UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 27, 2008

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

For the transition period from                      to                     

Bookham, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-1303994
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)

2584 Junction Avenue, San Jose, California 95134
(Address of principal executive offices, zip code)

(408) 383-1400
(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 þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No þ

Number of shares of common stock outstanding as of January 27, 2008: 100,870,290

 

 

BOOKHAM, INC.
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of December 27, 2008 and June 28, 2008			3
Condensed Consolidated Statements of Operations for the three and six months ended December 27, 2008 and December 29, 2007			4
Condensed Consolidated Statements of Cash Flows for the six months ended December 27, 2008 and December 29, 2007			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			33
Item 6. Exhibits			47
Signatures			48
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BOOKHAM, INC.

(unaudited, in thousands, except par value amount)

		December 27, 2008				June 28, 2008
ASSETS
Current assets:
Cash and cash equivalents		$	35,296			$	32,863
Short-term investments			8,894				17,845
Restricted cash			513				1,154
Accounts receivable, net			33,119				45,665
Inventories			58,448				59,612
Prepaid expenses and other current assets			4,842				6,007
Total current assets			141,112				163,146
Goodwill			—				7,881
Other intangible assets, net			6,191				7,829
Property and equipment, net			32,509				32,962
Other non-current assets			274				272
Total assets		$	180,086			$	212,090
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	15,402			$	21,501
Accrued expenses and other liabilities			21,245				20,789
Total current liabilities			36,647				42,290
Other long-term liabilities			1,821				1,336
Deferred gain on sale-leaseback			14,019				19,402
Total liabilities			52,487				63,028
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock: 5,000 shares authorized; none issued and outstanding			—				—
Common stock:
$0.01 par value per share; 175,000 shares authorized; 100,868 shares issued and outstanding at December 27, 2008 100,740 shares issued and outstanding at June 28, 2008			1,009				1,007
Additional paid-in capital			1,165,695				1,163,598
Accumulated other comprehensive income			24,742				44,036
Accumulated deficit			(1,063,847	)			(1,059,579	)
Total stockholders’ equity			127,599				149,062
Total liabilities and stockholders’ equity		$	180,086			$	212,090

The accompanying notes form an integral part of these condensed consolidated financial statements.

BOOKHAM, INC.

(unaudited, in thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
Revenues		$	50,204			$	58,956			$	116,735			$	113,238
Cost of revenues			41,499				45,522				91,401				87,467
Gross margin			8,705				13,434				25,334				25,771
Operating expenses:
Research and development			6,897				8,168				14,832				16,860
Selling, general and administrative			9,282				12,162				19,966				23,488
Amortization of intangible assets			444				1,353				907				3,350
Restructuring and severance charges			482				562				1,968				1,779
Legal settlement			—				877				(184	)			877
Impairment of goodwill			7,881				—				7,881				—
(Gain) loss on sale of property and equipment			(8	)			(1,481	)			8				(1,716	)
Total operating expenses			24,978				21,641				45,378				44,638
Operating loss			(16,273	)			(8,207	)			(20,044	)			(18,867	)
Other income (expense):
Other expense			(95	)			—				(695	)			—
Interest income			209				494				457				746
Interest expense			(132	)			(253	)			(324	)			(387	)
Gain on foreign exchange			9,866				2,732				16,362				2,320
Total other income (expense)			9,848				2,973				15,800				2,679
Loss before income taxes			(6,425	)			(5,234	)			(4,244	)			(16,188	)
Income tax provision (benefit)			36				(47	)			24				(47	)
Net loss		$	(6,461	)		$	(5,187	)		$	(4,268	)		$	(16,141	)
Net loss per share:
Basic		$	(0.06	)		$	(0.06	)		$	(0.04	)		$	(0.19	)
Diluted		$	(0.06	)		$	(0.06	)		$	(0.04	)		$	(0.19	)
Shares used in computing net loss per share:
Basic			100,339				90,963				100,209				86,775
Diluted			100,339				90,963				100,209				86,775

The accompanying notes form an integral part of these condensed consolidated financial statements.

BOOKHAM, INC.

(unaudited, in thousands)

		Six Months Ended
		December 27, 2008				December 29, 2007
Cash flows from operating activities:
Net loss		$	(4,268	)		$	(16,141	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			6,720				9,604
Stock-based compensation			2,241				4,409
Amortization of deferred gain on sale-leaseback			(486	)			(714	)
Impairment of short-term investments			706				—
Impairment of goodwill			7,881				—
Accretion on short-term investments			(102	)			—
(Gain) loss on sale of property and equipment			8				(1,716	)
Changes in assets and liabilities:
Accounts receivable, net			1,721				(6,614	)
Inventories			(825	)			(4,524	)
Prepaid expenses and other current assets			684				4,925
Other assets			(88	)			—
Accounts payable			(5,264	)			3,714
Accrued expenses and other liabilities			762				(1,884	)
Net cash provided by (used in) operating activities			9,690				(8,941	)
Cash flows from investing activities:
Purchases of property and equipment			(6,934	)			(5,688	)
Proceeds from sale of property and equipment			14				1,775
Purchases of available-for-sale investments			(6,945	)			—
Sales and maturities of available-for-sale investments			15,350				—
Transfer from restricted cash			575				4,480
Net cash provided by investing activities			2,060				567
Cash flows from financing activities:
Proceeds from issuance of common stock, net			—				40,902
Proceeds from bank loan payable			—				501
Repayment of bank loan payable			—				(4,313	)
Repayment of other loans			(31	)			(12	)
Amount paid to repurchase shares from former officer			—				(2	)
Net cash provided by (used in) financing activities			(31	)			37,076
Effect of exchange rate on cash and cash equivalents			(9,286	)			(2,331	)
Net increase in cash and cash equivalents			2,433				26,371
Cash and cash equivalents at beginning of period			32,863				36,631
Cash and cash equivalents at end of period		$	35,296			$	63,002

The accompanying notes form an integral part of these condensed consolidated financial statements.

BOOKHAM, INC.

(Unaudited)

Note 1. Nature of Business

Bookham, Inc., a Delaware corporation (“Bookham, Inc.”), designs, manufactures and markets optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals principally for use in high-performance fiber optics communications networks. Due to its advantages of higher capacity and transmission speed, optical transmission has become the predominant technology for large-scale communications networks. The Company’s primary operating segment is its telecom segment, which addresses this optical communications market. The Company’s remaining product lines, which address certain other optics and photonics markets, such as material processing, inspection and instrumentation, and research and development, and which leverage the resources, infrastructure and expertise of its telecom segment, comprise its non-telecom segment. References herein to the “Company” mean Bookham, Inc. and its subsidiaries.

Note 2. Basis of Preparation

The accompanying unaudited condensed consolidated financial statements as of December 27, 2008 and for the three and six months ended December 27, 2008 and December 29, 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 10 of Regulation S-X, and include the accounts of Bookham, Inc. and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s consolidated financial position and operations have been included. The consolidated results of operations for the three and six months ended December 27, 2008 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 27, 2009.

The condensed consolidated balance sheet as of June 28, 2008 has been derived from the audited consolidated financial statements as of such date. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2008 (the “2008 Form 10-K”).

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2008 Form 10-K.

Revenue Recognition for Financially Distressed Customers

The Company’s revenue recognition policy, which is more fully described in its 2008 Form 10-K, follows Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements. Specifically, the Company recognizes product revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped and title has transferred, (iii) collectability is reasonably assured, (iv) fees are fixed or determinable and (v) there are no uncertainties with respect to customer acceptance.

In the second quarter of fiscal 2009 the Company issued billings of (i) $4.1 million for products that were shipped to Nortel Networks, but for which payment was not received prior to its bankruptcy filing on January 14, 2009, and (ii) $1.3 million for products that were shipped to a contract manufacturer for which payment may not be received due to the Nortel Networks bankruptcy filing. As a result, an aggregate of $5.4 million in revenue was deferred, and therefore was not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings, as the Company determined that such amounts were not reasonably assured of collectability in accordance with its revenue recognition policy. The Company recognizes revenues from financially distressed customers when collectability becomes reasonably assured, assuming all other criteria for revenue recognition have been met.

Note 3. Fair Value

In the Company’s first quarter of fiscal 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets, primarily marketable securities, and liabilities at fair value.

The Company’s cash equivalents and short-term investment instruments are classified within Level 1, Level 2 or Level 3 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include investment-grade corporate bonds, mortgage-backed and asset-backed securities and foreign currency forward exchange contracts. Such instruments are generally classified within Level 2 of the fair value hierarchy.

In September 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code. At December 27, 2008, the Company held a Lehman security with par value of $0.8 million. As of January 30, 2009, the Company does not have an estimate of the recovery value of this security, but has reduced the carrying value of this security to $0.1 million based on Level 3 inputs. For the three and six months ended December 27, 2008, the Company has recorded impairment charges for the Lehman security of $0.1 million and $0.7 million, respectively, which are included in other expense in the condensed consolidated statement of operations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments at December 27, 2008:

		Fair Value Measurement at Reporting Date Using
		Quoted Prices				Significant
		in Active				Other				Significant
		Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
		(thousands)
Assets:
Cash and cash equivalents (1):
Money market funds		$	14,092			$	—			$	—			$	14,092
Short-term investments:
United States agency securities			6,177				—				—				6,177
United States corporate bonds			—				2,637				80				2,717
Total assets measured at fair value		$	20,269			$	2,637			$	80			$	22,986
Liabilities:
Accrued expenses and other liabilities
Unrealized loss on hedges		$	—			$	3,332			$	—			$	3,332
Total liabilities measured at fair value		$	—			$	3,332			$	—			$	3,332

Derivative Financial Instruments

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires the Company to recognize all derivatives, such as foreign currency forward exchange contracts, on the condensed consolidated balance sheet at fair value regardless of the purpose for holding the instrument. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through operating results or recognized in accumulated other comprehensive income until the hedged item is recognized in operating results in the condensed consolidated statements of operations.

At the end of each accounting period, the Company marks-to-market all foreign currency forward exchange contracts that have been designated as cash flow hedges and changes in fair value are recorded in accumulated other comprehensive income until the underlying cash flow is settled and the contract is recognized in operating results. As of December 27, 2008, the Company held nineteen outstanding foreign currency forward exchange contracts to sell U.S. dollars and buy U.K. pounds sterling. These contracts had an aggregate notional value of approximately $22.0 million of put and call options expiring at various times between January 2009 and December 2009. To date, the Company has not entered into any such contracts for longer than 12 months and accordingly, all amounts included in accumulated other comprehensive income as of December 27, 2008 will generally be reclassified into earnings within the next 12 months. As of December 27, 2008, the Company has recorded an unrealized loss of $3.3 million to accumulated other comprehensive income related to recording the fair value of the nineteen foreign currency forward exchange contracts designated as hedges for accounting purposes.

Note 4. Balance Sheet Details

The following table provides details regarding the Company’s cash, cash equivalents and short-term investments at the dates indicated:

		December 27, 2008				June 28, 2008
		(thousands)
Cash and cash equivalents:
Cash-in-bank		$	21,204			$	16,361
Money market funds			14,092				10,022
Commercial paper			—				6,480
		$	35,296			$	32,863
Short-term investments:
United States agency securities		$	6,177			$	2,977
United States corporate bonds			2,717				14,868
		$	8,894			$	17,845

As of December 27, 2008 and June 28, 2008, all of the Company’s short-term investments had a maturity of less than one year.

The following table provides details regarding the Company’s inventories at the dates indicated:

		December 27, 2008				June 28, 2008
		(thousands)
Inventories:
Raw materials		$	19,558			$	21,140
Work-in-process			28,806				24,786
Finished goods			10,084				13,686
		$	58,448			$	59,612

The following table provides details regarding the Company’s property and equipment, net at the dates indicated:

		December 27, 2008				June 28, 2008
		(thousands)
Property and equipment, net:
Buildings		$	15,842			$	18,411
Plant and machinery			78,388				78,652
Fixtures, fittings and equipment			956				1,098
Computer equipment			11,475				13,846
			106,661				112,007
Less: accumulated depreciation			(74,152	)			(79,045	)
		$	32,509			$	32,962

The following table provides details regarding the Company’s accrued expenses and other liabilities at the dates indicated:

		December 27, 2008				June 28, 2008
		(thousands)
Accrued expenses and other liabilities:
Trade creditor accruals		$	2,599			$	4,090
Compensation and benefits related accruals			7,090				6,724
Warranty accrual			2,174				2,598
Unrealized loss on hedges			3,332				—
Other accruals			4,464				5,657
Current portion of restructuring accrual			1,586				1,720
		$	21,245			$	20,789

Note 5. Goodwill and Other Intangible Assets

The Company reviews its goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also reviews goodwill annually in accordance with SFAS No. 142, Goodwill and Other Intangibles. The values assigned to goodwill and other intangible assets are based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.

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

Goodwill is tested for impairment using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill.

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

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

Note 6. Restructuring Liabilities

The following table summarizes the activity related to the Company’s restructuring liability for the six months ended December 27, 2008:

																		Accrued
		Accrued				Amounts												Restructuring
		Restructuring				Charged to												Costs at
		Costs at June				Restructuring				Amounts Paid				Adjustments				December 27,
		28, 2008				Costs				or Written-off				and Reversals				2008
		(thousands)
Lease cancellations and commitments		$	2,074			$	1,638			$	(686	)		$	—			$	3,026
Termination payments to employees and related costs			754				378				(887	)			(53	)			192
Total accrued restructuring			2,828			$	2,016			$	(1,573	)		$	(53	)			3,218
Less non-current accrued restructuring charges			(1,108	)															(1,632	)
Accrued restructuring charges included within accrued expenses and other liabilities		$	1,720															$	1,586

In connection with earlier plans of restructuring and cost reduction efforts, the Company continued to make scheduled payments drawing down the related lease cancellations and commitments and made further payments to terminated employees and for related costs. In the first quarter of fiscal 2009, the Company accrued an additional $1.5 million in expense related to existing restructuring plans for revised estimates of the cash flows for lease cancellations and commitments. Remaining net payments of lease cancellations and other commitments in connection with the Company’s earlier restructuring and cost reduction efforts are included in the restructuring accrual as of December 27, 2008 and will be paid out through April 2011.

For the three and six months ended December 27, 2008, the Company made payments of $0.4 million and $0.7 million, respectively, related to lease commitments and made payments of $0.6 million and $0.9 million, respectively, in personnel related costs in connection with transferring certain non-telecom manufacturing activities from its San Jose, California facility to its Shenzhen, China facility. Separation payments under the restructuring and cost reduction efforts were accrued and charged to restructuring in the period that both the benefit amounts were determined and the amounts had been communicated to the affected employees.

Note 7. Accounting for Uncertainty in Income Taxes

FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken, or expected to be taken, in a company’s income tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Step one, referred to as recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of benefit which is more likely than not to be realized on ultimate settlement.

The Company’s total amount of unrecognized tax benefits as of June 28, 2008 was approximately $92.3 million. For the six months ended December 27, 2008, there have been no material changes to the amount of unrecognized tax benefits. Also, the Company had no unrecognized tax benefits that, if recognized, would affect its effective tax rate for the six months ended December 27, 2008. Included in the balance of unrecognized tax benefits at December 27, 2008 is $1.3 million related to tax positions and estimated interest and penalties for which it is reasonably possible that the statute of limitations will expire in various jurisdictions within the next twelve months.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes. As of December 27, 2008, the Company did not have any accrual for payment of interest and penalties related to unrecognized tax benefits.

The Company files U.S. federal, U.S. state and foreign tax returns and has determined its major tax jurisdictions are the United States, the United Kingdom and China. Tax returns in the following jurisdictions remain open to examination by the appropriate governmental agencies: U.S. federal and China for tax years 2004 to 2008, Switzerland and various U.S. states for tax years 2003 to 2008 and the United Kingdom for tax years 2002 to 2008. The Company is not currently under audit in any major tax jurisdiction.

Note 8. Credit Agreement

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

The obligations of the Borrowers under the Credit Agreement are guaranteed by the Company, Ignis Optics, Inc., Bookham (Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., each a wholly-owned subsidiary of the Company (together, the “Guarantors” and together with the Borrowers, the “Obligors”), and are secured pursuant to a security agreement (the “Security Agreement”) by the assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in certain of their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a guaranty agreement and join in the Security Agreement. Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage points or the bank’s prime rate plus 1.25 percentage points. In the absence of an event of default, any amounts outstanding under the Credit Agreement may be repaid and re-borrowed at any time until maturity, which is August 2, 2009.

The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the material inaccuracy of representations or warranties, a cross-default related to other indebtedness in an aggregate amount of $1.0 million or more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA and judgments and a change of control default. The Credit Agreement contains negative covenants applicable to the Company, the Borrowers and their subsidiaries, including financial covenants requiring the Borrowers to maintain a minimum level of earnings before interest, taxes, depreciation and amortization (“EBITDA”) if the Borrowers have not maintained “minimum liquidity” (defined as $30 million of qualified cash and excess availability, each as also defined in the Credit Agreement), as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business, and transactions with affiliates. As of December 27, 2008 and June 28, 2008, there were no borrowings under the Credit Agreement. As of December 27, 2008, the Company was in compliance with all covenants under the Credit Agreement and there was $0.3 million in an outstanding letter of credit with a vendor secured by this credit facility which expires in February 2009. As of June 28, 2008, there were $4.8 million in outstanding letters of credit with vendors secured by this credit facility.

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

Note 9. Commitments and Contingencies

Guarantees

The Company follows the provisions of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. The Company has the following financial guarantees:

	•		In connection with the sale by New Focus of its passive component line to Finisar, Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property sold to Finisar. This obligation expires in May 2009 and has no limitation on maximum liability. The Company has not historically paid out any amounts related to this indemnification obligation and does not expect to in the future, therefore no accrual has been made for this indemnification obligation.
	•		The Company indemnifies its directors and certain employees as permitted by law, and has entered into indemnification agreements with its directors and senior officers. The Company has not recorded a liability associated with these indemnification arrangements as the Company historically has not incurred any costs associated with such indemnification arrangements and does not expect to in the future. Costs associated with such indemnification arrangements may be mitigated by insurance coverage that the Company maintains.
	•		The Company also has indemnification clauses in various contracts that it enters into in the normal course of business, such as those issued by its banks in favor of several of its suppliers or indemnification in favor of customers in respect of liabilities they may incur as a result of purchasing the Company’s products should such products infringe the intellectual property rights of a third party. The Company has not historically paid out any amounts related to these indemnification obligations and does not expect to in the future, therefore no accrual has been made for these indemnification obligations.

Provision for warranties

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

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
		(thousands)
Warranty provision — beginning of period		$	2,594			$	2,370			$	2,598			$	2,569
Warranties issued			694				681				1,622				1,303
Warranties utilized or expired			(727	)			(693	)			(1,488	)			(1,550	)
Currency translation adjustment			(387	)			(27	)			(558	)			9
Warranty provision — end of period		$	2,174			$	2,331			$	2,174			$	2,331

Litigation

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

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

Various plaintiffs have filed similar actions asserting virtually identical allegations against more than 300 other public companies, their underwriters, and their officers and directors arising out of each company’s initial public offering. These actions, including the action against New Focus and the action against Bookham Technology plc, have been coordinated for pretrial purposes and captioned In re Initial Public Offering Securities Litigation, 21 MC 92.

On April 19, 2002, plaintiffs filed a Consolidated Amended Class Action Complaint in the New Focus action and an Amended Class Action Complaint in the Bookham Technology plc action (together, the “Amended Class Action Complaints”). The Amended Class Action Complaints assert claims under certain provisions of the securities laws of the United States. They allege, among other things, that the prospectuses for Bookham Technology plc’s and New Focus’s initial public offerings were materially false and misleading in describing the compensation to be earned by the underwriters in connection with the offerings, and in not disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the underwriters. The Amended Class Action Complaints seek unspecified damages (or, in the alternative, rescission for those class members who no longer hold our or New Focus’ common stock), costs, attorneys’ fees, experts’ fees, interest and other expenses. In October 2002, the Individual Defendants were dismissed, without prejudice, from the action subject to their execution of tolling agreements. In July 2002, all defendants filed Motions to Dismiss the Amended Class Action Complaints. The motions were denied as to Bookham Technology plc and New Focus in February 2003. Special committees of the board of directors authorized the companies to negotiate a settlement of pending claims substantially consistent with a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their insurers.

The plaintiffs and most of the issuer defendants and their insurers entered into a stipulation of settlement for the claims against the issuer defendants, including Bookham Technology plc and New Focus. This stipulation of settlement was subject to, among other things, certification of the underlying class of plaintiffs. Under the stipulation of settlement, the plaintiffs would dismiss and release all claims against participating defendants in exchange for a payment guaranty by the insurance companies collectively responsible for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the District Court issued an Opinion and Order preliminarily approving the settlement provided that the defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in the original settlement agreement. The parties agreed to the modification narrowing the scope of the bar order, and on August 31, 2005, the District Court issued an order preliminarily approving the settlement.

On December 5, 2006, following an appeal from the underwriter defendants the United States Court of Appeals for the Second Circuit overturned the District Court’s certification of the class of plaintiffs who are pursuing the claims that would be settled in the settlement against the underwriter defendants. Plaintiffs filed a Petition for Rehearing and Rehearing En Banc with the Second Circuit on January 5, 2007 in response to the Second Circuit’s decision and have informed the District Court that they would like to be heard as to whether the settlement may still be approved even if the decision of the Court of Appeals is not reversed. The District Court indicated that it would defer consideration of final approval of the settlement pending plaintiffs’ request for further appellate review.

On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. In light of the overturned class certification on June 25, 2007, the District Court signed an Order terminating the settlement. The actions against Bookham Technology plc and New Focus remain stayed while litigation proceeds in six test cases against other companies which involve claims virtually identical to those that have been asserted against Bookham Technology plc and New Focus. On November 13, 2007, the issuer defendants in certain designated “focus cases” filed a motion to dismiss the second consolidated amended class action complaints that were filed in those cases. On March 26, 2008, the District Court issued an Opinion and Order denying, in large part, the motions to dismiss the amended complaints in the “focus cases.”

It is uncertain if the litigations will settle. If settlement of the litigations does not occur and litigation against Bookham Technology plc and New Focus continues, the Company believes that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the Amended Class Action Complaints and therefore believes that such claims will not have a material effect on its financial position, results of operations or cash flows.

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

On July 21, 2008, JDS Uniphase Corp. and Agility Communications, Inc. answered Bookham’s complaint and asserted counterclaims against Bookham for infringement of U.S. Patent Nos. 6,658,035, 6,654,400 and 6,687,278, which JDS Uniphase Corp. acquired from Agility Communications, Inc. On October 6, 2008, JDS Uniphase Corp. indicated that its

infringement claims are directed at Bookham’s LamdaFlex^TM TL500 VCJ; TL5000VLJ; TL3000; TL7000; TL8000 and TL9000 products. JDS Uniphase Corp. seeks unspecified compensatory damages, treble damages and attorneys’ fees from Bookham, and an order enjoining Bookham from future infringement of the patents-in-suit. This litigation has been stayed due to JDS Uniphase Corp.’s commencement of a U.S. International Trade Commission Investigation, which is described below.

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

On April 18, 2008, the Company settled a lawsuit in the United Kingdom under which it had been seeking claims against a land developer in connection with the Company’s sale of a certain parcel of land in 2005. In the fiscal year ended June 28, 2008, the Company has recorded a gain of $2.9 million, net of costs, associated with this settlement.

Note 10. Stock-based Compensation Expense

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

The Company has not issued and does not anticipate issuing dividends to stockholders and accordingly uses a zero percent dividend yield assumption for all Black-Scholes stock option pricing calculations. The Company uses an expected stock-price volatility assumption that is based on historical realized volatility of the underlying common stock during a period of time. With regard to the weighted-average option life assumption, the Company evaluates the exercise behavior of past grants as a basis to predict future activity.

The assumptions used to value stock option grants for the three and six months ended December 27, 2008 and December 29, 2007 are as follows:

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
Expected life		4.5 years				4.5 years				4.5 years				4.5 years
Risk-free interest rate			2.3	%			4.1	%			3.1	%			4.6	%
Volatility			82.9	%			77.0	%			70.4	%			81.7	%
Dividend yield			—				—				—				—

The amounts included in cost of revenues and operating expenses for stock-based compensation expenses for the three and six months ended December 27, 2008 and December 29, 2007 were as follows:

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
		(thousands)
Stock-based compensation by category of expense:
Costs of revenues		$	284			$	708			$	679			$	1,323
Research and development			222				643				472				1,094
Selling, general and administrative			518				1,332				1,090				1,992
		$	1,024			$	2,683			$	2,241			$	4,409
Stock-based compensation by type of award
Stock options		$	842			$	1,061			$	1,669			$	2,177
Restricted stock awards			150				1,835				430				2,179
Inventory adjustment to cost of revenues			32				(213	)			142				53
		$	1,024			$	2,683			$	2,241			$	4,409

As of December 27, 2008 and June 28, 2008, the Company had capitalized $0.2 million and $0.3 million, respectively, of stock-based compensation as inventory.

The following table summarizes the combined activity under all of the Company’s equity incentive plans for the six months ended December 27, 2008:

		Awards				Stock				Weighted-				Restricted Stock				Weighted-
		Available				Options				Average				Awards / Units				Average Grant
		For Grant				Outstanding				Exercise Price				Outstanding				Date Fair Value
		(thousands)				(thousands)								(thousands)
Balances at June 28, 2008			9,603				6,822			$	5.87				1,503			$	2.91
Granted			(2,707	)			2,707			$	1.74				—			$	—
Exercised or released			—				—			$	—				(741	)		$	3.06
Cancelled or forfeited			1,029				(870	)		$	5.20				(211	)		$	4.38
Balances at December 27, 2008			7,925				8,659			$	4.36				551			$	2.39

The Company generally grants stock options that vest over a four to five year service period and restricted stock awards that vest over a one to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives or pursuant to action by the Company’s Board of Directors or a committee of the Board.

Supplemental disclosure information about the Company’s stock options outstanding as of December 27, 2008 was as follows:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise Price				Contractual Life				Value
		(thousands)								(years)				(thousands)
Options exercisable at December 27, 2008			3,515			$	7.36				6.6			$	—
Options expected to vest at December 27, 2008			8,298			$	4.47				6.7			$	—
Options outstanding at December 27, 2008			8,659			$	4.36				8.0			$	—

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.45 as of December 27, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. There were no shares of common stock subject to in-the-money options which were exercisable as of December 27, 2008. The Company settles employee stock option exercises with newly issued shares of common stock.

Note 11. Earnings (Loss) Per Share

SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per share on the face of the statement of operations. Basic earnings per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted earnings per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock awards and units and warrants during such period.

For the three and six months ended December 27, 2008 and for the three and six months ended December 29, 2007, there were no stock options, warrants or restricted stock awards factored into the computation of diluted shares outstanding since the Company incurred a net loss in these periods and their inclusion would be anti-dilutive.

For the three and six months ended December 27, 2008, the effects of potentially dilutive securities (which include warrants, stock options and restricted stock awards) totaling 19.0 million and 18.5 million common shares, respectively, have been excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive. For the three and six months ended December 29, 2007, the effects of potentially dilutive securities totaling 16.9 million in each period have been excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive.

Note 12. Comprehensive Loss

For the three and six months ended December 27, 2008 and December 29, 2007, the Company’s comprehensive loss was primarily comprised of its net loss, the change in the unrealized loss on currency instruments designated as hedges, and unrealized gain on short-term investments and foreign currency translation adjustments.

The components of comprehensive loss were as follows:

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
		(thousands)
Net loss		$	(6,461	)		$	(5,187	)		$	(4,268	)		$	(16,141	)
Other comprehensive loss:
Unrealized loss on currency instruments designated as hedges			(2,982	)			(384	)			(4,023	)			(222	)
Unrealized gain on short-term investments			61				—				44				—
Currency translation adjustments			(8,903	)			(1,175	)			(15,315	)			562
Comprehensive loss		$	(18,285	)		$	(6,746	)		$	(23,562	)		$	(15,801	)

Note 13. Segments of an Enterprise and Related Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments, geographic areas and major customers in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Chief Executive Officer of the Company is the Company’s chief operating decision maker. As of December 27, 2008, the Company is organized and operates as two operating segments: (i) telecom and (ii) non-telecom. The telecom segment is responsible for the design, development, chip and filter level manufacturing, marketing and selling of optical solutions for telecommunications applications. The non-telecom segment is responsible for the design, development, marketing and selling of non-telecom products, which include photonics and microwave solutions, high power lasers, thin film filters and VCSELs (vertical cavity surface emitting lasers). The Company evaluates the performance of its segments and allocates resources based on consolidated revenues and overall performance.

Segment information for the three and six months ended December 27, 2008 and December 29, 2007 is as follows:

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
		(thousands)
Revenues
Telecom		$	37,418			$	44,799			$	89,673			$	85,532
Non-telecom			12,786				14,157				27,062				27,706
Consolidated revenues		$	50,204			$	58,956			$	116,735			$	113,238

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
		(thousands)
Operating loss
Telecom		$	(6,922	)		$	(6,916	)		$	(8,262	)		$	(15,802	)
Non-telecom			(454	)			788				(1,836	)			505
Total segment operating loss			(7,376	)			(6,128	)			(10,098	)			(15,297	)
Stock compensation			1,024				2,683				2,241				4,409
Legal settlement			—				877				(184	)			877
(Gain) loss on sale of property and equipment			(8	)			(1,481	)			8				(1,716	)
Impairment of goodwill			7,881				—				7,881				—
Consolidated operating loss		$	(16,273	)		$	(8,207	)		$	(20,044	)		$	(18,867	)

The following table shows revenues by geographic area based on the delivery locations of the Company’s products:

		Three Months Ended								Six Months Ended
		December 27,				December 29,				December 27,				December 29,
		2008				2007				2008				2007
		(thousands)
United States		$	11,780			$	13,604			$	30,981			$	28,357
Canada			3,243				10,832				7,898				21,456
Europe:
United Kingdom			2,324				2,581				5,860				4,264
Other			10,313				9,656				21,091				18,350
Asia:
China			12,567				14,659				27,432				25,263
Other			6,851				5,702				13,263				11,483
Rest of world			3,126				1,922				10,210				4,065
		$	50,204			$	58,956			$	116,735			$	113,238

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

		December 27, 2008				June 28, 2008
		(thousands)
United States		$	1,842			$	1,824
China			22,802				20,443
United Kingdom			3,312				6,296
Other			4,553				4,399
		$	32,509			$	32,962

Significant Customers and Concentration of Credit Risk

For the three months ended December 27, 2008, Nortel Networks accounted for 11 percent and Huawei Technologies accounted for 15 percent of the Company’s revenues. For the three months ended December 29, 2007, Nortel Networks accounted for 15 percent and Cisco Systems accounted for 11 percent of the Company’s revenues. For the six months ended December 27, 2008, Nortel Networks accounted for 15 percent and Huawei Technologies accounted for 14 percent of the Company’s revenues. For the six months ended December 29, 2007, Nortel Networks accounted for 15 percent and Cisco Systems accounted for 11 percent of the Company’s revenues.

As of December 27, 2008, Huawei Technologies accounted for 17 percent and Cisco Systems accounted for 14 percent of accounts receivable. As of June 28, 2008, Nortel Networks accounted for 15 percent and Huawei Technologies accounted for 12 percent of accounts receivable.

In the second quarter of fiscal 2009 the Company issued billings of (i) $4.1 million for products that were shipped to Nortel Networks, but for which payment was not received prior to its bankruptcy filing on January 14, 2009, and (ii) $1.3 million for products that were shipped to a contract manufacturer for which payment may not be received due to the Nortel Networks bankruptcy filing. As a result, an aggregate of $5.4 million in revenue was deferred, and therefore was not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings, as the Company determined that such amounts were not reasonably assured of collectability in accordance with its revenue recognition policy. As of December 27, 2008, the Company had contractual receivables from these two customers totaling $5.4 million, which are not reflected in the accompanying condensed consolidated balance sheet as of such date.

Note 14. Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended December 27, 2008, as compared to the recent accounting pronouncements described in the 2008 Form 10-K, that are of significance, or potential significance, to the Company.

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

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

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

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting principles. FSP No.142-3 is effective for financial statements issued for fiscal years beginning after December 15,

2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after June 27, 2009.

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

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 for financial assets in a market that is not active. FSP No. 157-3 was effective upon issuance. SFAS No. 157 was adopted by the Company, as it applies to its financial instruments, in the first quarter of fiscal 2009. The impact of adoption of SFAS No. 157 is discussed in Note 3.

Note 15. Subsequent Events

Merger of Bookham Inc. and Avanex Corporation

On January 27, 2009, Bookham announced that it had entered into a definitive agreement providing for the merger of Bookham and Avanex Corporation (“Avanex”). In connection with the merger, which is subject to customary closing conditions, including shareholder approval by both companies, Avanex shareholders will receive, at a fixed exchange ratio, 5.426 shares of Bookham common stock for every share of Avanex common stock. Bookham expects to issue approximately 88.6 million shares of Bookham common stock in the proposed transaction. Upon the close of the transaction, Bookham shareholders will own approximately 53.25 percent and Avanex shareholders will own approximately 46.75 percent of the combined company. Based on the closing price of Bookham common stock of $0.397 per share on January 27, 2009, the total consideration to be paid to Avanex shareholders would be equivalent to $35.2 million or $2.15 per share of Avanex common stock. The merger is expected to be completed within the next three to six months.

The Company has become aware that on February 3, 2009, a complaint was filed in the Alameda County Superior Court of the State of California naming, among others, the Company and Ultraviolet Acquisition Sub, Inc., a wholly-owned subsidiary of the Company, or Merger Sub, in a purported class action lawsuit on behalf of the stockholders of Avanex Corporation. The case is captioned Charlene McCune and Mary Cooksey, individually, and on behalf of all others similarly situated, v. Giovanni Barbarossa, Paul Smith, Vinton Cerf, Joel Smith, Susan Wang, Gregory Dougherty, Dennis Wolf, Avanex Corporation, Bookham, Inc. and Ultraviolet Acquisition Sub, Inc., Case No. RG09434156. The complaint relates to the proposed business combination of the Company and Avanex through a merger of Merger Sub with and into Avanex announced on January 27, 2009. The complaint alleges, among other things, that the individual Avanex director defendants are acting in their own interests at the expense of the Avanex stockholders and that they failed to adequately disclose all material information concerning the proposed transaction. The complaint further alleges that the individual Avanex director defendants failed to secure adequate consideration in the proposed transaction, are acting contrary to their duty to maximize stockholder value and are violating their fiduciary duties, including their duties of loyalty, good faith, independence and candor. The complaint further alleges that defendants Avanex, the Company and Merger Sub aided and abetted the individual Avanex director defendants’ breaches of fiduciary duties. The plaintiffs seek, among other things, to enjoin the proposed transaction as well as unspecified damages and costs.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements about our plans, objectives, expectations and intentions. You can identify these statements by words such as “expect,” “anticipate,” “intend,” “scheduled,” “designed,” “plan,” “believe,” “seek,” “estimate,” “may,” “will,” “continue,” “proposed” and similar words. You should read these forward-looking statements carefully. These forward-looking statements discuss our future expectations, contain projections of our future results of operations or our financial condition or state other forward-looking information, and may involve known and unknown risks over which we have limited or no control. You should not place undue reliance on forward-looking statements and actual results may differ materially from those contained in forward-looking statements. We cannot guarantee any future results, levels of activity, performance or achievements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law. The factors discussed in the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this Quarterly Report on Form 10-Q identify important factors that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

Overview

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

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

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

Recent Developments

On January 27, 2009, we announced that we had entered into a definitive agreement to merge with Avanex Corporation (“Avanex”). In connection with the merger, which is subject to customary closing conditions, including shareholder approval by both companies, Avanex shareholders will receive, at a fixed exchange ratio, 5.426 shares of our common stock for every share of Avanex common stock. We expect to issue approximately 88.6 million shares of our common stock in the proposed transaction. Upon the close of the transaction, our shareholders will own approximately 53.25 percent and Avanex shareholders will own approximately 46.75 percent of the combined company. Based on the closing price of our common stock of $0.397 per share on January 27, 2009, the total consideration to be paid to Avanex shareholders would be equivalent to $35.2 million or $2.15 per share of Avanex common stock. If the merger is completed, we expect that we will incur an aggregate of approximately $7.0 million in restructuring expenses, which we anticipate will be offset by $7.0 million in quarterly cost savings, which are expected to be realized in full at the end of the first twelve months after the deal closes, as a result of the merger. The merger is expected to be completed within the next three to six months.

Critical Accounting Policies

We believe that several accounting policies we have implemented are important to understanding our historical and future performance. We refer to such policies as “critical” because they generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable at the time—could have been used, and would have resulted in materially different reported financial results.

The critical accounting policies we identified in our Annual Report on Form 10-K for the year ended June 28, 2008 (or the 2008 Form 10-K), related to revenue recognition and sales returns, inventory valuation, accounting for acquisitions and goodwill, impairment of goodwill and other intangible assets and accounting for share-based payments. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies discussed in our 2008 Form 10-K.

Revenue Recognition for Financially Distressed Customers

Our revenue recognition policy, which is more fully described in our 2008 Form 10-K, follows Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements. Specifically, we recognize product revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped and title has transferred, (iii) collectability is reasonably assured, (iv) fees are fixed or determinable and (v) there are no uncertainties with respect to customer acceptance. We recognize revenues from financially distressed customers when collectability becomes reasonably assured, assuming all other criteria for revenue recognition have been met.

In the three months ended December 27, 2008, we issued billings of (i) $4.1 million for products that were shipped to Nortel Networks, but for which payment was not received prior to its bankruptcy filing on January 14, 2009 and (ii) $1.3 million for products that were shipped to a contract manufacturer to Nortel Networks for which payment may not be received as a result of the Nortel Networks bankruptcy filing. As a result, an aggregate of $5.4 million in revenue was not recognized as revenues or accounts receivable in the accompanying condensed consolidated financial statements at the time of such billings, and such amounts were therefore deferred as we determined that such amounts were not reasonably assured of collectability in accordance with our revenue recognition policy. The corresponding costs associated with these billings for the second quarter of fiscal 2009 are fully included in costs of revenues in the condensed consolidated financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q, as title to the products passed to the customer upon shipment or delivery, depending on the terms of the individual sale. Accordingly, revenue deferrals for the second quarter of fiscal 2009 to financially distressed customers reduced revenues and gross margin and increased net loss by $5.4 million, and decreased our gross margin rate by approximately 8 percentage points. To the extent that collectability becomes reasonably assured for these deferred billings in future periods, our future results will benefit from the recognition of these amounts.

Impairment of Goodwill

We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also review goodwill annually in accordance with SFAS No. 142, Goodwill and Other Intangibles. The values assigned to goodwill and other intangible assets are usually based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.

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

Goodwill is tested for impairment using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill.

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

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

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended December 27, 2008, as compared to the recent accounting pronouncements described in our 2008 Form 10-K, that are of significance, or potential significance, to us.

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

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

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

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other generally accepted accounting principles. FSP No.142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets we acquire after June 27, 2009.

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

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

Results of Operations

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

		Three Months Ended																				Increase
		December 27, 2008								December 29, 2007								Change				(Decrease)
		(thousands)				%				(thousands)				%				(thousands)				%
Revenues		$	50,204				100.0			$	58,956				100.0			$	(8,752	)			(14.8	)
Cost of revenues			41,499				82.7				45,522				77.2				(4,023	)			(8.8	)
Gross margin			8,705				17.3				13,434				22.8				(4,729	)			(35.2	)
Operating expenses:
Research and development			6,897				13.7				8,168				13.9				(1,271	)			(15.6	)
Selling, general and administrative			9,282				18.5				12,162				20.6				(2,880	)			(23.7	)
Amortization of intangible assets			444				0.9				1,353				2.3				(909	)			(67.2	)
Restructuring and severance charges			482				0.9				562				0.9				(80	)			(14.2	)
Legal settlement			—				—				877				1.5				(877	)			(100.0	)
Impairment of goodwill			7,881				15.7				—				—				7,881				n/m	(1)
(Gain) loss on sale of property and equipment			(8	)			—				(1,481	)			(2.5	)			1,473				(99.5	)
Total operating expenses			24,978				49.7				21,641				36.7				3,337				15.4
Operating loss			(16,273	)			(32.4	)			(8,207	)			(13.9	)			(8,066	)			98.3
Other income (expense):
Other expense			(95	)			(0.2	)			—				—				(95	)			n/m	(1)
Interest income			209				0.4				494				0.8				(285	)			(57.7	)
Interest expense			(132	)			(0.3	)			(253	)			(0.4	)			121				(47.8	)
Gain on foreign exchange			9,866				19.7				2,732				4.6				7,134				261.1
Total other income (expense)			9,848				19.6				2,973				5.0				6,875				231.2
Loss before income taxes			(6,425	)			(12.8	)			(5,234	)			(8.9	)			(1,191	)			22.8
Income tax provision (benefit)			36				0.1				(47	)			(0.1	)			83				n/m	(1)
Net loss		$	(6,461	)			(12.9	)		$	(5,187	)			(8.8	)		$	(1,274	)			24.6

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

		Six Months Ended																				Increase
		December 27, 2008								December 29, 2007								Change				(Decrease)
		(thousands)				%				(thousands)				%				(thousands)				%
Revenues		$	116,735				100.0			$	113,238				100.0			$	3,497				3.1
Cost of revenues			91,401				78.3				87,467				77.2				3,934				4.5
Gross margin			25,334				21.7				25,771				22.8				(437	)			(1.7	)
Operating expenses:
Research and development			14,832				12.7				16,860				14.9				(2,028	)			(12.0	)
Selling, general and administrative			19,966				17.1				23,488				20.7				(3,522	)			(15.0	)
Amortization of intangible assets			907				0.8				3,350				3.0				(2,443	)			(72.9	)
Restructuring and severance charges			1,968				1.7				1,779				1.6				189				10.6
Legal settlement			(184	)			(0.2	)			877				0.8				(1,061	)			n/m	(1)
Impairment of goodwill			7,881				6.8				—				—				7,881				n/m	(1)
(Gain) loss on sale of property and equipment			8				—				(1,716	)			(1.5	)			1,724				n/m	(1)
Total operating expenses			45,378				38.9				44,638				39.5				740				1.7
Operating loss			(20,044	)			(17.2	)			(18,867	)			(16.7	)			(1,177	)			6.2
Other income (expense):
Other expense			(695	)			(0.6	)			—				—				(695	)			n/m	(1)
Interest income			457				0.4				746				0.7				(289	)			(38.7	)
Interest expense			(324	)			(0.3	)			(387	)			(0.3	)			63				(16.3	)
Gain on foreign exchange			16,362				14.0				2,320				2.0				14,042				605.3
Total other income (expense)			15,800				13.5				2,679				2.4				13,121				489.8
Loss before income taxes			(4,244	)			(3.7	)			(16,188	)			(14.3	)			11,944				(73.8	)
Income tax provision (benefit)			24				—				(47	)			—				71				n/m	(1)
Net loss		$	(4,268	)			(3.7	)		$	(16,141	)			(14.3	)		$	11,873				(73.6	)

Revenues

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

Our decrease in telecom sales for the three months ended December 27, 2008 was primarily attributable to a decrease in sales to Nortel Networks (including its contract manufacturers) of $3.4 million, due to the deferral of recognition of $5.4 million in billings during the period in accordance with our revenue recognition policy, and decreased sales to other telecom customers of $4.0 million which we believe was due to the uncertainty in the worldwide financial markets and resulting impact on the markets for our products, which was partially offset by increases in sales to Huawei Technologies of $2.3 million and smaller increases in sales from other customers. For the three months ended December 27, 2008, Nortel Networks accounted for $5.4 million, or 11 percent, of our total revenues, and Huawei Technologies accounted for $7.4 million, or 15 percent, of our total revenues. For the three months ended December 29, 2007, Nortel Networks accounted for $8.8 million, or 15 percent, of our revenues, and Cisco Systems accounted for $6.6 million, or 11 percent, of our total revenues.

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

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

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

Cost of Revenues

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

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

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

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

Gross Margin

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

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

Our gross margin decreased by $0.4 million, or 1.7 percent, for the six months ended December 27, 2008, compared to the six months ended December 29, 2007. Our gross margin rate decreased to 21.7 percent for the six months ended December 27, 2008, compared to 22.8 percent in the six months ended December 29, 2007. The decreases in gross margin and gross margin rate were primarily associated with recognizing the costs associated with the $5.4 million of products shipped to two

customers in the second quarter of fiscal 2009, but for which revenue was deferred in accordance with our revenue recognition policy, and increased expenses for the six months ended December 27, 2008 of $0.9 million of additional manufacturing overhead costs in connection with the transfer of manufacturing operations of our non-telecom segment from our San Jose, California facility to our facility in Shenzhen, China.

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

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

Research and Development Expenses

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

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

Research and development expenses decreased to $14.8 million for the six months ended December 27, 2008 from $16.9 million for the six months ended December 29, 2007. The decrease was primarily due to decreases in personnel costs of $1.5 million and stock-based compensation of $0.6 million due to reductions in personnel and other miscellaneous decreases in spending of $1.3 million, as a result of our restructurings and cost reduction plans, which were partially offset by increased costs for materials used in research and development of $1.4 million.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses decreased to $9.3 million for the three months ended December 27, 2008 from $12.2 million for the three months ended December 29, 2007. The decrease was primarily the result of decreases in personnel costs of $1.4 million and stock-based compensation of $0.8 million as a result of restructuring and cost reduction plans and a reduction of $0.7 million in other miscellaneous expenses.

Selling, general and administrative expenses decreased to $20.0 million for the six months ended December 27, 2008 from $23.5 million for the six months ended December 29, 2007. The decrease was primarily the result of decreases in personnel costs of $1.8 million and stock-based compensation of $0.9 million as a result of restructuring and cost reduction plans and a reduction of $0.8 million in other miscellaneous expenses.

Amortization of Intangible Assets

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

Restructuring and Severance Charges

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

Impairment of Goodwill

During the three month period ended December 27, 2008, we saw indicators of potential impairment of our goodwill, including the impact of the current general economic downturn on our future prospects and the continued decline of our current market capitalization, which caused us to conduct a preliminary interim goodwill impairment analysis. Our management has determined, in our preliminary first step goodwill impairment analysis, that our goodwill in our New Focus and Avalon reporting units was in fact impaired. Based upon preliminary calculations, we have recorded a preliminary estimate of $7.9 million for the impairment loss in our statements of operations for the three and six months ended December 27, 2008 as we concluded that the loss was probable and that the amount of loss was reasonably determinable. This is a preliminary estimate only. We are continuing to evaluate the impairment of our goodwill, and the amount of the actual impairment charge may vary materially from this initial estimate. We expect that we will complete the full evaluation of the impairment analysis during the quarter ending March 28, 2009. The impairment will not result in any current or future cash expenditures.

Other Income (Expense)

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

Income Tax Benefit

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

Liquidity and Capital Resources

Cash Flows from Operating Activities

		Six Months Ended
		December 27,				December 29,
		2008				2007
		(thousands)
Net loss		$	(4,268	)		$	(16,141	)
Non-cash adjustments:
Depreciation and amortization			6,720				9,604
Stock-based compensation			2,241				4,409
Amortization of deferred gain on sale-leaseback			(486	)			(714	)
Impairment of short-term investments			706				—
Impairment of goodwill			7,881				—
Accretion on short-term investments			(102	)			—
(Gain) loss on sale of property and equipment			8				(1,716	)
Total non-cash adjustments			16,968				11,583
Increase in working capital			(3,010	)			(4,383	)
Net cash provided by (used in) operating activities		$	9,690			$	(8,941	)