converting, integrating and upgrading information systems, including the extremely complex and time-consuming integration of data from Alcatel and Corning’s incompatible enterprise resource planning systems with our system;

	•		integrating and reorganizing operations, including combining teams, facilities and processes in various functional areas;

	•		identifying duplicative or redundant resources and facilities, developing plans for resource consolidation and implementing those plans;

	•		professionals and consultants involved in completing the integration process;

	•		vacating, subleasing and closing facilities;

	•		employee relocation, redeployment or severance costs;

	•		integrating technology and products; and

	•		our financial advisor, legal, accounting and financial printing fees.

•		the current economic downturn 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;

•		our ability to control expenses, particularly in light of the current economic downturn;

•		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, and particularly to limit excess capacity commensurate with the volatile demand levels for our products;

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

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

•		the mix of our products sold;

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

•		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 processor 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 or later quarter;

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

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

•		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; and

•		unanticipated engineering complexities.

•		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.

•		greater difficulty in accounts receivable collection and longer collection periods;

•		difficulties inherent in managing remote foreign operations;

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

•		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, particularly with respect to intellectual

		property, license requirements, employment matters and environmental requirements;

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

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

•		political and economic instability, terrorism and war.

•		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 revenues or in losses from levels expected by securities analysts;

•		activities of short sellers and risk arbitrageurs;

•		future sales of our common stock; and

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

•		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 against intellectual property claims asserted against them.

•		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;

•		amortization expenses related to intangible assets; and

•		large one-time write-offs.

•		difficulties integrating operations, personnel, technologies, products and the information systems of the acquired 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.

			(ii) On August 15, 2003, the Registrant filed a current report on Form 8-K reporting the completion of the acquisition Alcatel Optronics France and its purchase of certain assets of the photonic technologies business of Corning Incorporated.

			(iii) On August 8, 2003, the Registrant filed a current report on Form 8-K furnishing the transcript of its conference call relating to its results for the fourth quarter and fiscal year ended June 30, 2003.

			(iv) On August 5, 2003, the Registrant filed a current report on Form 8-K furnishing its press release regarding its financial results for the fourth quarter and fiscal year ended June 30, 2003.